Kurio v. United States

• Decision Date: 11 December 1970
• Docket Number: Civ. A. No. 66-H-509.
• Citation: 429 F. Supp. 42
• Parties: Bernhard R. KURIO, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Southern District of Texas

429 F. Supp. 42

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

Civ. A. No. 66-H-509.

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

June 15, 1970.

Amended Memorandum December 11, 1970.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

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

Leonard B. Tatar, Atty., Tax Div., Dept. of Justice, Houston, Tex., for defendant.

NOEL, District Judge.

MEMORANDUM OPINION:

This case began as a suit for refund of payroll taxes. Over $89,000 in such taxes for 1963 and 1964 were assessed. Plaintiff paid a portion and sued for refund. The Government filed liens and counterclaimed for the balance.

On the day set for trial, the case became more than a refund suit. When called, Government counsel announced that the parties had agreed to settle the case, and requested leave to amend the Government's answer and counterclaim to so allege. The motion was unopposed and granted. The Government then moved for judgment on an asserted contract of settlement. Plaintiff admitted negotiations for settlement were had, but denied that a contract of settlement had been achieved. The Government's motion was carried with the case.

Trial was had, on both the refund and contract issues. After considering the record carefully, the Court determined that plaintiff should recover on his claim for refund. The Court also determined that the Government's motion to enforce the claimed contract probably should be denied but that the administration of justice would be best served by a severance of the refund issue from the contract issue. The latter conclusion was reached primarily because preparation of findings of fact and conclusions of law on the contract issue would require a tedious and lengthy examination of the procedure for processing tax returns, and the felt probability that after an adverse determination of the refund issue, the Department of Justice would review the record, perceive the weakness of its contract claim, and recede from the latter out of court.

The merits of the refund claim were fully examined in a Memorandum and Order constituting findings of fact and conclusions of law with respect to all issues other than the contract issue, D.C., 281 F.Supp. 252 (1968). A final judgment was entered as to such issues pursuant to Rule 54(b), Fed.R.Civ.P., in which plaintiff's claim for refund was granted and the Government's counterclaim dismissed insofar as it was based on the assessments for 1963 and 1964. No appeal was taken and such judgment became final. This transformed the posture of the pleadings left in the case from a suit by plaintiff for a tax refund, to a suit by the Government on an asserted contract.

Soon after the judgment became final, it became apparent that the Government would not dismiss but continue to press its claim of contract and seek recovery of the amount which it claimed plaintiff had agreed to pay in settlement. The settlement issue remained on the docket. The tax liens outstanding against plaintiff were not released or reduced, notwithstanding the Court had determined in its Memorandum and Order that plaintiff was not liable for any 1963 or 1964 tax and that the liens based on the assessments for those years were null and void. Though judgment on the tax aspect of the case had become final, the lien records in Harris County, Texas, continued to reflect that plaintiff owed the Government over $89,000 in 1963 and 1964 taxes.

Although requested by plaintiff to do so, the Government refused to release or reduce its liens until plaintiff paid the full amount claimed under the settlement. Eventually, to obtain release of the liens, plaintiff found it expedient to pay such amount. He then amended his pleadings and now sues for refund a second time, seeking to recover all that he has paid the Government, both in taxes and in satisfaction of the alleged contract. The Government has not responded to plaintiff's amended complaint, but its prior pleadings manifest its position that it is entitled to all sums plaintiff has paid. The Government's trial amendment which added the Government's claim of settlement had engrafted a cluster of new issues on the original refund suit.

As the evidence developed at trial, it became clear that the parties' attempts to settle were frustrated by processing errors in the automatic data processing system of the Internal Revenue Service (IRS) which released ripples and waves of governmental action and inaction, human and mechanical. These errors ultimately caused a misapplication of payments made by plaintiff. The system was incapable of promptly finding and correcting its errors. When the mistakes were finally discovered, the Government failed promptly to admit them. The resulting snarl is now before the Court for resolution.

As anticipated, the Court has concluded that no contract of settlement resulted from the negotiations between plaintiff's and Government counsel. Why this is so — why the words which passed between counsel failed to create a contract — while apparent from the testimony, is best understood from an application of the law of contracts to the pertinent events surrounding the negotiations and ultimate discovery by the Government of its mistake.

Agreements comprising tax litigation are, of course, contracts. As such they are subject to the rules applicable to contracts generally, United States v. Lane, 303 F.2d 1, 4 (5th Cir. 1962), unless tax policy requires some other result, as it did for example in United States v. Feinberg, 372 F.2d 352 (3d Cir. 1965), aff'd on rehearing en banc, 372 F.2d 352, 359 (1967). Before applying any of the general contract rules pertinent here, the Court in each instance has determined whether that rule is consistent with tax policy. All conflicts and potential conflicts are raised and considered herein.

Under general contract law, in considering whether a contract has been formed a court must place itself as nearly as possible in the position of the parties at the time of their negotiations, a process which requires analysis of all pertinent events. Local 787, IUE v. Collins Radio Co., 317 F.2d 214, 220 (5th Cir. 1963). See generally, 3 A. Corbin, Contracts §§ 538, 543A-B (1960 ed. & Supp.1964) hereinafter cited as 3 Corbin. Accordingly, the bulk of this memorandum opinion consists of a detailed statement and analysis of the complex facts.

I. BACKGROUND

The withholding tax provisions of the Internal Revenue Code of 1954 (hereinafter called "the Code") and the Federal Insurance Contributions Act (FICA) require every employer to deduct and withhold taxes upon the wages he pays his employees. 26 U.S.C. §§ 3101-02, 3402. Additionally, the FICA and the Federal Unemployment Tax Act (FUTA) impose taxes upon employers computed as a percentage of wages. 26 U.S.C. §§ 3111, 3301. By regulation, employers liable for withholding and FICA taxes are required to return such taxes quarterly on a prescribed form (hereinafter sometimes called a "941 return"). Treas. Reg. §§ 31.6011(a)-1, -4. FUTA taxes are required to be returned annually on a Form 940. Treas.Reg. § 31.6011(a)-3. Employers who fail without reasonable cause to file such returns are subject to penalty. 26 U.S.C. § 6651.

If an employer's liability for withholding and FICA taxes exceeds $100 for either of the first two months of a calendar quarter, he is required to deposit the tax for that month in a Federal Reserve Bank or authorized commercial bank. Treas.Reg. § 31.6302(c)-1; see 26 U.S.C. § 6302. During the period relevant here, he then could elect whether to deposit the remainder of his quarterly tax liability in the manner provided for monthly payments, or to enclose payment with his return.¹ A penalty is prescribed for failure without reasonable cause to make required deposits. 26 U.S.C. § 6656.

An employer required to make deposits for a taxable period in 1967 or earlier was also required to prepare a Federal Depositary Receipt for each deposit for validation by a Federal Reserve Bank. The validated depositary receipts and the remittance of any balance due were then attached to the 941 return for the period with respect to which the deposits were made. Treas.Reg. § 31.6302(c)-1(a)(3)(ii). The 941 return provided space not only for a summary computation of the employer's tax liability (the total taxable wages paid during the quarter, the amount of income tax withheld, the total FICA taxes due, the total of the enclosed depositary receipts, and the balance due), but also for identification of the depositary receipts by serial number, date, and amount. The depositary receipts thus served to substantiate the amount of tax deposited by the employer, entitling him to a credit on his 941 return for the quarter.²

An employer submitting a 941 return is required to substantiate the total wages he reports as subject to FICA tax by itemizing the taxable wages paid each employee during the quarter. Such amounts are entered in a schedule provided on the return and on continuation sheets furnished by the IRS for that purpose. Similar sheets are available from the IRS to correct wage information supplied for previous quarters. By completing such sheets and attaching an adjustment computation, an employer can correct a tax liability previously reported.

As a contractor in the construction industry during 1963, 1964, and 1965, plaintiff subcontracted drywall construction from house and apartment builders. During 1963 and 1964, plaintiff would bid on projects and if his bid was accepted, would arrange with others to perform the services necessary to carry out the jobs. He did not consider the persons with whom he contracted to do the work to be his employees. Rather, he treated them as self-employed independent contractors, and did not withhold any taxes from the amounts he paid them. He filed no 940 or 941 returns, and paid no withholding, FICA, or FUTA taxes.

Since January...