Kurio v. United States, 66-H-509.

• Decision Date: 05 March 1968
• Docket Number: No. 66-H-509.,66-H-509.
• Citation: 281 F. Supp. 252
• Parties: Bernhard R. KURIO, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Southern District of Texas

281 F. Supp. 252

Bernhard R. KURIO, Plaintiff, v. UNITED STATES of America, Defendant.

No. 66-H-509.

United States District Court S. D. Texas, Houston Division.

March 5, 1968.

Robert I. White, of Chamberlain & Hrdlicka, Houston, Tex., for plaintiff.

Leonard B. Tatar, Tax Division, U. S. Department of Justice, for defendant.

MEMORANDUM AND ORDER

NOEL, District Judge.

This is a suit for the refund of taxes, commonly referred to as payroll taxes, paid in the amount of $44.90 for the year 1963 and $161.22 for the year 1964. Plaintiff alleges such taxes to have been erroneously assessed pursuant to the Federal Insurance Contributions Act (FICA), 26 U.S.C. § 3101 et seq., the Federal Unemployment Tax Act (FUTA), 26 U.S.C. § 3301 et seq., and the collection of income tax at the source on wages (withholding or WH tax), 26 U.S.C. § 3401 et seq.¹ The United States filed a counterclaim demanding judgment (a) for FICA, FUTA, and withholding taxes assessed by the District Director of Internal Revenue for the quarters and years 1963 and 1964 which have not been paid by the plaintiff, (b) for additions to taxes (penalties) pursuant to 26 U.S.C. § 6651(a) for failure to file timely payroll tax returns and § 6656 for failure to make deposits of taxes, and (c) for interest thereon. The amount of the counterclaim is $89,063.56. In the alternative, the United States seeks judgment for the amount of $4,200, in addition to payments and credits of $8,188.41, alleged to be owing pursuant to a contract of settlement entered into between plaintiff and defendant with respect to the assessments here in issue.

On this day I have entered an Order Directing Entry of Final Judgment with respect to plaintiff's claimed liability for FICA, FUTA, and withholding (WH) taxes and additions to taxes for the years 1963 and 1964, pursuant to rule 54(b) of the Federal Rules of Civil Procedure. The issue as to whether a valid and binding contract of settlement was entered into by the parties has been severed for later determination. It is in the interest of the administration of justice that the order of severance has been entered, and there is no just reason for the delay of judgment in the issues disposed of in this Memorandum and Order.

During 1963 and 1964, Plaintiff Kurio was a contractor who subcontracted drywall work or construction from house and apartment builders. Kurio furnished materials for the construction work so contracted, but arranged with others to haul or truck the materials to the jobs, with workmen known as hangers, tapers, floaters and sanders to actually fabricate the materials into walls, and with others to clean up and haul or truck trash from the jobs after completion of his drywall construction on the jobs. On rare occasions Kurio contracted to perform drywall repair work, including minor painting, all of which he arranged to be done by workmen of the kind and in the manner next above mentioned.

The FICA, FUTA, and withholding taxes were assessed against Kurio on the theory that all of the persons who hung, taped, floated and sanded drywall board (commonly referred to both as sheetrock and as gypsum board), persons who trucked or hauled the drywall construction materials to the jobs, persons who did painting on the jobs, and persons who hauled or trucked trash away from the jobs for the plaintiff during 1963 and 1964 were his employees for payroll tax purposes under 26 U.S.C. §§ 3121(d), 3306(i), and 3401(c) and (d), Internal Revenue Code of 1954. It is the plaintiff's contention that the workmen were not his employees for payroll tax purposes, but were self-employed subcontractors (independent contractors) and, therefore, that he was exempt from the obligations imposed upon employers by sections 3121, 3306 and 3401 et seq.

On October 27, 1965, an agent from the Houston Office of the Internal Revenue Service (IRS) reviewed Kurio's books. This was done as part of a test check of the drywall construction industry, in an effort affirmatively to bring under the classification of employees for payroll tax purposes, certain drywall industry workmen who theretofore had been reported to the I.R.S. as subcontractors without challenge by the I.R.S. In the report of his review, the agent treated payments made by Kurio to drywall hangers, tapers, floaters and sanders, as well as the materials truckers, trash haulers and incidental painters, during 1963 and 1964, as "wages" paid "employees." On November 19, 1965, the agent prepared a formal Preliminary Statement² of delinquent FICA, FUTA and WH taxes due for 1963 and 1964, together with penalties for late filing without reasonable cause and for failure to make monthly deposits without reasonable cause, imposed pursuant to sections 6651(a) and 6656, respectively. The statement related that the reason Kurio did not report and pay payroll taxes was that he considered the people to whom such payments were made to be subcontractors. The Preliminary Statement and supporting forms were sent to the District Director, U. S. Treasury Department, Internal Revenue Service at Austin, Texas.³

On December 29, 1965, the District Director addressed a letter to Kurio advising him of the proposed adjustments to his tax liability for 1963 and 1964. The Director advised that Kurio had three alternatives available: he could accept the adjustment, or if he did not accept, he could either request a conference with a member of the District Conference Staff, or request a hearing with the Appellate Division of the Regional Commissioner's Office. On January 28, 1966, Kurio's counsel mailed a protest letter to the District Director, whereby Kurio took exception to the findings of the agent. A hearing before the Appellate Division of the Regional Commissioner's Office in Houston was requested.

A hearing conference was held in the Houston office on March 15, 1966. Kurio's counsel presented the facts and authority relied upon to support his position. Kurio's evidence included statements⁴ signed by various of the drywall workers under penalty of perjury, wherein the workers said that they had filed their own income tax returns for the tax periods in question, including the payments received from Kurio, and that Kurio had withheld no income tax from the money they had earned from him. Kurio's protest and exception were denied, which ended his appellate rights before the IRS.

The District Director assessed the tax,⁵ placed Kurio's name on an assessment list and forwarded the list to the Houston office for collection. The Kurio account was assigned to a revenue officer, commonly referred to as a collection officer, for application of collection procedures.

Kurio paid a portion of the assessment⁶ and filed with the District Director's Office, a claim for refund of taxes illegally, erroneously, or excessively collected.

A notice of the assessment was mailed to Kurio. Upon his failure to pay the assessment within the allowed time period, the collection officer prepared a notice of lien in the approximate amount of $89,000 and caused it to be filed in the Federal Lien Records in Harris County, Texas, on August 8, 1966.⁷ Seizure of Kurio's assets by the collection officer has been held in abeyance administratively, pending the outcome of this proceeding.

Kurio's claim for refund was rejected by the District Director, following which this suit for refund was filed.⁸ The United States filed a counterclaim herein for the balance of the assessment in the stated amount of $89,063.56. Subsequently, plaintiff Kurio was able to convince the IRS that a number of the people treated by it as "employees," had reported the amounts received from Kurio on Schedule C of their own federal income tax returns as self-employment income, and with respect thereto had paid their self-employment taxes.⁹ 26 U.S.C. sections 1401 and 1017. This resulted in a substantial abatement of withholding taxes by the IRS and a subsequent stipulation by counsel of the maximum liability of plaintiff for 1963 and 1964 FICA, FUTA, and WH taxes to be $25,629.48. Despite the fact that the maximum liability has been so reduced, the lien recorded to notice the liability continues to voice the original assessment as the amount of taxes due.

Plaintiff is a young businessman, 29 years of age, who now resides in Houston, but came here from the small town of Giddings, Texas in 1957. Between 1957 and 1963, he sub-contracted work from certain drywall construction contractors, as a drywall board hanger, taper and/or floater. In 1963 plaintiff decided to become a drywall construction contractor himself. He made contact with various home and apartment builders¹⁰ in and around the Houston area and sought to sub-contract their drywall construction work. Thereafter, builders would invite plaintiff to make bids on their apartment and residential projects. Upon receipt of each such invitation to bid, Kurio would compute the square footage of wall to be constructed and estimate his costs of doing the job, including a satisfactory margin of profit for himself. Having done so, he would submit his bid or price for doing the job to the builder.

In the drywall construction business, the workmen bear titles which are descriptive of the work they do.

A "hanger" is one who puts the drywall board or sheetrock in position on the walls and ceiling. A "taper" fills in the joints or gaps between the pieces of drywall with "mud" and covers the cracks to keep the mud from cracking. A "floater" coats the wall with a substance to give the drywall the appearance of being one piece of installation, having the appearance of a plaster wall. A "sander" rubs the drywall with sandpaper so as to give it a smooth surface.

In Kurio's operations, some hangers would do taping work, and some tapers would do floating work. Normally, however, one person would do only one phase of the drywall work (hang, tape, float or sand). Each phase was functionally and chronologically separate from the...