Newsome v. United States, Civ. A. No. 67-H-404.

• Decision Date: 04 October 1968
• Docket Number: Civ. A. No. 67-H-404.
• Citation: 301 F. Supp. 757
• Parties: J. A. NEWSOME, Jr. v. UNITED STATES of America.
• Court: U.S. District Court — Southern District of Texas

301 F. Supp. 757

J. A. NEWSOME, Jr. v. UNITED STATES of America.

Civ. A. No. 67-H-404.

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

October 4, 1968.

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

John H. Baumgarten, Wm. B. Butler, Asst. U. S. Attys., Houston, Tex., for defendant.

Memorandum and Order

SINGLETON, District Judge.

This is a civil action brought by plaintiff, J. A. Newsome, Jr., for recovery of $28.00, plus interest, representing a portion of a 100 per cent penalty assessment made pursuant to Section 6672 of the Internal Revenue Code of 1954. The penalty was assessed because of Mr. Newsome's alleged failure to pay over to the Internal Revenue Department federal withheld income taxes for the fourth calendar quarter of 1961 in the amount of $31,074.81 and the first calendar quarter of 1962 in the amount of $7,724.25. The withheld payroll taxes totaling $38,799.06 were due and payable by New Wolf Construction Company on wages paid its employees for this period of time. After paying a nominal amount of the tax assessed ($28.00) and filing a claim for refund, plaintiff filed this suit demanding refund of $28.00. The government counterclaimed for the balance due under the theory of its assessments, $39,000.00, plus interest.

Plaintiff, J. A. Newsome, Jr., was president of New Wolf Construction Company. New Wolf Construction Company was incorporated in 1960 and engaged in the construction of facilities relating to the oil and gas transmission business. Seven stockholders of this company invested approximately $60,000.00 to begin the business. Of the seven persons, three were actively engaged in the day-to-day operation of the business. These three persons were J. A. Newsome, Jr., president, Paul J. Wolfinger, vice president, and Mrs. Oleda J. Mixon, secretary-treasurer. This company actively continued in business until on or about February 14, 1962.

At the inception of the business operations of the company a certified public accounting firm and counsel were employed and retained. Of the three persons actively engaged in the company only Mrs. Mixon, secretary-treasurer of the company, worked in the company's main office in Houston all of the time, and she was in charge of the day-to-day administrative affairs. Mrs. Mixon, under the active supervision of the company's accounting firm, kept track of the accounts receivable and accounts payable, received moneys paid to the company, made deposits, kept payroll records, prepared payroll tax returns, not only for the federal government but also in the states in which the company was actively engaged in business, prepared checks to disburse money to creditors, including payments to state and federal taxing agencies, and attended to the mailing of all tax returns. Also Mrs. Mixon kept the books of account from the beginning of the company through the end of May, 1961, under the supervision of the accounting firm. These books of account were kept manually, using standard journals and ledgers.

The company had a main bank account in Houston and payroll bank accounts near each job site. Payrolls at the various job sites were paid out of the payroll bank accounts. Either the job superintendent or the office manager at the job sites would prepare payroll sheets respecting each employee, such sheets reflecting gross pay, taxes withheld, union dues withheld, and the net pay. The checks were disbursed by the job superintendent or the office manager. Copies of checks, together with the payroll sheets, were mailed to the home office in Houston where Mrs. Mixon would verify the mathematics and then would post the sheets to individual payroll records. Mrs. Mixon would then draw a check on the company's main account in the approximate amount of the total net payroll and reimburse the field payroll bank accounts so that funds would be available in the field to pay the next week's payroll.

In the beginning two signatures were required on company checks, the signatories being Newsome, Wolfinger, and Mrs. Mixon. This system proved to be unsatisfactory because Wolfinger and Newsome were frequently out of the office, making it difficult to obtain two signatures on checks that had to be sent out. As a result, this procedure was changed so that the company funds could be disbursed over the signature of either Newsome, Wolfinger, or Mrs. Mixon and this procedure continued throughout the remaining history of the company.

About the end of May, 1961, the accounting firm approached Newsome and recommended that an automatic data processing system of accounting be employed. This recommendation was accepted by Newsome, and beginning June 1, 1961, and continuing thereafter, the accounting firm kept the books of account utilizing automatic data processing procedures. Under this system, copies of checks, copies of bank deposit slips, and copies of invoices were forwarded by Mrs. Mixon to the accounting firm's office. In addition, under the supervision of the accounting firm, Mrs. Mixon prepared certain journal vouchers with respect to depreciation and other regular recurring items that were necessary to bring the books up to date. These journal vouchers were prepared generally as of the last day of the month. The accounting firm presented to the company "printouts" or "machine runs" which disclosed financial information relating to the company. Newsome had difficulty understanding these printouts, and because of this difficulty, as well as requests from bonding companies and the company's main bank, the accounting firm was asked to prepare a balance sheet, as of November 30, 1961, and a profit and loss statement for the preceding six months. The company's fiscal year ended May 31. On or about December 27, 1961, the balance sheet and profit and loss statement were presented to the company. This balance sheet reflected total aggregate current assets of $345,266.58 and total aggregate current liabilities of $302,035.39. The balance sheet reflected no long-term liabilities and reflected other assets having a cost basis of $34,009.58. The profit and loss statement reflected earnings of approximately $66,000.00 during the operations of the preceding six months. The balance sheet and profit and loss statement were forwarded to the company's main bank and to the bonding companies that were supplying the bonds for jobs in progress.

Late in the afternoon of January 29, 1962, Mrs. Mixon informed Newsome that she had just concluded preparing the federal payroll tax return for the fourth quarter of 1961 and the return reflected a liability of approximately $31,000.00, and there were not sufficient funds in the company's checking account to cover this liability. The next morning Newsome contacted the accounting firm which checked the accuracy of the fourth quarter payroll tax return. The accounting firm also attempted to assist Newsome in trying to collect sufficient receivables to pay the tax obligation. On January 31 Newsome called the company's regular attorney. This attorney was experienced in federal tax matters. The attorney came to the company's office, and, after discussing the...