Bloom v. United States

Decision Date20 January 1960
Docket NumberNo. 16127.,16127.
Citation272 F.2d 215
PartiesEdward J. BLOOM, Appellant, v. UNITED STATES of America, Appellee.
CourtU.S. Court of Appeals — Ninth Circuit


James W. Harvey, San Francisco, Cal., for appellant.

Charles K. Rice, Asst. Atty. Gen., C. Guy Tadlock, Lee A. Jackson, A. F. Prescott, Joseph Kovner, Attorneys, Department of Justice, Washington, D. C., Lynn J. Gillard, U. S. Atty., Charles Elmer Collett, Asst. U. S. Atty., San Francisco, Cal., for appellee.

Before BARNES, HAMLEY and JERTBERG, Circuit Judges.

JERTBERG, Circuit Judge.

This is an appeal from a judgment against an officer of a corporation for the amount of income taxes and social security taxes withheld from wages of employees of the corporation but not paid over to the United States.

Jurisdiction was conferred on the district court by Title 28 U.S.C.A. § 1345. This Court has jurisdiction under the provisions of Title 28 U.S.C.A. § 1291.

The action was predicated on Section 2707(a) and Section 2707(d) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 2707(a, d).1 This section applies to social security taxes and withholding taxes by virtue of Sections 1430 and 1627 respectively of the Internal Revenue Code of 1939, 26 U.S.C.A. §§ 1430, 1627.

Appellant Edward J. Bloom, a licensed metallurgist, entered the aluminum smelting business in 1945 at the conclusion of his wartime service in the Navy. He formed and operated at that time the Idaho Company, an individual proprietorship, for the purpose of purchasing wrecked aircraft (chiefly from the War Assets Administration), making aluminum alloy ingots from the scrap, and selling the ingots to foundries. To finance the operation of the Idaho Company, appellant relied on his own funds and those of friends and also borrowed extensively from the Seattle Trust and Savings Bank. During 1945 and 1946 the scrap aluminum business was extremely profitable. The business was incorporated in the State of Washington on or about July 1, 1946 as Idaho Smelting, Inc. All assets of the Idaho Company were transferred to Idaho Smelting, Inc. Certain preferred stock was issued to persons who had individually lent money to appellant for his business, and 898 out of 900 shares of common stock were issued to appellant, who became president and chief executive officer of the new corporation.

Upon the formation of Idaho Smelting, Inc., the financing bank agreed to make the same financing arrangements with the corporation as had existed with the sole proprietorship, and with the adoption of the necessary corporate resolution, this was done. The agreement provided for the extension of credit up to the sum of $849,000, but the maximum ever extended was approximately $700,000. The terms of the financing agreement extended credit on an overdraft system of lending (sometimes referred to as the Canadian style of banking), and required the corporation to buy and sell aluminum on a trust receipts basis.

In September of 1947 the metal market dropped drastically. There was no longer a shortage of metal. Foundries did not want to stock large amounts, and Idaho Smelting, Inc. was left holding a large inventory for which there was no immediate demand. The organization remained in business, however, hoping to weather out the storm. Since the corporation was not making large sales, it could not meet its obligations to the bank promptly.

On or about January 20, 1948, the bank informed appellant by letter that "We are not at all satisfied with the progress which is being made to place the account of Idaho Smelting, Inc. on a satisfactory basis," and gradually exerted pressure on the company to liquidate its inventory so as to insure that the bank would not suffer a loss on its loans. On January 31, 1948, when the corporation filed a tax return for the last quarter of 1947, for the first time it failed to include payment for the withheld income and social security taxes of that quarter. Throughout the remaining months of 1948, as the corporation continued to liquidate its inventory to satisfy the bank's demands, employees were paid a net amount excluding the withheld income and social security taxes, but none of the withheld taxes (with the exception of two quarters' social security taxes) were ever paid to the United States. Returns without payment were filed quarterly. The government assessed the delinquent taxes against the corporation for each quarter.2 In July, 1948 tax liens were filed against the corporation by the government.

Many of the creditors of the corporation were induced to accept debenture bonds in place of their open account claims against the corporation, and bonds aggregating $106,000 in amount were issued, with the bank as trustee and paying agent for the coupons. By the middle of July, 1948, virtually all major creditors of the corporation had accepted debenture bonds. By December 31, 1948, with the liquidation process completed, all indebtedness to the bank had been discharged, and the corporation was practically without funds. There were then no paid employees of the corporation. For all practical purposes the corporation was dead. Loans were sought from other banks, but primarily because of the outstanding tax liens filed against it, the corporation was unable to procure them.

On November 23, 1949, the Commissioner of Internal Revenue assessed against appellant and his wife certain taxes, aggregating $13,448.45, which represented the amount of delinquent withheld taxes originally assessed against the corporation, under the theory that they were "persons who had willfully failed to pay, collect, or truthfully account for and pay over" said withheld taxes. Notice and demand for payment was made. Warrants of distraint were issued, and tax liens were filed against them. Payment was refused, appellant and his wife contending that they did not willfully fail to pay the corporation's taxes, and that they were not the persons required to pay, collect, or truthfully account for and pay over the same. This action was brought on November 18, 1955, to reduce to judgment the above unpaid assessment. The trial court, without a jury, held that there was no evidence as to Mrs. Bloom's liability for the taxes, and rendered judgment in her favor. The trial court also held that "The defendant Edward J. Bloom was the responsible officer of the Idaho Smelting, Inc. whose duty it was to collect, account for and pay over to the Internal Revenue Service the withholding and F.I.C.A. taxes of Idaho Smelting, Inc." and concluded that "The defendant Edward J. Bloom willfully failed to collect, account for and pay over the withholding taxes of Idaho Smelting, Inc. for the fourth quarter of 1947 and the first, second, third and fourth quarters of 1948" and "The defendant Edward J. Bloom willfully failed to collect, account for and pay over the F.I.C.A. taxes of Idaho Smelting, Inc. for the fourth quarter of 1947, first quarter of 1948 and fourth quarter of 1948."

On the basis of the findings of fact and conclusions of law, the trial court entered judgment for the United States against appellant for $19,292.79.

On this appeal appellant presents four contentions. They are:

First, that since the suit to reduce to judgment the assessment made against him was commenced almost seven years after the assessments had been duly made against the corporation, whatever claim the government may have against him individually has become outlawed under Section 3312 of the Internal Revenue Code of 1939, 26 U.S.C.A. § 3312,3 which requires a suit to reduce an assessment to judgment to be commenced within six years of the date of the assessment.4

Second, that since Section 2707(a) provides for a "penalty", the assessment of that penalty was without due process of law, was an arbitrary and capricious exercise of the taxing power and consequently constituted a violation of Amendments V, VII and VIII of the United States Constitution.

Third, that the trial court erred in holding that he was the responsible officer whose duty it was to collect, account for, and pay over the withheld taxes.

Fourth, that the trial court used an improper definition of "willfully" in concluding that appellant willfully failed to pay over and collect the said taxes.

Under the first contention, appellant argues that the tax sought to be collected from the corporate officer is the same tax sought to be collected originally from the corporation, and that, therefore, the government's claim is only that of a secondary liability against the officer. Hence he claims that when the primary claim against the corporation is barred, the secondary claim against the officer is also barred. Appellant does not claim that the assessments made against the corporation and the assessment made against him were not made within the time specified by Section 3312(a), supra. Appellant's only assertion is that this suit was not brought within the six-year period specified in Section 3312 (d) supra after the date of the assessments against the corporation. As the assessment against appellant was made November 23, 1949 and suit was filed on November 18, 1955, appellant must and does concede that the suit was filed within six years after the assessment against him.

Section 1622 of the Internal Revenue Code of 1939, 26 U.S.C.A. § 16225 provides for the collection of income taxes at source by requiring every employer to deduct and withhold a percentage of the wages paid to the employees. Section 1627 of the Internal Revenue Code of 1939, 26 U.S.C.A. § 16276 makes Section 2707(a) applicable to the collection of this tax. Similarly, Section 1400 of the Internal Revenue Code of 1939, 26 U.S.C.A. § 14007 imposes a tax on wages of employees as a contribution to their insurance under the social security, old age and survivors program. Section 1401 of the Revenue Code of 1939, 26 U.S.C.A. § 14018 imposes the duty to collect this tax...

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