Monday v. United States, 66-C-140.

• Decision Date: 14 January 1969
• Docket Number: No. 66-C-140.,66-C-140.
• Citation: 294 F. Supp. 1384
• Parties: Robert W. MONDAY, Plaintiff, v. UNITED STATES of America, Defendant and Third-Party Plaintiff, v. John A. MONDAY, Third-Party Defendant.
• Court: U.S. District Court — Eastern District of Wisconsin

294 F. Supp. 1384

Robert W. MONDAY, Plaintiff, v. UNITED STATES of America, Defendant and Third-Party Plaintiff, v. John A. MONDAY, Third-Party Defendant.

No. 66-C-140.

United States District Court E. D. Wisconsin.

January 14, 1969.

Martin J. Torphy and E. Campion Kersten, Milwaukee, Wis., for plaintiff.

Mitchell Rogovin, Asst. Atty. Gen., Daniel J. Dinan and Nestor M. Nicholas, Attys., Dept. of Justice, Washington, D. C., James B. Brennan, U. S. Atty., by Thomas R. Jones, Asst. U. S. Atty., Milwaukee, Wis., for defendant and third-party plaintiff.

Francis J. Demet, Milwaukee, Wis., for third-party defendant.

OPINION AND ORDER ON DEFENDANT'S MOTION FOR JUDGMENT NOTWITHSTANDING THE VERDICT, OR FOR A NEW TRIAL

REYNOLDS, District Judge.

INTRODUCTION

This opinion on the Government's motions after verdict is primarily concerned with the proper construction of the word "willfully" as used in § 6672 of the Internal Revenue Code.¹ The Government, in effect, claims that the word "willfully" does not include the concept of reasonable cause and in effect means "knowingly."

This court believes that the word in the statute has a meaning which in part encompasses the concept that where the failure to do the required act is based on reasonable cause, then such failure is not willful. As will be seen later, if this court's interpretation of the word is correct, then the Government's motions after verdict must be denied; and, of course, if this court is in error on the meaning of "willful," then the Government's motions should have been granted.

A penalty assessment under 26 U.S.C. § 6672 was made against Robert W. Monday for the withholding and F.I.C.A. taxes withheld from wages of employees of the P. C. Monday Tea Company for the last two quarters of 1960. Partial payment was made under protest, and timely claim for refund was made. The District Director of Internal Revenue denied the claim for refund. Robert W. Monday then instituted this action for recovery of the amount so paid. The Government counterclaimed for $10,836.17, the balance of the assessment, and interpleaded John A. Monday as a third-party defendant, claiming that he was equally liable with Robert W. Monday under the counterclaim.

Trial to a jury was had from June 4, 1968 to June 7, 1968. The jury found that both Robert W. Monday and John A. Monday were responsible officers for the periods in question pursuant to § 6672. The jury also found that neither John A. Monday nor Robert W. Monday willfully failed to pay the taxes in question. Accordingly, judgment was entered for the Mondays on June 11, 1968. The Government filed motions for judgment notwithstanding the verdict or, in the alternative, for a new trial.

FACTS

The P. C. Monday Tea Company (hereinafter called the "Company") was organized in 1918 by the father of Robert and John Monday. In 1960, the Company, which had about fifty-five employees, sold groceries to housewives, door to door, on a delivery route basis. The salesmen carried the groceries with them in their trucks.

During the last half of 1960 and thereafter, Robert W. Monday was president and a director and John A Monday was vice president, secretary, and a director of the Company. Both Robert and John Monday were active in the management of the business, although there was a substantial division of authority between them. John A. Monday spent virtually all of his time in the office, and Robert W. Monday was in the office about 25 per cent of the time. John A. Monday signed and participated in the preparation of the corporate tax returns.

The employer's quarterly federal tax returns were timely filed for the period in question without remittance. Both of the Mondays had the authority to sign checks, and together they negotiated loans and signed notes and mortgages as necessary.

In about 1956, the financial condition of the Company took a decided turn for the worse. This condition continued so that by 1960 the annual gross of the Company was only about half of its annual gross of the previous five years.

After 1960, the Company acquired its merchandise virtually on a c. o. d. basis. In March 1961, the Monday brothers went to the Milwaukee Internal Revenue Office to discuss the withholding tax arrearage. Despite the withholding tax arrearage, they were given specific permission by a supervisor in the Collection Department to continue to buy merchandise on a cash basis so that the Company could stay in business.

The Government argues that the action of the supervisor in giving the corporation permission to buy on a cash basis in no way relieved the Mondays of their legal responsibilities and therefore is immaterial. I agree that the action of the supervisor in no way relieved the Mondays of their legal responsibilities, but I believe it was admissible so that the jury could consider this evidence along with the other evidence in determining whether the Mondays' action was willful. This is especially so in view of the fact that the essence of the Government's case is that the Mondays bought this merchandise instead of paying the money over to the Government, and that this constituted a preference over the Government.²

In spite of this cash operation, the Company went into receivership in May of 1961. Bankruptcy followed on July 18, 1961. In September 1963, the trustee in bankruptcy distributed to the District Director the amount of $10,978.24, of which $435.84 was applied to the taxes on which the penalty assessment was based.

As indicated at the outset, all but one of the questions now raised by the Government result from a dispute as to the meaning of the word "willfully" in § 6672 of the Internal Revenue Code. The Government contends that if a responsible officer knew the taxes were due and the corporation had any money that was not used to pay the taxes, then the failure to pay was, as a matter of law, willful. In essence, the Government would impose on the responsible officer a form of strict liability for the taxes if there was any money coming into the hands of the corporation and if such officer knew the taxes were due and owing.

The statute in question, however, uses the word "willfully" not once but twice. Had that word been omitted, the type of liability suggested by the Government would exist. If Congress had wanted to hold the responsible officer strictly liable for the taxes if there was at any time any money available in the corporation, it could have done so with direct language by making such officer personally liable. The Government here is trying to impose such a standard of strict liability on the responsible officer. I do not believe that to be the law. Congress said that for a person to be liable for the tax, he must be a responsible officer who "willfully fails to * * * pay over such tax * * *." Consequently, an intentional failure which cannot be negated by a reasonable cause on the part of the responsible officer is essential to a finding of liability. To hold otherwise would render nugatory the very language of the statute. This court respectfully declines to rewrite the statute as the Government now requests.

IS THERE EVIDENCE WHICH SUPPORTS THE JURY FINDING THAT THE MONDAYS DID NOT WILLFULLY FAIL TO PAY THE TAXES IN QUESTION?

The Government has moved for judgment notwithstanding the verdict. If it can be said that no evidence supports the finding of the jury, the Government must prevail. In the view of this court, however, there is evidence from which the jury could infer that the failure by Robert and John Monday to pay over the taxes in question was not a willful failure as "willfully" was defined in the instructions given by this court, which will be discussed later.

The jury could find that the specific permission given by the supervisor in the Collection Department of the Milwaukee Internal Revenue Office to buy merchandise on a cash basis, despite the withholding tax arrearage, constituted reasonable cause for failure to pay the taxes due. This, of course, would mean that the failure was not willful, which is the verdict the jury returned. Consequently, since there is evidence which supports the verdict, it cannot be disturbed.

WAS THE INSTRUCTION ON THE MEANING OF THE TERM "WILLFUL" ERRONEOUS?

The following instructions on the meaning of "willful" were requested by the Government and refused:

"An act is willful if it is voluntary, conscious, and intentional. If you find that plaintiff and/or third-party defendant knowingly used available funds to prefer other creditors over the United States then you must find that he acted willfully.

"The Court instructs you that when a corporation meets its payroll it is presumed to have withheld therefrom the amount of taxes which the law requires it to withhold. The payment of wages to employees charges responsible persons with having in their hands the withholding taxes which is held as a trust fund. If a responsible person uses those funds for purposes other than payment of taxes, he or she is deemed to have acted willfully.

"The Court further instructs you that if a responsible person pays employees their net wages at a time when the corporation does not have sufficient funds to pay the taxes withheld, and when the funds become available, he or she uses them to pay other creditors, that person acts willfully.

"With regard to the phrase `reasonable cause,' you are instructed that if you find that John and Robert Monday knew the taxes were owing, that there was money available to pay the taxes, and that John and Robert Monday paid other creditors instead of paying the taxes, then their failure to pay over the taxes was not due to reasonable cause."

The court gave the jury the following instructions as to the meaning of the word "willful" as used in § 6672 of the Internal Revenue Code of 1954:

"You are instructed that for the plaintiff's and/or third-party defendant's failure to pay over the taxes withheld to have been willful it is not

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