Taubman v. United States

• Decision Date: 12 January 1978
• Docket Number: Civ. A. No. 4-72489,5-71759.
• Citation: 499 F. Supp. 1133
• Parties: Lester TAUBMAN, Plaintiff, v. UNITED STATES of America, Defendant and Third Party Plaintiff, v. Murton M. SCHLESINGER, Third Party Defendant. UNITED STATES of America, Plaintiff, v. INTERCONTINENTAL INDUSTRIES, INC., Defendant.
• Court: U.S. District Court — Western District of Michigan

499 F. Supp. 1133

Lester TAUBMAN, Plaintiff, v. UNITED STATES of America, Defendant and Third Party Plaintiff, v. Murton M. SCHLESINGER, Third Party Defendant.

UNITED STATES of America, Plaintiff, v. INTERCONTINENTAL INDUSTRIES, INC., Defendant.

Civ. A. Nos. 4-72489, 5-71759.

United States District Court, E. D. Michigan, S. D.

January 12, 1978.

COPYRIGHT MATERIAL OMITTED

J. Laevin Weiner, Southfield, Mich., for Taubman.

D. Patrick Mullarkey, Tax Div., Dept. of Justice, Washington, D. C., James K. Robinson, U. S. Atty. by Pamela J. Thompson, Asst. U. S. Atty., Dept. of Justice, Detroit, Mich., for United States of America.

Murton Schlesinger, in pro per.

Dean Carlton, Dallas, Tex., for Intercontinental Industries, Inc.

OPINION

FEIKENS, District Judge.

These combined actions have been brought to determine if Lester Taubman and Murton Schlesinger, former president and vice-president respectively of the now-bankrupt corporation, Prebuilt Homes, Inc., can be held personally liable under § 6672 of the Internal Revenue Code for the failure of Prebuilt Homes to pay over to the government income and social security taxes withheld from its employees from August, 1969 until February, 1970, when the company finally ceased operations. Both Taubman and Schlesinger were assessed $156,565.34, the full amount claimed by the government as owing in withholding taxes from Prebuilt. Taubman paid $300 on his assessment and filed this complaint to recover it. The United States counterclaimed for the balance of the assessment and joined Schlesinger as a third party defendant. The government alleges that both Taubman and Schlesinger are liable under § 6672 as responsible and controlling corporate officers who wilfully failed to collect and pay over federal payroll taxes for the corporation's employees. Consolidated with this action is another action by the government, brought under § 3505(b) of the Internal Revenue Code against Intercontinental Industries, Inc. (INI), Prebuilt's principal source of financing during the period in question. The government alleges that from August, 1969 to February, 1970, INI loaned $253,897.79 to Prebuilt specifically for the payment of salaries and wages knowing that no federal payroll taxes were being collected or withheld on them. If this is proven, then under § 3505(b), INI would be liable for 25% of this amount, or $63,474.45.

All claims were tried to the court. The record consists of the affidavits of the principal parties, depositions, a number of documentary exhibits, and the testimony of Robert Campbell, an IRS agent who reviewed and analyzed Prebuilt's financial records. Post-trial briefs have been submitted, and the court now makes findings of fact and conclusions of law as required by Federal Rule of Civil Procedure 52.

I.

Prebuilt Homes, Inc. was formed in April, 1969 by Paul Corp and Lester Taubman for the purpose of constructing pre-fabricated homes and installing them on building sites.¹ Prebuilt's homes were to be built by a unique modular construction process, which Paul Corp had originated several years earlier, as president of his own home construction company, Peerless Manufacturing Corporation. When Peerless went bankrupt in March, 1969, Corp interested Taubman in his modular home design. Taubman redrafted the design, entered it in a contest sponsored by the Metropolitan Detroit Citizens Development Authority (MDCDA), won the contest, and was awarded a contract to build some 800 modular housing units at a total price of $12,000,000. Prebuilt Homes, Inc. was formed shortly thereafter.

Taubman supplied the initial capital, and Corp supplied the technical expertise. Corp was made chairman of the board, and Taubman was president. Initially, each owned a 50% interest in Prebuilt, but shortly after incorporation, Murton Schlesinger, who had formerly worked as an officer of Peerless Manufacturing under Corp, was made vice-president-treasurer and given a 5% interest.

It was apparent from the outset that Prebuilt would require large amounts of capital to operate and produce the houses under contract with the MDCDA. To obtain this needed capital, Prebuilt, following extensive negotiations, entered into a financing agreement with Intercontinental Industries, Inc. of Dallas, Texas, a holding company with an interest in a number of diversified businesses. The agreement, dated May 16, 1969, provided that 81% of Prebuilt's issued and outstanding stock would be transferred to INI in exchange for stock of INI listed on the American Stock Exchange; this was the first major step in a process which would eventually have made Prebuilt a wholly-owned subsidiary of INI. In return, INI committed itself to obtain all of the operating funds needed by Prebuilt not otherwise obtainable, not to exceed $6,000,000.

INI began at once to fund Prebuilt's operating expenses. To implement their financing arrangement, a procedure was established under which the accounting department of Prebuilt would, on a weekly basis, determine the amount of operating funds needed for the following week which could not be obtained from other sources. These needs would be communicated to INI by telephone or in writing. INI would then transfer the requested funds to Prebuilt's general account at the City National Bank in Detroit and would subsequently receive back daily expense reports from Prebuilt verifying that the funds had been used for the purposes requested. Under this arrangement, a total of $948,000 was transferred to Prebuilt during 1969 and 1970.² In further satisfaction of its financing obligations under the May 16, 1969 agreement, INI also arranged two loans of $350,000 each from the City National Bank of Detroit to Prebuilt in May and October of 1969. INI supplied collateral for these loans totaling $1,485,500.

The business relationship between Prebuilt and INI was in jeopardy almost from the beginning. Shortly after their agreement was signed, S. Mort Zimmerman, president of INI, issued a misleading announcement to the financial community regarding Prebuilt's future earning potential. The announcement indicated that Prebuilt had obtained $130,000,000 in firm housing construction contracts, whereas in fact the company had only received bid solicitations and indications of interest in this amount. Immediately, the price of INI's stock on the American Stock Exchange soared. Trading in INI's stock was suspended pending an investigation, and on August 9, 1969, following a hearing, INI's stock was "delisted" from the American Stock Exchange. This development prevented INI from fulfilling all of its obligations to Prebuilt under their May 16, 1969 agreement.

At about this same time, Prebuilt was informed by the Federal Housing Administration that none of Prebuilt's home construction loans would be guaranteed by the FHA as long as Prebuilt was associated with INI. FHA's position may have been prompted by reports that one of INI's subsidiaries, Valley Die Cast Corporation of Detroit, had connections with organized crime. FHA approval was required on all homes to be built under Prebuilt's contract with MDCDA.

These developments made it clear to the officers of both Prebuilt and INI that the two companies would have to disassociate, and thus in early August, 1969, a concerted effort was begun to find a successor to INI to assume Prebuilt's capitalizing responsibilities.

Though it was no longer possible for Prebuilt to become a subsidiary of INI under their May 16, 1969 agreement, INI continued to treat Prebuilt as a subsidiary and to finance Prebuilt's operations with regular transfers of funds. Subsequent to August 9, 1969, INI lent over $488,000 to Prebuilt for operating expenses,³ a substantial proportion of which was used for payroll. Moreover, the record reflects a close, continuing contact between INI and Prebuilt during the latter half of 1969, which included almost daily telephone correspondence between officers of the two companies.⁴

The parties were unsuccessful in finding a new buyer for Prebuilt Homes, and the company's operations gradually declined and finally ceased altogether in January, 1970. Prebuilt had been able to manufacture and install only a small number of its modular housing units under its contract with MDCDA. A petition in bankruptcy was filed in May, 1970.

From August 15, 1969 until March, 1970 when the company went out of business, Prebuilt failed to pay over to the government any federal income or social security taxes for its employees, as required by §§ 3102(a), 3402(a), and 7501(a) of the Internal Revenue Code. At the time it went bankrupt, Prebuilt had an unpaid tax liability of $55,393.65 for the third quarter of 1969, $97,069.45 for the fourth quarter of 1969, and $17,457.83 for the first quarter of 1970, for a total of $169,920.93, including penalties and interest. The IRS assessed Corp, Taubman, and Schlesinger for this liability under § 6672 of the Internal Revenue Code. Corp has since died, leaving no assets, and thus his liability is not involved in this proceeding. No formal assessment was made prior to the government's action against INI for its alleged liability under § 3505(b).

II.

Section 6672 of the Internal Revenue Code provides:

§ 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.

Two conditions must be met before an individual can be held liable under this provision: (1) he must...