Pacific National Insurance Company v. United States

• Decision Date: 05 July 1967
• Docket Number: No. 41359.,41359.
• Citation: 270 F. Supp. 165
• Court: U.S. District Court — Northern District of California
• Parties: PACIFIC NATIONAL INSURANCE COMPANY, a Corporation, Plaintiff, v. UNITED STATES of America, Defendant.

270 F. Supp. 165

PACIFIC NATIONAL INSURANCE COMPANY, a Corporation, Plaintiff, v. UNITED STATES of America, Defendant.

No. 41359.

United States District Court N. D. California.

July 5, 1967.

COPYRIGHT MATERIAL OMITTED

George H. Koster, San Francisco, Cal., for plaintiff.

Cecil F. Poole, U. S. Atty., Richard L. Carico, Asst. U. S. Atty., San Francisco, Cal., for defendant.

MEMORANDUM OPINION AND ORDER

GEORGE B. HARRIS, Chief Judge.

The pretrial stipulations and orders have measurably reduced the judicial labors of the trial judge. In addition, recognition should be given to the very careful briefing and subsequent oral arguments tendered by both sides to this controversy.

The several issues posed may be answered only after a careful consideration of the detailed factual background:

This action has been brought by Pacific National Insurance Company to recover a penalty tax of $52,881.30 and interest assessed against and collected from it, under Section 6672 of the Internal Revenue Code of 1954 (26 U.S.C. 1964 Ed., § 6672).

Jurisdiction rests upon Section 7422 (a) of the Internal Revenue Code of 1954 (26 U.S.C. 1964 Ed., § 7422) and Section 1346(a) (1) of Title 28 of the United States Code (28 U.S.C. 1964 Ed., § 1346).

The question presented:

(a) Was plaintiff^a1 a "person" required to collect, truthfully account for, and pay over to the United States the income tax and FICA tax withholdings reported for employees of Central States Construction and Equipment Company, Inc. for the second and third quarters of 1955?

(b) Did plaintiff "wilfully" fail to collect or "wilfully" fail to truthfully account for and pay over such taxes to the United States?

The statutes involved:¹

Sec. 6671. Rules for Application of Assessable Penalties.

(a) * * *

(b) Person Defined.—The term "person", as used in this subchapter, includes an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs.

Sec. 6672. Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax.

Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. No penalty shall be imposed under section 6653 for any offense to which this section is applicable.

Sec. 7701. Definitions.

(a) When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof—

(1) Person.—The term "person" shall be construed to mean and include an individual, a trust, estate, partnership, association, company or corporation.

* * * * * *

(b) Includes and Including.—

The terms "includes" and "including" when used in a definition contained in this title shall not be deemed to exclude other things otherwise within the meaning of the term defined.

(c) * * *

The contentions of the parties are summarized in the pretrial order:

Plaintiff asserts that assessment and collection of the penalty tax and interest in issue were invalid for the following reasons:

(a) Surety was not the employer of the employees of Central States; (b) surety was not obligated or authorized to withhold or collect income or FICA taxes from employees of Central States; (c) surety did not withhold or collect income or FICA taxes from employees of Central States during the quarterly periods ended June 30, 1955, and September 30, 1955, or at any other time; and (d), surety was not a person required to collect, truthfully account for, or pay over any such tax within the meaning of Sections 6671(b) and 6672 of the Internal Revenue Code of 1954, supra, and consequently did not wilfully attempt in any manner to evade or defeat any such tax or the payment thereof.

Defendant contends that the assessment and collection of the entire tax and interest in issue were proper for the reason that (a) surety was the "person" required to collect, truthfully account for and pay over income tax and FICA tax withholdings reported for Central States employees for the quarterly periods ended June 30, 1955, and September 30, 1955, because, by reason of its control and domination over funds available for the payment of creditors of Central States it determined which creditors were to be paid and (b) surety "wilfully" failed to collect, truthfully account for, and pay over such taxes when it caused payments to be made to creditors other than the United States.

For the purpose of clarification it should be noted at the threshold of the court's discussion that the bulk of the decisions upon which plaintiff relies, involves issues other than those presented herein. Thus, cases involving questions whether a surety company was the "employer" of the contractor's employees or whether a surety is liable for withholding taxes because of having bonded the contractor's performance, such as Central Bank v. United States, 345 U.S. 639, 73 S.Ct. 917, 97 L.Ed. 1312; Century Indemnity Co. v. Riddell, 317 F.2d 681 (9th Cir. 1963); Westover v. William Simpson Construction Co., 209 F.2d 908 (9th Cir. 1954); Reliance Insurance Co. v. United States, Civ. No. 37234, N.D.Cal.1959; and American Fidelity Co. v. Delaney, D.C., 114 F.Supp. 702, are entirely beside the point, and are without persuasive value. As clearly observed by the Ninth Circuit, an assessment under Section 6672 "is not one against a transferee of property of an original taxpayer, nor is it one solely of derivative character. Rather, it is one of distinct and separate statutory liability." Bloom v. United States, 9 Cir., 272 F.2d 215, 221.

Plaintiff in threshing about in a welter of inapplicable cases, has obscured the nature and primary purpose of the fund represented by the loan which forms the basis of the controversy.

During the course of the trial testimony was elicited from William T. Atkins, representing the Pacific National in handling all claims against various surety bonds, and Mrs. Ellen Eiswirth who, in 1955, was the acting President of Central States Construction and Equipment Co.

The substance of their testimony is all-controlling and important as demonstrative of surety's complete control and domination of Central States' finances from May through August, 1955.

Some time prior to May of 1955, Mr. Charles Leick, secretary and general counsel of surety, received information that Central States was in financial difficulty. Central States was out of funds and Mrs. Eiswirth went to Philadelphia to attempt to arrange for a bank loan. She met Mr. Leick and was offered financial assistance by the surety. She advised him of the status of the Central States jobs, including several which were not bonded by surety. She further told him of the general nature of Central States' outstanding bills, one of which was for the withholding taxes for prior periods.

During May of 1955 Central States requested financial assistance from surety, and surety made loans to Central States in amounts approximately equal to its net payrolls. But surety would not loan Central States funds for payment of withholding taxes, although specific requests were made.

Shortly prior to June of 1955, Mr. Leick made arrangements for Central States to borrow $150,000 from Provident Trust Company of Philadelphia. Presumably, the loan was to provide working capital until payments were received on jobs then in progress. The amount of the loan was determined by Mr. Leick after an inspection of the jobs and the examination of Central States' general ledger and job ledgers, creditors' invoices and progress payment information, all of which were made available to him at the Central States offices.

Prior to arranging the loan surety was also furnished with a list of all Central States creditors, which included the United States as a creditor for prior withholding taxes.

Before the loan papers were executed, Mrs. Eiswirth met with Mr. Leick in Philadelphia and requested a letter or formal agreement spelling out the way in which disbursement of the loan proceeds would be handled and the bills which would be paid.

One of the specific items to be covered by the document was withholding taxes. Mr. Leick and Mrs. Eiswirth agreed on the terms of a letter. (Tr. p. 89, 1. 14-25) But on the day the loan papers were signed Mr. Leick told Mrs. Eiswirth that no such letter would be forthcoming because surety might thereby incur a direct liability for payment of taxes to the United States. (Tr. p. 90, 1. 1-20)

On June 3, 1955, Provident Trust Company ostensibly loaned $150,000 to Central States and received therefrom as security assignments of all proceeds due and to become due on the construction contracts bonded by surety, who also guaranteed the loan. At this time Central States had earned approximately $150,000 on these construction contracts.

The proceeds of $150,000 however, never entered Central States' corporate account. Rather, deposit was made in five "special accounts" opened by surety with Provident Trust Company. These accounts were subject to surety's exclusive control. Further, it was agreed that Provident Trust would advise surety upon receipt of progress payments on the assigned contracts and surety would then decide which payments would be applied to reduce the Central States loan or deposited to the special accounts.

The loan proceeds allocated by surety to the four Central States jobs in the Midwest, together with progress payments on the assigned contracts and advances designated by surety for use on those jobs, were thereafter deposited in four "special accounts" which surety had opened at Mercantile Trust Company of St....