Johnson v. U.S.

• Citation: 602 F.2d 734
• Decision Date: 07 September 1979
• Docket Number: Nos. 77-1469,77-1471 and 77-1472,77-1470,s. 77-1469
• Parties: 79-2 USTC P 9577 Ralph JOHNSON, Plaintiff-Appellee, and Norma Jean S. Johnson, Administratrix of the Estate of Fairis Johnson,Deceased, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

Page 734

602 F.2d 734

79-2 USTC P 9577

Ralph JOHNSON, Plaintiff-Appellee, and Norma Jean S. Johnson, Administratrix of the Estate of Fairis Johnson,Deceased, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

Nos. 77-1469, 77-1470, 77-1471 and 77-1472.

United States Court of Appeals, Sixth Circuit.

Argued June 20, 1979.

Decided Sept. 7, 1979.

Patrick H. Molloy, U. S. Atty., Lexington, Ky., M. Carr Ferguson, Asst. Atty. Gen., Gilbert E. Andrews, Michael L. Paup, Jane M. Edmisten, Tax Div., Dept. of Justice, Washington, D.C., for defendant-appellant.

Charles F. Wood, Louisville, Ky., J. Leonard Walker, Louisville, Ky., for plaintiff-appellee.

Before CELEBREZZE, Circuit Judge and PHILLIPS, Senior Circuit Judge, and THOMAS, District Judge. ^*

WILLIAM K. THOMAS, District Judge.

The United States appeals from that part of the "amended judgment Nunc pro tunc" of the trial judge:

. . . which in accordance with the "order" of the District Court dated and filed April 19, 1977 limits interest before judgment to defendant, United States of America, to a period beginning with the date, notice and demand was made with respect to the assessments in issue and ending one year from the date of the filing of complaint herein.

Pursuant to 26 U.S.C. § 6672, ¹ the United States assessed Ralph Johnson and Fairis Johnson, each as an officer of Central Quality Coal Company, Inc. and each as an officer of Kentucky Esco Company, Inc. (thus as "responsible person"), for each individual's alleged willful failure as an officer of each corporation to pay to the Internal Revenue Service the unpaid but withheld federal income taxes and F.I.C.A. (Social Security) taxes on the wages such corporations paid to their employees for the designated quarters.

Plaintiff Ralph Johnson paid $980.73 on April 4, 1973 towards penalties assessed by the government in connection with the two companies. Similarly, plaintiff Fairis Johnson paid $1,268.38 on April 4, 1973 towards the penalties assessed. A separate action to recover the portions of the assessment paid as to each company pursuant to 28 U.S.C. § 1346(a)(1), was brought by Ralph Johnson and Fairis Johnson. ²

The United States counterclaimed in each of the four suits. In each suit involving Central Quality Coal Company, the United States asked judgment against the particular plaintiff in the amount of $54,724.93 (less credit for the April 4 payment). In each suit involving the Kentucky Esco Coal Company, the United States asked judgment against the particular plaintiff in the amount of $49,377.63 (less credit for the April 4 payment). On each counterclaim the government asked for "interest thereon in accordance with law."

The four suits were filed on April 27, 1973 in the United States District Court for the Eastern District of Kentucky at Pikeville. The consolidated cases were tried to a jury beginning November 1, 1976; and on November 3, 1976, jury verdicts were returned in favor of the United States of America and against the plaintiffs, Ralph Johnson and Norma Jean S. Johnson, Administratrix of the Estate of Fairis Johnson. The court entered judgments (with no dollar amounts specified) on the verdicts on March 31, 1977.

Thereafter on April 11, 1977, the United States moved to alter or amend the judgment:

. . . so as to reflect the principal amount for which plaintiffs, Ralph Johnson and Norma Jean S. Johnson, Administratrix of the Estate of Fairis Johnson, are liable and to reflect the allowance of prejudgment and post judgment interest on the amounts of the judgments.

In the two "Central Quality" judgments against Ralph Johnson and the estate of Fairis Johnson, deceased, the government asked specifically for judgment,

. . . in the amount of $53,427.65 plus prejudgment interest from the date of notice and demand, March 11, 1971 to the date of judgment of $21,065.91 for a total of $74,493.56, with statutory interest on the total amount of $74,493.56 from and after the date of judgment entry.

In the two "Kentucky Esco" judgments against Ralph Johnson and the estate of Fairis Johnson deceased, the government asked specifically for judgment,

. . . in the amount of $48,180.53, plus prejudgment interest from the date of notice and demand, March 11, 1971, to the date of judgment of $19,013.99, for a total of $67,194.52 with statutory interest on the total amount of $67,194.52 from and after the date of judgment entry.

On April 19, 1977, the trial judge entered an order which in part read:

The motion of the defendant, United States of America, to amend the judgment entered herein on March 31, 1977, will be SUSTAINED insofar as granting judgment in its favor and against the plaintiffs; the motion of the United States will be OVERRULED as to the basis for prejudgment interest beyond interest calculated from date of notice and demand plus one year from the date of the filing of these actions.

Explaining its action, the court further ordered:

The untimely delay in disposing of these cases was beyond the control of the parties and is attributable to an extensive backlog of civil matters. The record shows that plaintiffs have sought a timely trial on the issues and have not sought to delay or otherwise impair timely disposition. To permit the imposition of interest for a period of more than one year after the date of filing, under the pertaining circumstances, is contrary to the interests of justice and would, in fact, take on a punitive character. Counsel for both parties were advised prior to trial that such position would be taken by the Court regardless of which party prevailed.

Thereafter an amended judgment Nunc pro tunc was entered by the court. As to the two actions involving "Central Quality," judgment was entered for $53,427.65 "for stipulated assessment" and "for prejudgment interest" of $10,142.98, making a total of $63,570.63. In the "Kentucky Esco" actions, judgment was entered for $48,180.53 "for stipulated assessment" and $9,163.80 "for prejudgment interest," making a total of $57,344.33. The trial judge thus limited prejudgment interest to $19,306.78 while the government claimed $40,079.90 (prejudgment interest computed from the date of notices and demands (March 11, 1977) until date of judgment (March 31, 1977)).

The taxpayers have not appealed the judgments entered Nunc pro tunc against them. The government appeals the court's reduction and remission of prejudgment interest from $40,079.90 to $19,306.78.

The United States thus states the issue on this appeal:

Whether the District Court erred in ruling that the Government could recover prejudgment interest for only a portion of the period between notice and demand for payment and judgment, rather than for the full period the penalty taxes here involved remained unpaid.

The taxpayers, appellees, state the issues differently:

1. Whether the District Court was correct, under the exercise of its equitable power, in limiting the amount of prejudgment interest payable in these cases.

2. Whether the United States, whose representative agreed to the limiting of interest when the District Court stated its position thereto, and who failed to appropriately raise objections even after entry of judgment, has waived its entitlement to prejudgment interest in excess of that amount allowed by the Court.

I.

The docket sheets of the four cases do not reflect that counsel for the plaintiff ever moved or took any other action to have the refund suits advanced or set for trial. It is, therefore, not clear what the trial judge is referring to when he states in his order:

The records show that plaintiffs have sought a timely trial on the issues and have not sought to delay or otherwise impair timely disposition.

Although not shown in the record, it will be assumed for purposes of this appeal that both the plaintiffs and the government sought "a timely trial on the issues"; and that "the untimely delay in disposing of these cases was beyond the control of the parties and is attributable to an extensive backlog of civil matters." Judicial notice is taken of the fact that the "extensive backlog of civil matters" has defied the persistent efforts of the judges of the Eastern District of Kentucky to reduce the size of that backlog. ³

Notwithstanding any increased prejudgment interest which the court's delayed civil docket may cause these taxpayers to pay, ⁴ the question still remains whether this condition or any mitigating circumstances allows a trial court, exercising its equitable powers, to reduce or remit prejudgment interest.

Title 26, U.S.C. § 6601(a) and § 6601(e)(3) ⁵ provides compositely that interest on penalty taxes shall be imposed "at an annual rate established under section 6621" from the date of notice and demand until the date of judgment. Penalty taxes have been imposed under section 6672 on the plaintiffs as responsible corporate officers by the verdicts of the jury.

It is not disputed that the government served notices and demands upon each of the Johnson taxpayers with respect to each of the two corporations upon March 11, 1971. Hence, under section 6601(e)(3), "interest shall be imposed . . . from the date of the notice and demand to the date of payment."

However, the court, seeking to exercise its equitable powers, declared:

To permit the imposition of interest for a period of more than one year after the date of filing, under the pertaining circumstances, is contrary to the interests of justice and would, in fact, take on a punitive character.

Prejudgment interest provided in section 6601 is not of a "punitive character"; it represents compensation for the value of holding money over a period of time as held in United States v. Childs, 266 U.S. 304, 309-10, 45 S.Ct. 110, 111, 69 L.Ed. 299 (1924):

Interest is put upon it (the tax) and so denominated, distinguished from the 5% As penalty, Clearly intended to compensate the delay in payment of the tax the detriment of its nonpayment, to be...