McCarty v. United States

• Decision Date: 19 February 1971
• Docket Number: No. 229-62.,229-62.
• Citation: 437 F.2d 961,194 Ct. Cl. 42
• Parties: Lewis C. McCARTY, Jr. v. The UNITED STATES.
• Court: U.S. Claims Court

194 Ct. Cl. 42, 437 F.2d 961 (1971)

Lewis C. McCARTY, Jr. v. The UNITED STATES.

No. 229-62.

United States Court of Claims.

February 19, 1971.

Stanley Worth, Washington, D.C., attorney of record for plaintiff. Scott P. Crampton, Worth & Crampton, Washington, D.C., of counsel.

David J. Gullen, Washington, D.C., with whom was Asst. Atty. Gen. Johnnie M. Walters, for defendant. Philip R. Miller, and Joseph Kovner, Washington, D.C., of counsel.

Before COWEN, Chief Judge, and LARAMORE, DURFEE, DAVIS, COLLINS, SKELTON, and NICHOLS, Judges.

OPINION

SKELTON, Judge:

We are indebted to Trial Commissioner C. Murray Bernhardt in this case for his findings of fact and conclusions of law and also for his opinion in which he held that the plaintiff was entitled to recover and that defendant's counterclaim should be dismissed. We have adopted his findings of fact with minor changes and have reached the same result on questions of law but for different reasons. The opinion of the court follows.

This is an action brought under the provisions of 28 U.S.C. § 1491, and § 2707(a) of the Internal Revenue Code of 1939, reenacted as § 6672 of the 1954 Code,¹ to recover $9,370.14 of penalties paid by plaintiff on account of withholding taxes, including Federal Insurance Contribution Act taxes, due from his principal, Marine Aircraft Corporation (hereinafter "Marine"), for 1952 and through the third quarter of 1953. By counterclaim the Government seeks a judgment for $201,257.70 for the unpaid balance of the penalty assessments against plaintiff for the same period. This figure results from crediting against the $219,678.65 assessed plaintiff the sum of $9,370.14 paid by him and an abatement of $9,050.81, as reported in finding 12.

The facts in this case are as follows: In 1948 plaintiff and one Felio incorporated Marine to exploit certain inventions made by them and to engage in manufacturing and aeronautical engineering. Starting on a modest scale in New York City with six to eight employees, Marine moved to larger quarters in Texas in 1949 with the cooperation of the Navy. Its business increased rapidly, ultimately involving a total of approximately 29 Navy and Air Force contracts and subcontracts aggregating in excess of $5,000,000, accompanied by an expansion of personnel to a 1952 payroll peak of about 700.

Plaintiff was responsible for obtaining the bulk of Marine's contract work. At the outset he held over 70 percent of Marine's stock. As of late 1952 he and Felio collectively held the majority of Marine's stock. Plaintiff held 40 percent plus of the stock from April through October 1952, and 28 percent plus thereafter through October 1953.

Marine's increased workload was financed by a loan agreement arranged in August 1951 with the Fort Worth National Bank (hereafter "Bank") setting up a revolving credit in the initial amount of $250,000, later increased to $400,000 in February 1952, and to $650,000 in August 1952. The loan was secured by an assignment of payments under the contracts. Borrowings against the credit were made weekly or whenever Marine needed funds, and were obtained by submission of a certificate of investment disclosing Marine's net investment in contract performance as reduced by progress payments to derive a borrowing base, plus Marine's promissory note if the borrowing base exceeded the outstanding loan balance, subject always to the credit limit. After August 1952 Marine could borrow up to 100 percent of its unreimbursed inventory cost. The Navy guaranteed the loan by a V-loan Guarantee Agreement with the Bank. Through November 11, 1952, payments on the assigned contracts when received by the Bank were applied to the loan balance.

Marine was perennially short of funds to meet its obligations. This condition was brought about by inadequate capitalization, rapid expansion, delays in collections (particularly the standard 15 percent retainages from Government progress payments), and losses under many contracts due to poor cost estimates or poor management, or both. Plaintiff kept close watch over Marine's current and prospective financial status and instructed its treasurer to accord priority to bills for materials and payroll, to the apparent neglect of withholding tax bills, in order that the company could stay in business. By the end of July 1952 Marine owed about $130,000 in withholding taxes, a condition with which all members of its board of directors were not familiar until it was formally disclosed at a board meeting on August 5, and steps then were taken to negotiate a deferred payment arrangement with the Internal Revenue Service (hereafter "Service"). The Navy knew in August 1952 of Marine's tax arrears, and thereafter is charged with such knowledge at all times, even though prior to November 1952 it may not have known specifically of the tax liens filed by the Service.

Those portions of Marine's bylaws which are in the record contain no specific authorization as to payment of bills, including taxes. By resolution of the board of directors company checks required dual signatures from a list of several designated company officials, including plaintiff as president. Plaintiff's authority to pay Marine's bills lost some of its autonomy for practical purposes starting as early as June 9, 1952, when Harry Vollmer was elected as chief executive officer to run the company and set its policy, while plaintiff participated therein but concentrated in the main on production problems and scouting new business. In the next few months plaintiff signed about half of Marine's checks and Vollmer the rest, along with a cosigner's signature in each case. It is reasonable to conclude that the financial condition of Marine was such in this period, and its withholding tax arrears so sizable, that as a practical matter plaintiff would not, after June 9, 1952, have paid the tax arrears on his sole initiative without approval of the board of directors, even though at times there was enough cash in the till and there was nothing tangible disclosed by the record which would have literally prohibited plaintiff from such payment, except for the pressure of operating expenses. Subsequently, plaintiff's authority to pay Marine's bills on his own initiative was further curtailed and eventually terminated as we shall see.

Marine's general counsel negotiated an agreement with the Service dated October 1, 1952, which, after reciting the tax arrears of approximately $130,000 through July 31, 1952, provided that the tax liens would not be enforced if Marine would pay up the arrears at the rate of $8,000 monthly starting October 1, 1952, and would also meet its current taxes when due. The Service's policy was not to interfere with the war effort by enforcing its tax liens against Marine. Marine's board of directors approved the agreement on October 6, 1952, and plaintiff signed it for the company. A copy of this agreement is attached to defendant's brief. It provided, in pertinent part, in addition to the foregoing, that:

WHEREAS, the notices of Federal Tax liens which are in the process of being filed by the Collector of Internal Revenue in Tarrant County, Texas or elsewhere against Marine * * * will operate against machinery and equipment owned free and clear of any other liens by Marine * * * with an acquisition value after depreciation of $98,000, and a present resale value due to the emergency need for this type of equipment of substantially in excess of that sum,

NOW, THEREFORE, it is agreed by and between the parties hereto as follows:

1. The Collector of Internal Revenue for the Second Texas District shall file notices of tax liens in the proper office in Tarrant County, Texas or elsewhere against Marine * * * covering the full amount of unpaid internal revenue taxes owing from that corporation to the United States Government.

2. The Collector of Internal Revenue * * * so long as the conditions of Paragraph 3 and 4 of this Agreement are adhered to by Marine * * * i. e., the payment of all current withholding taxes and old age benefit payments plus $8,000 per month on past due taxes plus interest, beginning October 1, 1952, shall refrain from enforcing said federal tax liens by distraint or seizure action, other than as set forth in Paragraph 1 above.

* * * * * *

5. In the event that for any reason whatsoever, Marine * * * shall fail to make any of the payments or comply with any of the agreements contained herein, then and in any such event The Collector of Internal Revenue * * * may at his discretion take such steps of distraint or seizure or otherwise as in his judgment he may deem advisable and necessary to protect the interest of the United States Government as outlined herein.

The facts also reflect that the IRS had filed three tax liens on Marine's property through July 25, 1952, all of which except the last had been discharged. It filed eight tax liens thereafter from October 17, 1952, through January 5, 1954. The trial commissioner found that the Fort Worth National Bank, the Federal Reserve Bank of Dallas, and the Navy knew or should have known of these eight tax liens filed by the IRS.

The above described agreement for the payment by Marine of its delinquent taxes was similar to an agreement made in 1951 between Marine and the IRS for the payment of Marine's earlier tax arrears for 1949 and 1950, which was fully carried out.

On the basis of cash forecasts and prospective improvements in production efficiency, Marine's officers responsibly believed that, although its financial situation was serious in 1952, its cash picture would improve each month to enable it to meet the terms of its agreement with the Service and cure its financial situation by late 1953. In view of Marine's default in deliveries and losses under most of its contracts there was perhaps little reason to be sanguine.

Marine made four payments of $8,000 each from October 1, 1952 to January 2, 1953, against the pre-August 1 tax...