United States v. Fred A. Arnold, Inc.
| Decision Date | 20 June 1975 |
| Docket Number | No. C-74-0315 WHO.,C-74-0315 WHO. |
| Citation | 400 F. Supp. 1118 |
| Court | U.S. District Court — Northern District of California |
| Parties | UNITED STATES of America, Plaintiff, v. FRED A. ARNOLD, INC., Defendant. |
James L. Browning, Jr., U. S. Atty., Martin Schainbaum, Asst. U. S. Atty., San Francisco, Cal., for plaintiff.
Barbara Ashley Phillips, San Francisco, Cal., for defendant.
This case presents the question whether under 26 U.S.C. § 3505(a) a person, who is not an employer but who directly pays the wages of an employer's employees, is liable to the United States for the withholding and F.I.C.A. taxes required to be deducted and withheld from such wages by such employer, whether or not he has knowledge that the taxes should be deducted and withheld or that the employer is unable or unwilling to pay them.
Section 3505(a) reads as follows:
In the case at bench, the United States, as the plaintiff, brought this action under 26 U.S.C. § 3505(a) against the defendant, Fred A. Arnold, Inc., to seek collection of a sum equal to the total unpaid federal tax liabilities for withholding and F.I.C.A. taxes for the third and fourth quarters of 1969 of Jesse G. and John C. Pannell, doing business as Pannell Brothers Construction Company (hereinafter the "Pannell Company").
Plaintiff claims the defendant directly paid the wages of the Pannell Company employees within the meaning of the statute because it deposited funds used to pay the wages in a checking account in the name of the Pannell Company. The wage payments were made by checks drawn on this account and signed by defendant's agents and one of the Pannell brothers. Plaintiff contends that the only requirements for defendant's liability under Section 3505(a) are that the wage payment was made directly and that the defendant had knowledge that the funds would be used for wages. Plaintiff argues that the actual knowledge that withholding and F.I.C.A. taxes will not be paid is only required under Section 3505(b) and is not required under Section 3505(a).
The defendant contends that it did not directly pay the wages of the Pannell Company's employees during the third and fourth calendar quarters of 1969 since the funds deposited in the Pannell Company account were not disbursed directly to Pannell Company employees by the defendant. The defendant also contends that the concept of direct payment must inherently involve the knowledge, not only that the funds supplied will be used for wages, but also the knowledge that the withholding and F. I.C.A. taxes will not or could not be paid.
This Court has jurisdiction of the subject matter and the parties in this action, pursuant to 28 U.S.C. §§ 1340 and 1345 and 26 U.S.C. §§ 7402(a) and 3505(a), and venue is properly laid in this Court under 28 U.S.C. § 1396.
The question of defendant's liability is presented to this Court by cross motions for summary judgment coming on for hearing as the opening step at the trial.2 The motions are based upon the pleadings, affidavits, depositions, exhibits, interrogatories, and other documents on file in this action as well as upon the undisputed facts which were agreed to by the parties in a pretrial statement.
The undisputed facts may be summarized as follows:
The defendant is a California corporation doing business as a general building contractor. From August, 1968, and during all of 1969, the Pannell Company was a partnership in which Jesse Pannell and John C. Pannell were partners.
The defendant entered into contracts dated October 17, and November 20, 1968, with the Pannell Company pursuant to which the Pannell Company agreed, as a sub-contractor of defendant, to perform certain carpentry work at the United States Naval Post-Graduate School at Monterey, California, and at the United States Naval Air Station at Lemoore, California.
On December 19, 1968, a checking account was opened in the name of Pannell Company at the Monterey Branch, Wells Fargo Bank, in Monterey, California. Defendant made deposits to this account. The signature card on the account provides that the signatures of two of the three authorized individuals were required in order to negotiate checks from the account. The individuals listed as signatories on the account are Carl A. Blaisdell ("Blaisdell"), Oscar T. Davis ("Davis") and John C. Pannell. Blaisdell and Davis were employees of defendant and they were not at any time employees of the Pannell Company.
On July 1, 1969, a checking account was opened in the name of the Pannell Company at the Del Monte Branch, Wells Fargo Bank, Monterey, California, with a deposit in the form of a check drawn on the Wells Fargo Bank, Monterey Branch. Defendant also made deposits to this account.
The signature card on the Del Monte Branch account also provides that the signatures of two of the three individuals authorized were required in order to negotiate checks from this account, and the individuals listed as signatories on this account are Blaisdell, Davis and Jesse G. Pannell.
On October 31, 1969, the Pannell Company filed its employment tax return on IRS Form 941 for its F.I.C.A. and withholding tax liabilities for the calendar quarter ending September 30, 1969, showing a total liability of $34,381.65. This amount was duly assessed and is now due and owing to the United States. On or about February 17, 1970, the Pannell Company filed its employment tax return on IRS Form 941 showing the F.I.C.A. and withholding tax liabilities for the calendar quarter ending December 31, 1969, to be $6,145.46.3 This amount was duly assessed and is due and owing.
On October 29, 1969, a Pannell Company check was made payable to cash in the amount of $4,400. This check bears the signatures of only Blaisdell and Davis.
On October 29, 1969, a Pannell Company check was made payable to Wells Fargo Bank in the amount of $4,500, and this check bears the signatures of only Blaisdell and Davis.
On or about October 31, 1969, defendant received and deposited to its account at the United California Bank, Hollywood, California, the $4,400 in proceeds of cashier's check dated October 29, 1969, drawn on the Wells Fargo Bank, Del Monte Branch, Monterey, California, and on October 31, 1969, the defendant received and deposited to its account at the United California Bank, Hollywood, California, the $4,500 in proceeds of cashier's check dated October 29, 1969, numbered 37816 drawn on the Wells Fargo Bank, Monterey, California.
Funds paid to both of these checking accounts were used to pay wages of Pannell Company employees.
The defendant knew that this money was being used to pay the wages of the employees of the Pannell Company.
The statute in question, 26 U.S.C. § 3505(a) is of recent origin and, accordingly, lacks judicial gloss. It has been interpreted in only a few cases, but in each of those cases, unlike the case at bench, the third-party payor knew that the employer could not or would not pay the withholding and F.I.C.A. taxes.
In Abrams v. United States, 333 F. Supp. 1134 (S.D.W.Va.1971), the court held that although the third-party defendant Julyn Sportswear, Inc., had actual knowledge or notice that McDowell Fashions, Inc. would not or could not pay the deducted and withheld amounts of withholding and F.I.C.A. taxes to the Government, such knowledge was not required to establish liability under Section 3505(a).4
In United States v. Clayton-Kent Builders, Inc., 378 F.Supp. 1109 (M.D. La.1974), the court held a builder liable for taxes when he issued checks to the contractor's employees, had the employees endorse the worthless checks and then return them to the builder. The court found that the defendant had the knowledge that the employer was unable or unwilling to make timely payment of the amount of tax required to be withheld and was, therefore, liable under 26 U.S. C. § 3505(b). In addition, however, the court also found that a direct payment...
To continue reading
Request your trial
-
U.S. v. Fred A. Arnold, Inc.
...to pay on behalf of its employees. Arnold appeals from the district court's grant of the government's motion for summary judgment. 400 F.Supp. 1118. This court has jurisdiction under 28 U.S.C. § The defendant demanded a trial by jury, to which it was entitled in this kind of action. United ......
-
U.S. v. Kennedy Const. Co. of NSB, Inc.
...law. The system by which payment was provided to Raybrun's employees is strikingly similar to the one involved in United States v. Arnold, 400 F.Supp. 1118 (N.D.Calif.1975). Although different in execution it is the same in result as that utilized in United States v. Clayton-Kent Builders, ......