Feist v. United States

• Citation: 607 F.2d 954
• Decision Date: 17 October 1979
• Docket Number: No. 474-76.,474-76.
• Parties: Howard N. FEIST, Jr. v. The UNITED STATES.
• Court: Court of Federal Claims

607 F.2d 954

Howard N. FEIST, Jr. v. The UNITED STATES.

No. 474-76.

United States Court of Claims.

October 17, 1979.

COPYRIGHT MATERIAL OMITTED

James R. McGowan, Providence, R. I., for plaintiff. Salter, McGowan, Arcaro & Swartz, Inc., Providence, R. I., of counsel.

Marc Levey, Washington, D. C., with whom was Asst. Atty. Gen. M. Carr Ferguson, Washington, D. C., for defendant. Theodore D. Peyser, Jr., Washington, D. C., of counsel.

Before COWEN, Senior Judge, and KUNZIG and SMITH, Judges.

ON DEFENDANT'S MOTION FOR PARTIAL SUMMARY JUDGMENT AND PLAINTIFF'S CROSS-MOTION FOR SUMMARY JUDGMENT

EDWARD S. SMITH, Judge:

The Commissioner of Internal Revenue assessed a 100 percent penalty in the amount of $45,429.80 against plaintiff, Howard N. Feist, Jr., under the authority of section 6672 of the Internal Revenue Code of 1954, as amended¹ (I.R.C.). This assessment was based on plaintiff's asserted liability for a penalty in the amount of the federal income and social security (FICA) taxes due and owing from the Shepard Company on the wages of its employees for the third quarter of 1973. Plaintiff paid $63.70, the amount of tax due for that quarter for one employee, and filed a timely claim for refund which was disallowed. This refund suit followed. The Government counterclaimed for the unpaid portion of the penalty assessed against plaintiff but not paid. The question for decision, before us on the parties' cross-motions for summary judgment, is whether plaintiff is personally liable under section 6672 of the Internal Revenue Code of 1954 for the taxes the corporation should have withheld from the wages of its employees and should have paid over to the United States. Section 6672 imposes personal liability for taxes upon "any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof."

Sections 3102(a) and 3402(a) of the Internal Revenue Code require employers to withhold from their employees' wages, at the time the wages are paid, each employee's share of his personal federal income tax and of his FICA tax. The employer is required to hold the taxes withheld from the wages of his employees in a "special fund in trust for the United States." 26 U.S.C. § 7501 (1976). An employee is automatically given credit on his individual federal tax liability for the amount of federal income taxes withheld from his wages by his employer even though the employer may not have turned over the withheld sums to the Government. 26 U.S.C. § 1462 (1976); Bolding v. United States, 565 F.2d 663, 669, 215 Ct.Cl. 148, 158 (1977); Newsome v. United States, 431 F.2d 742 (5th Cir. 1970). Once the withheld sums are credited against the employee's tax liability, the Government's only recourse is against the employer under sections 3102(b) and 3403 of 26 U.S.C. or against the corporate officer or employee² who is deemed to be a person within the meaning of section 6672 who willfully failed to collect and pay over the withheld taxes to the United States.³

The civil penalty assessed against persons viewed by the Commissioner as having willfully breached their duty to pay over the withholding taxes is not imposed in order to punish; it is simply a means of ensuring that the tax which is unquestionably owed the Government is paid. Botta v. Scanlon, 314 F.2d 392, 393 (2d Cir. 1963). As it would be unjust to impose a penalty upon a person not having authority to require the corporate employer to collect and pay the taxes, the penalty is assessed only if the person had the responsibility for the collection and payment of the tax and willfully failed to carry out his duty. Bolding v. United States, supra; Bauer v. United States, 543 F.2d 142, 211 Ct.Cl. 276 (1976); Burack v. United States, 461 F.2d 1282, 198 Ct.Cl. 855 (1972); McCarty v. United States, 437 F.2d 961, 194 Ct.Cl. 42 (1971); White v. United States, 372 F.2d 513, 178 Ct.Cl. 765 (1967).

The question whether a particular person willfully failed to carry out his responsibility of causing the corporation to collect or pay over the taxes depends upon the facts and circumstances of each case. Bauer v. United States, supra, 543 F.2d at 148, 211 Ct.Cl. at 285-86. After carefully reviewing the record and having heard oral argument, we hold that plaintiff was a person responsible for the collection and payment of the taxes, but that he did not willfully fail to pay over the taxes to the Government.

I.

Plaintiff, Howard N. Feist, Jr., is the sole shareholder of the New England Mica Company (Mica). Mica purchased the common and preferred stock of the Shepard Company (Shepard) in 1970; hence, plaintiff became the indirect owner of Shepard after Mica bought the stock of Shepard. Shepard, a large retail department store which started doing business in 1870, had several branches. It employed 600 to 800 persons. At the time Mica purchased Shepard's stock, Shepard was in a precarious financial position. After the acquisition, plaintiff became Shepard's treasurer and chairman of its board of directors.

Mica also owned the stock of Denholm & McKay Company, Inc., a department store located in Worcester with a branch in Auburn, Massachusetts, and Gladdings, Inc. (Gladdings), a women's specialty store in Providence, Rhode Island. After the purchase of Shepard, Mica merged Shepard's retail operations in Rhode Island with those of Gladdings. Plaintiff thought that combining several of the back-office operations, i. e., the credit, accounting, and warehousing departments, would result in substantial savings.

During the first quarter of 1972, Mr. Fred Cooper, president of Shepard, who was responsible for the day-to-day management of the company, informed plaintiff that Shepard was short of working capital. Plaintiff negotiated a loan of several million dollars on behalf of Shepard from James Talcott, Inc. (Talcott), a factoring firm which is engaged in the business of lending money on receivables and inventories. During the loan negotiations, plaintiff provided Talcott with every document regarding the financial history and operations of Shepard for the previous 5 years. Talcott secured its loan to Shepard by taking a security interest in Shepard's accounts receivable and inventory. The Talcott-Shepard agreement itself is not in the record.

After arranging the loan from Talcott, plaintiff regularly policed the ongoing operations of the business. He reviewed the monthly financial statements prepared by the firm's controller and attended weekly meetings with Shepard's president. The belief that the infusion of more working capital, via the loan from Talcott, would end Shepard's financial difficulties was short-lived. After a good 1972 Christmas season, Shepard had a poor first quarter in 1973. During March or April of 1973, Shepard's president told plaintiff that the company needed an additional one-half to one million dollars in working capital. During the spring of 1973, plaintiff took an active part in raising additional funds which Shepard needed in order to purchase merchandise. Plaintiff arranged a loan of several million dollars from the General Electric Credit Corporation in June 1973.

Aside from loans, several other solutions to the firm's financial problems were explored. Consideration was given to a merger of Shepard with Denholm & McKay. However, in August 1973, it was discovered that Shepard's inventory had been overvalued by $300,000 to $500,000. Also, in August 1973, a group of attorneys representing the various creditors of Shepard called an informal creditors' meeting and demanded payment of some of the corporate debts. Plaintiff attended this meeting and was successful in delaying the creditors.

Plaintiff decided to sell the stock of Shepard after Shepard's president informed plaintiff that even more working capital was needed in order to purchase merchandise for the 1973 Christmas season. As plaintiff had come to believe that Shepard had exhausted its lending resources, plaintiff sold Shepard's stock to Eastern Dry Goods Company (Eastern) on September 12, 1973. Prior to the sale, plaintiff had investigated the business reputations of the principals of Eastern. He had inquired about their standing in the business community and conducted a check with Dun & Bradstreet. The investigation indicated that the principals of Eastern were reliable persons.

On or about September 12, 1973, plaintiff was informed that Shepard was delinquent in some of its deposits of federal taxes for the third quarter of 1973 which ended September 30, 1973. All other quarters had been paid in a timely manner. Plaintiff notified the purchasers of Shepard of the delinquency and he received an oral assurance by Eastern that the taxes would be paid "immediately."⁴ On the date of sale, September 12, 1973, Shepard had approximately $10,000 to $15,000 in a company bank account and approximately $50,000 to $60,000 scattered throughout the stores in the company's several hundred cash registers. These funds were sufficient to pay Shepard's taxes.

Eastern had represented to plaintiff that it would continue to operate Shepard as an ongoing business with the same management which had previously handled the day-to-day operations of Shepard and which had previously overseen Shepard's payment of employment and withholding taxes and filing of the returns while plaintiff was Shepard's owner. When plaintiff resigned from his positions as treasurer and chairman of Shepard's board of directors at the closing on September 12, 1973, the third quarter was only 80 percent complete. As of September 12, 1973, Shepard had paid the Internal Revenue Service $123,495.79 of its total Form 941 liability of $176,301.64 for the third quarter, or approximately 70 percent of its total liability for the full quarter ended ...