U.S. v. Intercontinental Industries, Inc.

• Decision Date: 29 December 1980
• Docket Number: Nos. 78-1519,78-1520,s. 78-1519
• Citation: 635 F.2d 1215
• Parties: 81-1 USTC P 9129 UNITED STATES of America, Plaintiff-Appellee and Cross-Appellant, v. INTERCONTINENTAL INDUSTRIES, INC., Defendant-Appellant and Cross-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1215

635 F.2d 1215

81-1 USTC P 9129

UNITED STATES of America, Plaintiff-Appellee and Cross-Appellant, v. INTERCONTINENTAL INDUSTRIES, INC., Defendant-Appellant and Cross-Appellee.

Nos. 78-1519, 78-1520.

United States Court of Appeals Sixth Circuit.

Argued Sept. 18, 1980.

Decided Dec. 29, 1980.

Dean Carlton, The Carlton Firm, Dallas, Tex., for defendant-appellant and cross-appellee.

James K. Robinson, U. S. Atty., Detroit, Mich., M. Carr Ferguson, Asst. Atty. Gen., Gilbert Andrews, Jonathan S. Cohen, Timothy McBride, JoAnn Horn, Tax Div., Dept. of Justice, Washington, D. C., for plaintiff-appellee and cross-appellant.

Before ENGEL and BROWN, Circuit Judges, and WISEMAN, District Judge. ^*

BAILEY BROWN, Circuit Judge.

This case presents cross appeals by the government and a taxpayer from a decision in the district court for the Eastern District of Michigan. The court, the Honorable John Feikens, sitting without a jury, found taxpayer Intercontinental Industries, Inc. (INI) liable for $62,598.95 in unpaid withholding taxes under 26 U.S.C. § 3505(b) (1976). The court refused, however, to impose approximately $30,000 in additional liability for prejudgment interest. The taxpayer has appealed from the decision imposing liability for unpaid taxes, and the government has appealed from the decision denying prejudgment interest. The district court's opinion on the question of INI's underlying liability is published at 499 F.Supp. 1133. The court's opinion on the question of liability for prejudgment interest is reported at 449 F.Supp. 520.

Facts

INI of Dallas, Texas, is a holding company with an interest in a number of diversified businesses. In May 1969, INI entered into an agreement with Prebuilt Homes, Inc. (Prebuilt), which needed assistance in the financing of a $12,000,000 contract to build 800 modular homes. The May 1969 agreement was the first major step in a process which would eventually have made Prebuilt a wholly owned subsidiary of INI. It provided that 81 percent of Prebuilt's issued and outstanding stock would be transferred to INI in exchange for stock of INI listed on the American Stock Exchange. 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 by 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 anticipated needs were communicated to INI either by telephone or in writing. INI then transferred the requested funds to Prebuilt's general account at the City National Bank in Detroit, and would receive thereafter 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. In further satisfaction of its financing obligations under the May 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. Prebuilt also received funds from other sources not connected with INI.

Shortly after the agreement had been signed INI issued a misleading announcement to the financial community regarding Prebuilt's future earning potential. The price of INI's stock on the American Stock Exchange immediately soared. However, 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 the May 1969 agreement.

Prebuilt was informed by the Federal Housing Administration (FHA) that none of Prebuilt's home construction loans would be guaranteed by the FHA as long as Prebuilt was associated with INI. These developments made it clear to the officers of both Prebuilt and INI that the two companies would have to disassociate, and in early August, 1969, a concerted effort was begun to find a successor to INI to assume Prebuilt's capitalization needs.

Nonetheless, INI continued to finance Prebuilt's operations with regular transfers of funds. After August 9, 1969, INI transferred more than $488,000 to Prebuilt for operating expenses, a substantial portion of which went to the payroll account. There was continuing contact between INI and Prebuilt during the latter half of 1969 which included almost daily telephone correspondence between officers of the two companies.

The parties were unsuccessful in finding a new buyer for Prebuilt. The company's operations gradually declined, and finally ceased altogether in January, 1970. Prebuilt went into bankruptcy in May, 1970.

From August 15, 1969 until May, 1970, when the company went out of business, Prebuilt failed to pay to the government any federal income or social security taxes for its employees. At the time it went bankrupt, Prebuilt had an unpaid tax liability of $169,920.93, including penalties and interest.

The IRS brought this action against INI, contending that INI was liable for a portion of the unpaid taxes of Prebuilt under 26 U.S.C. § 3505(b) (1976):

3505(b) Personal Liability Where Funds Are Supplied. If a lender, surety, or other person supplies funds to or for the account of an employer for the specific purpose of paying wages of the employees of such employer, with actual notice or knowledge (within the meaning of section 6323(i)(1)) that such employer does not intend to or will not be able to make timely payment or deposit of the amounts of tax required by this subtitle to be deducted and withheld by such employer from such wages, such lender, surety, or other person shall be liable in his own person and estate to the United States in a sum equal to the taxes (together with interest) which are not paid over to the United States by such employer with respect to such wages. However, the liability of such lender, surety, or other person shall be limited to an amount equal to 25 percent of the amount so supplied to or for the account of such employer for such purpose.

The case was tried to the court sitting without a jury. The court found that INI not only knew of Prebuilt's decision not to pay withholding taxes after August 9, 1969, but INI actually made that decision for Prebuilt as a condition of further financing. The court further found that INI, through its president and its vice-president, informed Prebuilt's officers that after August 9, 1969, INI would continue to finance only those expenses which were absolutely necessary to maintain Prebuilt as a going concern until a successor to INI could be found, with the result that INI continued to finance Prebuilt's payroll only on a net basis.

The court found that of the $488,000 advanced to Prebuilt by INI after August 9, 1969, $250,395.78 had been advanced and was used for the payment of wages as to which INI knew that no withholding taxes would be collected or paid. In accordance with Section 3505(b) the court found INI liable for 25 percent of that amount, or $62,598.95. The court declined to find that INI was also liable for prejudgment interest, since that would have caused INI's liability to exceed the 25 percent limitation imposed by Section 3505(b).

Both INI and the government appealed. INI contends there was not substantial evidence to support the finding that INI advanced $250,395.78 to Prebuilt specifically for the payment of wages and that the funds were so used. The government argues that the district court erred as a matter of law in not requiring INI to pay prejudgment interest. For the reasons that follow we find both contentions to be without merit.

Sufficiency of the Evidence

Section 3505(b) imposes liability for withholding taxes on a third party which supplies funds to an employer "for the specific purpose of paying wages," and the funds are so used, if the third party has reason to know the employer cannot or will not pay the withholding taxes. INI does not seriously contest the district court's finding that it had knowledge of Prebuilt's failure to pay the withholding taxes in question. The district court correctly found, on the basis of overwhelming and uncontradicted evidence (App. 28, 30, 43, 47, 126-127, 140), that INI not only knew of Prebuilt's failure to pay the taxes, but that INI actually made the decision not to pay. Furthermore, INI does not deny that at least some of the funds it supplied to Prebuilt were used to pay wages.

The question of whether INI supplied funds specifically for the payment of wages, and if so, in what amount, is a question of fact to be found by the court. The district court's findings may not be set aside on review unless they are clearly erroneous. Commissioner v. Duberstein, 363 U.S. 278, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960).

The district court found that INI supplied $250,395.78 to Prebuilt for the payment of wages. The financing arrangements between Prebuilt and INI were extremely informal. Prebuilt would inform INI on a daily or weekly basis, either by telephone or in writing, about its cash needs. INI would then send a check to Prebuilt to cover the expenses. Generally the check would not be for the full amount requested by Prebuilt. It is clear that INI was aware of Prebuilt's payroll needs and was aware that monies it was supplying were being used to meet those needs. (App. 28, 45-47). One example of this knowledge is a letter of November 21, 1969 from Mort Zimmerman of INI to Paul Corp of Prebuilt. (Exh. 12).

Dear Paul:

There is enclosed herewith a check in the amount of $22,000 as an additional advance to Pre/Built Homes, Inc. pursuant to the continuous financing required. As per our telephone conversation, this advance is being made for the primary purpose of covering labor salaries for the week ending 11/21/69.

The record amply...