Scott v. United States

• Decision Date: 17 December 1965
• Docket Number: No. 64-58.,64-58.
• Citation: 173 Ct. Cl. 650,354 F.2d 292
• Parties: Linda SCOTT, a Partnership, consisting of Harold Beeten, Edward Frank and Sam M. Slosberg, Partners, and Robert H. Holland, Trustee in Bankruptcy of Linda Scott, Inc., Intervening Petitioner v. The UNITED STATES.
• Court: U.S. Claims Court

173 Ct. Cl. 650, 354 F.2d 292 (1965)

Linda SCOTT, a Partnership, consisting of Harold Beeten, Edward Frank and Sam M. Slosberg, Partners, and Robert H. Holland, Trustee in Bankruptcy of Linda Scott, Inc., Intervening Petitioner v. The UNITED STATES.

No. 64-58.

United States Court of Claims.

December 17, 1965.

Marvin J. Levin, Philadelphia, Pa., attorney of record, for plaintiff. Robert H. Holland, Bethlehem, Pa., for third party petitioner.

Sheldon P. Migdal, Washington, D. C., with whom was Acting Asst. Atty. Gen. Richard M. Roberts, for defendant. Sheldon J. Wolfe, Washington, D. C., of counsel.

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

DAVIS, Judge.

Linda Scott, a partnership consisting of three partners — Harold Beeten, Edward Frank, and Sam M. Slosberg — commenced this action on February 15, 1958, to recover an amount allegedly due as an equitable adjustment for additional work it had been required to perform under a supply contract executed in 1951 with the Department of the Army. The trial commissioner's report indicates that it was stipulated in this proceeding that $9,456 is due and owing from the Government on the contract claim.¹ On May 29, 1962, the trustee in bankruptcy of Linda Scott, Inc., the assignee of the assets of Linda Scott, the partnership, filed an intervening petition stating, in effect, a claim to the amount due under the contract and requesting the court to determine whether the partnership or the trustee was the proper recipient of that amount.² The defendant has asserted counterclaims against the trustee in bankruptcy for certain taxes owed by Linda Scott, Inc., and against Harold Beeten, one of the members of the claimant partnership, for $13,618.76 assessed against him as a 100 per cent penalty under the applicable Internal Revenue Code provisions for his alleged willful failure, as the responsible corporate official, to pay to the Government certain withholding and F.I.C.A. tax assessments made against Richard Scott, Inc. (a separate corporation otherwise uninvolved in this litigation).

After the trial commissioner's report was filed, none of the parties took any further steps and we dismissed for default the plaintiff's petition and the trustee's intervening petition, by order dated June 5, 1964.³ Neither the plaintiff nor the intervenor has asked to set aside this default. The June 5th order also dismissed the Government's two counterclaims. On June 10th, however, the defendant moved for relief from this portion of the court's order, and for leave to file a brief and exceptions to the commissioner's findings. By order of October 16, 1964, we set aside the judgment dismissing the counterclaims on the ground that the defendant's failure earlier to file a brief and exceptions constituted "excusable neglect." Accordingly, we must now dispose of these two tax counterclaims.

The trial commissioner has found that taxes, properly assessed against Linda Scott, Inc. between February 1954 and August 1956, remain unpaid. The trustee in bankruptcy of Linda Scott, Inc., does not except to these findings or contest, in any way, the corporation's liability. There is no reason to reject the commissioner's conclusion. Judgment on the counterclaim for these taxes must therefore be entered against the trustee as provided by law.

The tax counterclaim against Beeten, for unpaid Richard Scott, Inc. taxes, presents two questions. The first is whether Beeten may be held responsible, and a penalty assessed against him, for these imposts. The second, of more general interest, is whether, in an action commenced by a partnership, the Government may maintain a counterclaim against one member of the partnership arising out of a transaction wholly unrelated to the partnership's claim and with which it has no concern.

We are clear that, if the defendant's tax-penalty claim against Beeten may be considered in this proceeding, the controlling provision of the 1939 Internal Revenue Code — § 2707(a) — entitles the Government to recover.⁴ This section declares that "any person who willfully fails to pay, collect, or truthfully account for and pay over * * *" certain taxes (including withholding and F.I.C.A. taxes⁵) may be assessed "a penalty of the amount of the tax evaded, or not paid, collected, or accounted for and paid over * * *." Corporate officers under a duty to discharge these general tax-collecting functions are included within the class to which § 2707(a) applies. § 2707(d), 1939 I.R.C. The unchallenged findings disclose that Richard Scott, Inc., incurred withholding and F.I.C.A. tax liabilities in four fiscal quarters of 1954 and 1955 in the amount of $13,618.76; that Harold Beeten was an incorporator, director, and secretary-treasurer of Richard Scott, Inc.; that as treasurer of the corporation during two quarters in 1954⁶ he had the authority, duty, and responsibility to collect, account for, and pay over to the Treasury the tax liability then incurred; that the Treasury assessed a 100 per cent penalty for unpaid Richard Scott, Inc., taxes against Beeten; that the Commissioner of Internal Revenue gave him notice of, and demand for payment of, this assessment; and, finally, that Beeten's failure to collect and remit the taxes was "a knowing, deliberate, and willful act on his part." No more is needed; these findings are supported by the evidence, and meet the twin requirements of § 2707(a) — a willful default in the payment of taxes by a responsible person.

The condition that the failure to pay the overdue taxes be willful has been seen by the courts of appeals passing on the point as calling for proof of a voluntary, intentional, and conscious decision not to collect and remit taxes thought to be owing — and not as requiring a special intent to defraud or deprive the Government of the monies withheld on its account. Bloom v. United States, 272 F.2d 215, 223 (C.A. 9, 1959), cert. denied, 363 U.S. 803, 80 S.Ct. 1236, 4 L.Ed.2d 1146 (1960); Flan v. United States, 326 F.2d 356, 358 (C.A. 7, 1964); Dillard v. Patterson, 326 F.2d 302, 304-305 (C.A. 5, 1963). These courts have rejected suggestions that a finding of willfulness entails a showing of evil motive, bad purpose, or calculated malevolence. Bloom v. United States, supra, 272 F.2d at 223-224; Dillard v. Patterson, supra; Frazier v. United States, 304 F.2d 528, 530 (C.A. 5, 1962). They focus, rather, on the deliberate nature of the individual's election not to pay over the money and the circumstances of that refusal. See 8A Mertens, Federal Income Taxation § 47A.25a at 127 (1964). We agree with this reading of the statute.

In the two fiscal quarters here involved, Mr. Beeten either deliberately caused tax returns to be filed or acquiesced (apparently without objection) in their filing while aware that the proper withholding taxes were not being paid. As an accountant, he was familiar with the provisions of the withholding tax laws. As treasurer of Richard Scott, Inc., he supervised the activity of the bookkeeper preparing the corporate tax returns, and clearly "knew that the corporation was not * * * depositing the withholding taxes" in accordance with the law. Although "it appears very probable" that corporate funds sufficient for timely payment of the necessary withholding taxes were unavailable at the time of the returns, it is also plain that Beeten either failed to cause the requisite taxes to be collected or that (by his direction or with his approval) they were collected and thereafter used to pay other corporate creditors, rather than the Government. This intentional preference of others over the United States constituted a willful failure to collect and pay the taxes within § 2707(a). See Flan v. United States, supra, 326 F.2d at 358; Frazier v. United States, supra, 304 F.2d at 530; Dillard v. Patterson, supra, 326 F.2d at 304; Rev.Rul. 54-158, CB 1954-1, at 247.⁷

The second requirement of the penalty provision — that the person failing to make the remittance have a duty to do so — applies by its terms to corporate officers who are found legally obliged to pay the taxes over to the Government. § 2707(d). Mr. Beeten possessed general authority to sign a wide variety of corporate documents (including tax returns), to draw checks on the corporate bank account, and to make decisions respecting financial difficulties arising in the ordinary course of business, as well as the special authority and responsibility to collect and remit to the Treasury money withheld from employee wages. Plaintiff's claim that he did not have such authority is supported only by his own testimony (some of which must be rejected on various grounds, see finding 30(b)), and, in the light of the other evidence, cannot be accepted. Cf. United States v. Strebler, 313 F.2d 402, 404 (C.A. 8, 1963). It is inconsequential that exclusive control over all corporate affairs was not vested in him, or that the corporation's president retained a considerable measure of decision-making discretion. Section 2707(d) is not so phrased or designed as to exclude one corporate officer from its sanction merely because it might also be held to extend to another. Realistically read, the subsection encompasses all those who are so connected with a corporation as to have the responsibility and authority to avoid the default which constitutes a violation of § 2707(a), even though liability may thus be imposed on more than one person. Scherer v. United States, 228 F.Supp. 168, 170 (D.C.Idaho, 1963).

Beeten says, however, that an independent counterclaim against an individual partner will not lie in a suit by the partnership, and asks us to adhere to that rule as laid down in Boehm v. United States, 20 Ct.Cl. 142 (1885), and reaffirmed in Marietta Mfg. Co. v. United States, 61 Ct.Cl. 122 (1925).⁸

This problem must be scanned within the framework of our jurisdictional statute and our rules, and against the backdrop of modern procedural...