Flan v. United States

• Decision Date: 07 January 1964
• Docket Number: No. 14095.,14095.
• Citation: 326 F.2d 356
• Parties: Anthony FLAN, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

326 F.2d 356 (1964)

Anthony FLAN, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 14095.

United States Court of Appeals Seventh Circuit.

January 7, 1964.

Anna R. Lavin, Chicago, Ill., for appellant.

Louis F. Oberdorfer, Asst. Atty. Gen., Earl J. Silbert, Atty., U. S. Dept. of Justice, Washington, D. C., Frank E. McDonald, U. S. Atty., Chicago, Ill., for appellee.

Before DUFFY, CASTLE and SWYGERT, Circuit Judges.

DUFFY, Circuit Judge.

This suit was brought by plaintiff Anthony Flan seeking a refund of $9,513.23 plus interest. This sum had been exacted as a penalty under provisions of Title 26 U.S.C. §§ 6671 and 6672 which provided that persons who collect withholding and FICA taxes, are required to truly account for and pay over such taxes.

Anthony Flan was the president and principal stockholder of the Oakton Engineering Corporation (Oakton). The only other officer of the firm was Shirley Flan, but she was inactive. Oakton was engaged in the business of manufacturing and selling a display machine used by purchasers to market their products.

Oakton had filed with the District Director of Internal Revenue, employers' quarterly federal tax returns for each quarter between January 1, 1955 and December 31, 1957, reflecting its liability under the Federal Insurance Contribution Act (FICA), and the Federal Unemployment Tax Act (FUTA). Each return was signed by taxpayer, Anthony Flan.

Oakton did not make payment of taxes withheld from its employees' wages for the fourth quarter of 1955. It made partial payment for the second quarter of 1957 and failed to make any payment for the third and fourth quarters of 1957.

In 1955, Oakton found itself in a difficult financial condition. It was overdrawn at the bank. It was delinquent for several quarters of its withholding and FICA taxes. All of its outstanding capital stock had been pledged. Oakton was on the lookout for a source of additional income.

Pettibone-Mulliken Corporation (Pettibone) was interested in expanding into the electronics business. It hired one Barrett King on a fee basis to examine companies in this field and make recommendation with respect to companies with which Pettibone might become affiliated. King recommended several concerns including Oakton.

On December 28, 1955, Oakton and Pettibone executed a written agreement in which Pettibone agreed to employ Oakton to manufacture and assemble 250 "Robo-Tape Vendors". Pettibone agreed to purchase the inventory then owned by Oakton which was to be used in the manufacture of the 250 machines, and also agreed to purchase the necessary additional inventory from other suppliers. Pettibone was to pay Oakton the sum of $62 for each complete machine "which said sum shall compensate Oakton Engineering Corporation for all labor, overhead burden and margin of profit in the manufacture of these items."

Thereafter, King devoted substantially all of his time to the business of Oakton. He remained at Oakton until June 1957.

The arrangement between Oakton and Pettibone did not provide Oakton with sufficient working capital. From time to time, King would recommend to Pettibone that it make cash advances to Oakton. Pettibone did make many cash advances, but it did not do so each time such a request was made. The monies advanced were used by Oakton to pay many of its operating expenses including salaries and current and delinquent taxes.

In January 1957, Oakton and Pettibone entered into a second agreement. This agreement was dated back to December 28, 1955. By this agreement, all of Oakton's receivables were assigned to Pettibone. Pettibone did not agree it would pay or be liable for Oakton's salary obligations, delinquent taxes or any other payables. Pettibone continued to make advances.

Many times when King requested an advance to pay taxes he would remind Pettibone of the outstanding obligation for the December 1955 installment. However, no advance was ever sent to specifically cover this item. When memoranda from King on this subject ceased, Flan testified he assumed the tax had been paid.

On April 1, 1959, the District Director assessed a penalty equal to the amount of the unpaid tax against Flan pursuant to §§ 6671 and 6672, Internal Revenue Code of 1954. On March 25, 1960, Flan paid the assessment in full. Thereafter he filed timely claims for a refund.

Title 26 U.S.C. § 6672 provides: "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 * * *" shall be liable for a penalty (Emphasis supplied).

The District Court held "The word `wilfully' as used in § 6672 means `knowingly', `voluntarily', or `intentionally'." Taxpayer argues the standard of conduct necessary to imposition of the penalty is more stringent; that only when the failure to account is done "without reasonable cause" can the penalty be imposed. Taxpayer says that the authorities are divided on the question, but insists that his view represents the weight of authority and finds strong support, not only in law, but in reason.

Taxpayer points out that the tax liability here involved is not his, and insists that the courts cast a "jaundiced eye" where the United States Government calls upon a third person to respond to the tax of another.

It is argued by taxpayer that the wording of the statute that any person required to account for and pay over the tax who willfully fails to collect such tax or willfully attempts to in any manner evade or defeat the tax, are words familiar in the context of fraud statutes; that the fraud statute requires not only a bad or evil motive but a motive specifically...