Koegel v. United States, 75 Civ. 5013-CLB.

• Decision Date: 01 July 1977
• Docket Number: No. 75 Civ. 5013-CLB.,75 Civ. 5013-CLB.
• Citation: 437 F. Supp. 176
• Parties: David KOEGEL, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Southern District of New York

437 F. Supp. 176

David KOEGEL, Plaintiff, v. UNITED STATES of America, Defendant.

No. 75 Civ. 5013-CLB.

United States District Court, S. D. New York.

July 1, 1977,

Stephen L. Packard, New York City, for plaintiff.

N. L. Gerber, Asst. U. S. Atty., New York City, for defendant.

FINDINGS AND CONCLUSIONS

BRIEANT, District Judge.

By his complaint filed October 13, 1975, plaintiff David Koegel seeks a refund of a tax penalty of $24,872.35, which he paid on April 4, 1973. This penalty was timely assessed on November 24, 1971 for the unpaid federal employee withholding taxes and the Social Security ("FICA") taxes of Auburn Toys, Inc. ("Auburn Toys"). The assessment included $12,462.98 for the first quarter of 1969 and $10,562.12 for the second quarter of 1969, together with interest of $1,838.25 and a lien fee of $6.00, all of which Auburn Toys had failed to pay when due, although withheld to the extent chargeable to its employees.

Plaintiff contends that this assessment, made pursuant to Sections 6671 and 6672 of the Internal Revenue Code ("IRC"), was illegal and erroneous in that he was not a "person" responsible for the collection and payment of these FICA and payroll withholding taxes, and that he did not "willfully" fail to collect, account for and pay over these taxes.

On April 3, 1975, plaintiff filed a timely Claim for Refund on Internal Revenue Service ("IRS") Form 843. This claim was denied by the IRS on May 23, 1975. This action was timely brought, and the Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1346(a)(1). A non-jury trial was held before me on December 22 and 23, 1976. Post-trial briefs have been submitted and considered.

Facts

Familiarity is assumed with the uncontested facts which have been stipulated to in the Pre-Trial Order, signed December 22, 1976. Since 1965, plaintiff was the president and chief executive officer of the Flora Mir Candy Corporation ("Flora Mir") located in New York, which manufactured chocolates and other candies. Beginning in April, 1968, Flora Mir embarked on a program to acquire smaller candy companies in order to create a single large candy company. During the ensuing four months, Flora Mir acquired eleven subsidiaries, owning 100% of the capital stock of each.

Following these acquisitions, Koegel testified that he concentrated on "financing, acquisitions and developing some new ideas such as combining candy with toys and bringing in a larger income. . . ." (Tr. p. 8).

In middle or late 1968, Mr. R. J. Hodson, then president of Auburn Rubber, a toy manufacturing company, approached plaintiff regarding the possible acquisition of the business of his company by Flora Mir. Plaintiff did not acquire the company on behalf of Flora Mir, since, as he testified:

"The toy company has been burdened with heavy longterm loans, and as such it would have ruined Flora Mir Candy's financial statements and financial position. . . ." (Tr. p. 11).

He did, however, agree to acquire the company himself, with a view to packaging Flora Mir candies inside of or together with toys produced by Auburn Rubber.

To execute this plan, in December 1968 plaintiff arranged for the incorporation of Auburn Toys as a New Mexico corporation, located in Deming, New Mexico. Plaintiff, together with his wife, owned over 60% of the outstanding stock of this corporation. The balance of the stock of Auburn Toys was held by James M. Martin (33%), who executed a voting proxy to Koegel (JX-2), Zia Investment Co. (2%) and Shirley M. Henschel (1.66%). Auburn Toys immediately acquired all of the outstanding common stock of Auburn Rubber, paying no consideration whatsoever to the former owners of that stock. In short, plaintiff, through Auburn Toys, acquired the ongoing business of Auburn Rubber without anybody paying any money. (Tr. p. 13). Instead, plaintiff acquired the company with the promise of an infusion of capital to insure its continued solvency and, of course, continued employment for its employees.

At the time of its acquisition, Auburn Rubber was burdened with over $200,000.00 in debts. Plaintiff lent $100,000.00 of his own money for the purpose of settling these old debts, thus hoping to reopen credit lines for the business. Approximately $86,000.00 of this fund was spent in settling Auburn Rubber's debts. Plaintiff contends that he did not take part in the actual settlement of these debts, but rather, authorized that this be carried out by two of his subordinates at Flora Mir, Messrs. Stanley Goldman (Assistant to the President of Flora Mir) and Harvey Kaplan (Vice President and Accountant of Flora Mir).

Plaintiff was never an officer, director or employee of Auburn Toys (Stipulation ¶ 43). During the relevant time period (January 1, 1969-June 30, 1969), plaintiff was the president and chief operating officer of Flora Mir, and the manager and vice president of the Hotel Kenmore in New York City where Flora Mir maintained its offices. The officers of Auburn Toys included Frieda Howe, president (a desk clerk at the Hotel Kenmore); John Amiento, secretary (Frieda Howe's husband and a former employee of the Hotel Kenmore); Shirley M. Henschel, assistant secretary (vice president and a director of Flora Mir with offices in the Hotel Kenmore); Albert Zodda (a vice president of Flora Mir); and J. Thomas Hodson (a former officer of Auburn Rubber and son of its former president). Of the five directors of Auburn Toys (Stipulation ¶ 30), the clear majority were employees of Koegel and under his complete control.

The three top executive employees of Auburn Toys, in Deming, New Mexico were J. Thomas Hodson, John C. Hodson and Ronald Sherman. J. Thomas Hodson was the son of the founder of Auburn Rubber, R. J. Hodson. J. Thomas Hodson was employed by Auburn Toys from January 1, 1969 until late February 1969, serving in the capacity of executive vice president. Although J. Thomas Hodson did not testify at the trial, his deposition was taken in Albuquerque, New Mexico on October 27, 1976, and admitted into evidence as Government's Exhibit 10 ("GX"). Mr. Hodson testified that he was fired by plaintiff in a telephone call in which a dispute arose over Koegel's failure to advance funds to Auburn Toys to the full extent which had been promised. Koegel's denial of this conversation (Tr. p. 50) is not credited by the Court.

John C. Hodson was employed by Auburn Toys from January 1, 1969 to February 20, 1969 in the capacity of special assistant to the executive vice president. Mr. John Hodson did not testify at the trial, but was deposed in Dallas, Texas on December 6, 1976. His deposition was admitted into evidence at the trial as GX 11. Mr. John Hodson testified that he was fired by plaintiff in the course of the telephone conversation between plaintiff and John Hodson's brother above mentioned. Again, Koegel's denial is not credited.

Mr. Ron Sherman was employed by Auburn Toys from mid-February through mid-May 1969 in the capacity of plant manager at Deming, New Mexico. He testified that he was recommended for this job by an attorney, Mr. Ralph Wanek. He was then interviewed in Deming by Mr. Stanley Goldman of Flora Mir. Mr. Sherman did not testify at trial but was deposed in Miami, Florida on October 27, 1976. This deposition was admitted into evidence as GX 9. In the course of the deposition, Mr. Sherman testified that he took orders from Mr. Stanley Goldman and from Mr. David Koegel.

Plaintiff had no authority to sign checks for Auburn Toys (Stipulation ¶ 44). However, in order to induce Mercantile Financial Corp. ("Mercantile"), a commercial factor of Chicago, Illinois, to enter into an agreement with Auburn Toys to finance its accounts receivable, plaintiff did sign a personal guarantee for Auburn Toys, Auburn Rubber, and Auburn Financial Corporation. (See JX 6 and 7). The guarantee and the accounts receivable financing agreement were both executed on January 2, 1969. Koegel personally negotiated this agreement with Mr. Howard Grant of Mercantile, beginning in January 1969, and culminating in a joint visit to Deming, New Mexico in April 1969.

There is no dispute as to Auburn Toys' failure to pay the required federal employee withholding tax and FICA tax for the first two quarters of 1969. The federal employer's tax return for the relevant period was signed by Ronald Sherman (Stipulation ¶ 45).

Although plaintiff was not officially present at Auburn Toys, it does appear that he directed several of his employees at Flora Mir to act pursuant to his minute instructions, regularly given, in managing the business and financial affairs of Auburn Toys. The record reveals that Stanley Goldman, Harvey Kaplan and Albert Zodda, all Flora Mir employees, were actively involved in the payment of creditors of Auburn Toys and the hiring and firing of Auburn Toys employees. For example, plaintiff testified that he delegated to Goldman the responsibility for the daily affairs of Auburn Toys including the "payouts" of the $200,000.00 of debts accumulated by Auburn Rubber. He testified to the same effect with respect to the activities of Kaplan.

Goldman (Koegel's personal assistant) testified, and I find, that his authority with respect to Auburn Toys stemmed directly from Koegel, with whom he consulted on a regular basis. Koegel personally chose the president and secretary of Auburn Toys. Koegel opened all the incoming mail at the offices of Flora Mir, according to Goldman, in order to keep "control" of all his companies. Koegel often read a letter pertaining to Auburn Toys then called in Goldman and instructed him as to the required response. Goldman also had several conversations with Koegel regarding which creditors of Auburn Toys should be paid and which should not be paid.

Frieda Howe, the desk clerk at the Hotel Kenmore, who served as president of Auburn Toys, testified, and I find, that she knew nothing about Auburn Toys and acted solely at the behest and directions of Mr. Koegel,...