ENKINS v. U.S., Cite as 108 AFTR 2d 2011-XXXX, 09/15/2011

TIMOTHY L. JENKINS, Plaintiff, v. THE UNITED STATES, Defendant.

Case Information:

Code Sec(s):      

Court Name:      In The United States Court of Federal Claims,

Docket No.:        No. 08-50T,

Date Decided:   09/15/2011.

Disposition:       

HEADNOTE

.

Reference(s):

OPINION

Jane C. Bergner, Washington, D.C., for plaintiff.

Allison B. Ickovic, Tax Division, United States Department of Justice, Washington, D.C., with whom was Acting Assistant Attorney General John A. DiCicco, for defendant.

In The United States Court of Federal Claims,

OPINION

Judge: ALLEGRA, Judge:

Tax refund suit; Trial; Responsible officer penalty — 26 U.S.C. § 6672(a); Responsible person; Founder, major stockholder, primary financier, chief executive officer, publisher, and member of the board of directors was responsible person; Willfulness; Obligation to prevent corporate default on payment of withholding tax obligations; Reckless disregard of knowledge that payment was at risk; Unencumbered funds available for payment; Willfulness established; Penalty upheld; Refund denied.

This tax refund case is before the court following trial in Washington, D.C. At issue is whether plaintiff is liable for a so-called “responsible officer” penalty imposed by   section 6672(a) of the Internal Revenue Code of 1986 (26 U.S.C.). For the reasons that follow, the court finds that plaintiff, indeed, was liable for the penalty in question and, therefore, is not entitled to the refund he seeks.

I. FACTS

To say the least, Mr. Timothy L. Jenkins (plaintiff) has had a distinguished career, with a long list of achievements that includes appointments as the interim president of the University of the District of Columbia, a governor of the United States Postal Service, a consultant to the United Nations High Commissioner of Human Rights, and a trustee for Howard University.

Mr. Jenkins and Mr. Gary A. Puckrein were cofounders of Dialogue Diaspora, Inc. (DDI), a corporation which publishedAmerican Visions magazine 1 and promoted African-American culture. Prior to 1991, Mr. Jenkins and Mr. Puckrein discussed various collaboration opportunities. Those discussion began to intensify in 1991, when Mr. Puckrein made several offers of employment to Mr. Jenkins. On or about August 10, 1992, plaintiff and Mr. Puckrein entered into a preorganizational memorandum of understanding governing the creation of the new company. That agreement provided that the parties would each “hold 50% voting stock in the new corporation with parallel compensation.” It further indicated that Mr. Puckrein would be the President of the corporation (and hold certain roles regarding television programming), while Mr. Jenkins would assume the title of Publisher of American Visions. And it stated that either party would be individually able to sign all checks under $5,000, but that both would be required to sign all checks over $5,000. 2

On August 26, 1992, plaintiff, Mr. Puckrein and Ms. Joanne Harris (Mr. Puckrein's wife) filed articles of incorporation for DDI with the District of Columbia, which articles were accepted by the District on September 21, 1992. The articles listed four directors for the company: plaintiff, Mr. Puckrein, Ms. Harris, and plaintiff's wife, Lauretta Jenkins. On September 15, 1992, Mr. Puckrein received notification that the American Visions trademark had been approved. On or about September 22, 1992, DDI's new board resolved that plaintiff be appointed Chief Executive Officer and Chief Financial Officer of DDI, with the title of “Publisher,” and that Mr. Puckrein and Ms. Harris be hired to serve as the President of the Corporation and editor of American Visions, respectively. It was also resolved that DDI would become the designated publisher ofAmerican Visions in exchange for its assuming specified debts owed to Brown Printing Company (Brown Printing), which printed the magazine. The board minutes also reflect that the initial distribution of voting stock was 55 percent to Mr. Jenkins, 22.5 percent to Mr. Puckrein and 22.5 percent to Ms. Harris.

On September 22, 1992, plaintiff, Mrs. Jenkins, Warwick Communications, Brown Printing and Mr. Puckrein (on behalf of DDI) executed an agreement that stated that DDI would become the producer, publisher and owner of American Visions. The agreement described Mr. Jenkins as being “an executive officer and an equity participant” in DDI. Under the agreement, Brown Printing agreed to continue to print the magazine at its usual and customary rates. The agreement acknowledged that DDI could not pay Brown Printing on a current basis. Instead, Brown Printing agreed to continue to print the magazine provided that DDI would: (i) make a series of scheduled payments; and (ii) assume all outstanding obligations owed by Warwick (the prior publisher of American Visions). Plaintiff and Mr. Puckrein, agreed to guarantee jointly and severally all payments due to Brown Printing by DDI, and plaintiff agreed to secure his guarantee with a deed of trust in favor of Brown Printing as to property he owned on S Street, N.W., in the District of Columbia (the S Street Property).

DDI's corporate ledger shows that as of October 3, 1992, plaintiff, Mr. Puckrein, and Ms. Harris owned 550, 225, and 225 shares of DDI's stock, respectively. 3 On December 2, 1992, DDI (by Mr. Puckrein as its President) entered into a lease with Mr. and Mrs. Jenkins of the S Street Property. 4 On or about January 26, 1993, plaintiff, Mrs. Jenkins, Mr. Puckrein and Ms. Harris entered into an agreement entitled “Loan Commitment for Start-Up and Operation Costs of [DDI].” In that document, Mr. and Mrs. Jenkins agreed to: (i) encumber the S Street Property for an amount up to, but not to exceed, $130,000 as security for Brown Printing; 5 and (ii) lend an amount up to, but not to exceed, $70,000 to DDI for both the direct costs of the publication ofAmerican Visions during DDI's start-up year and certain other budgeted operating costs. The agreement established various procedures for drawing on said funds, for security and repayment. On January 28, 1993, Mr. Puckrein and Ms. Harris both countersigned this agreement, with each being described therein as a shareholder of DDI and Mr. Puckrein being also described as an endorser.

To further secure this loan agreement, on January 27, 1993, DDI's Board of Directors (plaintiff, Mrs. Jenkins, Mr. Puckrein and Ms. Harris) executed a “Stand By Voting Trust and Uniform Commercial Code Security Agreement.” The first part of this agreement established a voting trust. Mr. Puckrein and Ms. Harris each pledged to that trust approximately five percent of the 225 DDI shares each owned, yielding a total of 22.5 shares. Plaintiff had the option, by exercising this voting trust, of controlling fifty-five percent of the shares of the corporation. Plaintiff and Mrs. Jenkins, jointly and separately, accepted the pledges as trustees of the voting trust. 6

The second part of this agreement was a loan agreement secured by a factor's lien. This part identified plaintiff, along with his wife, as the “Factor,” and DDI and Mr. Puckrein as the “Borrower.” The agreement provided that Mr. and Mrs. Jenkins would lend the Borrower an amount to exceed the lesser of either $200,000 or the sum of eighty percent of the net current accounts receivable of the Borrower. This loan was secured in favor of the Factor by a “continuing lien upon all merchandise of the borrower and upon all accounts receivable or other proceeds resulting from the sale or other disposition of such merchandise.” The Borrower further assigned to the Factor “all of its merchandise and all of its accounts receivable or other proceeds.” This agreement further recited that: (i) DDI would provide monthly detailed financial reports to Mr. and Mrs. Jenkins; (ii) Mr. and Mrs. Jenkins had “all the rights and remedies of [DDI] in respect to the merchandise and the accounts receivable,” including the right to receive payments from any person owing an account receivable to DDI; (iii) without notice to DDI, all accounts receivable and proceeds were assigned to Mr. and Mrs. Jenkins; and (iv) the Borrower was restricted from performing a number of activities, including borrowing money (except from the Factor), employing additional employees or increasing their salary, or making any expenditures except in the ordinary course of business.

On May 20, 1994, Mr. Puckrein, in his stated capacity as President and Chief Operating Officer of DDI, and plaintiff, acting as a “Personal Surety,” signed an “Interest Bearing Bond” in favor of Hilbert R. Sandholm, through Mr. Sandholm's guardian, Sandra L. Reischel, evidencing a $100,000 obligation owed by DDI to Mr. Sandholm. On October 3, 1994, plaintiff executed a promissory note under which both DDI and plaintiff promised to pay Ms. Reischel $90,000, plus interest, within six months. The note was signed twice by plaintiff, once in his capacity as Publisher/CEO of DDI and again as a personal guarantor. The proceeds of this bond were not used to pay off past debts, but rather for growth opportunities.

Mr. Jenkins provided DDI with funds on other occasions. Between August 17, 1992, and November 9, 1994, he wrote a series of checks on his personal account (or that of TLJ International) payable to DDI (or to American Visions), the memo lines on which reflect various purposes relating to the operation of DDI. 7 All these advances, totaling $253,670.90, were made by plaintiff in response to requests made by Mr. Puckrein. During this period, Mr. Puckrein was primarily responsible for the day-to-day management of the business. In addition, DDI had a financial manager, Samuel Collins, who was responsible for processing all checks and performing all payroll tasks, including calculating the tax withholding with respect to payroll. For his part, Mr. Jenkins exercised limited authority over DDI's hiring of certain personnel and over a fund used for the business development activities of the corporation. 8

An entry in DDI's corporate ledger reflects that as of February 1, 1995, Ms. Harris and Mr. Puckrein each transferred 12.5 shares of their DDI stock to “TL & LC Jenkins, Voting Trustees.” A March 24, 1995, entry in the same ledger reflects that plaintiff transferred fifty shares of DDI stock to Mr. Puckrein.

Some time early in 1995, Mr. Jenkins and Mr. Puckrein had a major falling out. On March 23, 1995, Mr. Jenkins sent Mr. Puckrein a letter notifying him of a March 31, 1995, meeting of the directors of DDI. 9 On March 25, 1995, Mr. Puckrein responded, in writing, that he and Ms. Harris did not believe that Mr. Jenkins had the authority to call a meeting of DDI's board of directors and that he and Ms. Harris would not attend that meeting. This letter accused plaintiff of taking improper actions and indicated that “[u]nder the circumstances, our association must come to an end.” Toward the latter end, Mr. Puckrein purported to instruct plaintiff to cease using any DDI assets for purposes that had not been approved by him and he threatened to file suit against plaintiff.

No later than April of 1995, plaintiff learned from Mr. Puckrein that DDI had been experiencing employment tax problems with the IRS and had entered into an installment agreement with the Internal Revenue Service (IRS) for the payment of those taxes. 10 On June 2, 1995, plaintiff and Mrs. Jenkins, as members of DDI's board of directors, wrote a representative of the Industrial Bank of Washington (Industrial Bank), directing the bank not to honor any overdrafts or any checks signed by persons who were not named on the DDI board resolution on file with the bank. This letter further requested copies of DDI's May 1995, bank statement and all checks and wire transfers relating to DDI's account for that month.

Sometime before June 9, 1995, Mr. Jenkins learned that DDI was still not compliant in making its tax payments. At or around this same time, plaintiff learned that Mr. Puckrein had been secretly operating another company, American Visions Enterprises, some of whose activities paralleled those of DDI. On June 9, 1995, Mr. Jenkins (as secretary and a director of DDI) and Mrs. Jenkins (as director of DDI) wrote Ms. Harris, calling a special meeting of DDI's Board of Directors for June 12, 1995. A copy of this letter was faxed to the IRS with the following handwritten message: “Attn: Mrs. Venita Gardner, Group Manager Collection, Internal Revenue Service, 500 North Capitol Street. Please note our desire to have one of your agents in attendance at this meeting. Timothy Jenkins.” 11 The next day, June 10, 1995, Mr. Jenkins had the locks on the S Street Property replaced. At or about this time, he posted a sign on the door at the entrance to the building, which stated:

These premises at 2101 S Street, N.W., have been sealed.

The locks have been changed by the owners for nonpayment of rent and to preserve criminal and civil evidence for the Internal Revenue Service.

Any trespass, removal of documents or equipment will be treated as civil and criminal offenses by the owners and the U.S. Treasury Department. For any further information call (202) 234-[].

On June 12, 1995, Mr. Puckrein wrote Mr. Jenkins protesting the latter's action in changing the locks on the S Street Property and indicating that neither he nor Ms. Harris intended to recognize any of the actions that might be taken at the board of directors' meeting scheduled for later that day.

The DDI board of directors, indeed, met on June 12, 1995. The minutes of that meeting, which were signed by plaintiff, as Secretary of DDI, reflect that the following individuals were present: Mr. Jenkins (identified as a DDI director); Mrs. Jenkins (identified as a DDI director); Ms. Harris (identified as a DDI director); Mr. Puckrein; various legal counsel for the parties; and Robert A. Bendery, from the “Collections Dept. of the Internal Revenue Service.” The minutes indicate that Mr. Puckrein and Ms. Harris explained that they were present only to object to the meeting and declare the proceedings to be null and void. Despite this, the minutes indicate that the following resolutions were adopted by a two-thirds majority of the voting members of the DDI board: (i) that all acts affecting DDI, DDI's staff and DDI's property taken by persons purporting to act on behalf of American Visions Enterprises were null and void; (ii) that Marilyn Crawford was appointed President of DDI; (iii) that Mr. Puckrein was removed as Editor-in-Chief and spokesperson ofAmerican Visions ; (iv) that Ms. Crawford, as DDI's President, and Mr. Jenkins, as the Publisher and Secretary/Treasurer of the DDI Board were the new authorized signatories on DDI's various bank accounts; and (iv) that a DDI Executive Committee was appointed, comprised of Mr. and Mrs. Jenkins.

On June 15, 1995, Mr. Jenkins signed an IRS Form 4180, Report of Interview with Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Tax. This form was also signed by Revenue Officer Bendery. The form reflected,inter alia , that plaintiff owned fifty percent of DDI and that beginning in 1992 and 1993, plaintiff had opened corporate bank accounts, signed corporate checks and guaranteed or co-signed corporate bank loans. The form also indicated that plaintiff had determined “[c]ompany financial policy.” In a later segment, the form indicated that plaintiff had become aware of the delinquent taxes based upon the issuance of DDI's year-end financial statements for 1993 and 1994. 12 Also on June 15, 1995, plaintiff signed an IRS Form 433-B, Collection Information Statement for Business, that had previously been prepared by Revenue Officer Bendery. This form listed various income and assets owned by DDI. 13

On July 5, 1995, plaintiff wrote a check on DDI's bank account at Industrial Bank for $16,668.47 made payable to him and Mrs. Jenkins. 14 Plaintiff later cashed the check and deposited the proceeds into one of his personal bank accounts. 15 At trial, Mr. Jenkins testified that he wrote this check to himself upon demanding, based upon the factoring agreement, that Industrial Bank provide him with the moneys in the various DDI accounts. He admitted that at the time he wrote this check, he knew about the unpaid IRS liability.

On July 29, 1995, Mr. Jenkins, Mr. Puckrein and DDI (by Mr. Puckrein) entered into a Stock Purchase Agreement pursuant to which Mr. Puckrein agreed to purchase plaintiff's 500 shares of DDI stock (identified therein as representing 50 percent of the issued and outstanding DDI stock) for $50. In addition, Mr. Puckrein agreed to discharge DDI's debt to Mr. Jenkins by means of a $200,000 payment due by January 30, 1996. The agreement further stated that if Mr. Puckrein failed to pay this debt when due, the transferred shares referenced would revert to Mr. Jenkins at the price originally paid.

As the foregoing would suggest, for the quarterly tax periods ending March 31, 1993, through September 30, 1995, DDI filed Federal employment tax returns but failed to pay in full to the IRS the liabilities associated therewith. Mr. Puckrein signed the returns filed during this period. The liability for the unpaid employment taxes for the first of these periods (that of March 31, 1993) was assessed by the IRS on June 14, 1993. On August 7, 1995, Mr. Puckrein signed an IRS Form 433-D, entitled a “Tentative Installment Agreement,” for payment of DDI's employment tax liabilities. During this period, DDI became increasingly past-due on its rent payments to plaintiff — as of June 1, 1995, it owed Mr. and Mrs. Jenkins $84,156, and by October 31, 1995, that figure had swelled to $117,381. On December 1, 1995, Revenue Officer Bendery wrote Mr. Jenkins, indicating that the IRS had been unable to collect trust fund taxes owed by DDI and was prepared to assess a Trust Fund Recovery Penalty against him. On January 26, 1996, plaintiff responded to this letter, protesting the assessment of a penalty against him. On June 9, 1997, the IRS denied plaintiff's protest. On January 28, 1998, the IRS assessed against Mr. Jenkins a penalty of $189,972, pursuant to   section 6672(a) of the Code, for failure to pay over withheld employment taxes.

After various procedural steps were taken, in 2005 and early 2006, the IRS collected an amount corresponding to the penalty asserted against plaintiff (plus accrued interest) by levying on plaintiff's individual retirement account and Social Security benefits. The total amount recovered in this fashion was $264,097.56. On February 5 and 6, 2007, plaintiff filed a claim for refund seeking the return of these funds. On May 10, 2007, the IRS send plaintiff a notice of claim disallowance. Subsequently, plaintiff timely filed this refund suit on January 24, 2008.

Subsequently, in the course of discovery, it was determined that plaintiff's IRS administrative file had been lost. On April 14, 2010, plaintiff filed a Motion for an Order Shifting the Burden of Production and Proof to Defendant, in which he alleged that the loss of the administrative file, and the concomitant loss of material establishing the historical factual basis for the IRS” assessment of the penalty against him, altered, in his favor, various rules concerning the presumption of correctness and burden of proof ordinarily associated with a tax refund suit. 16 Following briefing and oral argument on this matter, this court, on July 9, 2010, granted plaintiff's motion, in part. See Jenkins v. United States,   2010 WL 2935791 [106 AFTR 2d 2010-5226] (Fed. Cl. July 9, 2010). Based onCook v. United States ,   46 Fed. Cl. 110 [85 AFTR 2d 2000-1017] (2000), it held that while the loss of the administrative file did not shift the burden of proof in this matter, it did require defendant to show that a prima facie case for the assessment of the penalty existed, i.e., that the assessment was not naked. Jenkins,   2010 WL 2935791 [106 AFTR 2d 2010-5226]. Trial in this matter was held in Washington, D.C., from September 27, 2010, through September 30, 2010. Consistent with its prior procedural ruling, the court required defendant to present its evidence first. Based on this evidence, the court found that defendant had produced sufficient evidence for the presumption of correctness to attach to the IRS' penalty assessment. Trial on the merits thus proceeded with the standard presumptions and burdens regarding the conduct of a tax refund suit in place. After the filing of post-trial briefs, closing argument in this case was held on March 17, 2011.

II. DISCUSSION

We begin with common ground. Every employer is required to deduct and withhold federal income tax and Federal Insurance Contributions Act (FICA) tax from employees' wages as and when they are paid. See 26 U.S.C. §§ 3102 (FICA) and 3402(a) (income tax). Under   section 7501 of the Code, such amounts are held in trust for the United States and thus are commonly referred to as trust fund taxes. See Slodov v. United States,  436 U.S. 238, 243 [42 AFTR 2d 78-5011] (1978). In imposing the obligation to collect these taxes on other than the actual taxpayer, Congress recognized that collectors might fail to set aside and pay over the taxes to the United States. See United States v. Sotelo,   436 U.S. 268, 277 [42 AFTR 2d 78-5001] n.10 (1978). Where, as here, the collector fails to remit the withheld taxes, the United States must, nevertheless, credit each taxpayer as if the funds were actually paid over. See, e.g., 26 C.F.R. § 1.31-1(a) (2010); see also Slodov, 436 U.S. at 243; United States v. Huckabee Auto Co.,   783 F.2d 1546, 1548 [57 AFTR 2d 86-987] (11th Cir. 1986). As a consequence, the United States obligates itself to pay benefits such as social security and income tax refunds, for which there is no corresponding revenue. See Emshwiller v. United States,   565 F.2d 1042, 1044 [40 AFTR 2d 77-6094] (8th Cir.1977) (“any failure by the employer to pay withheld taxes results in a loss to the government in that amount”); Salzillo v. United States,   66 Fed. Cl. 23, 31 [95 AFTR 2d 2005-2104] (2005).

To protect against such losses, the persons responsible for ensuring that the trust fund taxes are paid, who willfully fail to do so, may be held personally liable under   section 6672 of the Code. See 26 U.S.C. § 6672; see also United States v. Bisbee,   245 F.3d 1001, 1005 [87 AFTR 2d 2001-1611] (8th Cir. 2001).   Section 6672(a) states in pertinent part:

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.

26 U.S.C. § 6672(a). By its terms, then, liability under   section 6672 results from the confluence of three factors: “(1) There must be a “person” who (2) is required to collect, truthfully account for and pay over taxes, but who (3) “willfully” fails to do so.” Emshwiller, 565 F.2d at 1045; see also Vinick v. United States,   205 F.3d 1, 3 [85 AFTR 2d 2000-1177]–4 (1st Cir. 2000); United States v. Landau,   155 F.3d 93, 101 [82 AFTR 2d 98-6113] (2d Cir. 1998), cert. denied, 526 U.S. 1130 (1999); Cook v. United States,   52 Fed. Cl. 62, 68 [89 AFTR 2d 2002-1541] (2002). 17

“The first two of these requirements are typically collapsed into the single concept of a “responsible person,”” this court has stated, “while the willfulness criteria commands separate attention.” Salzillo, 66 Fed. Cl. at 32. Both the responsible person analysis and the assessment of willfulness are fact-based determinations unique to the circumstances of each case. See Feist v. United States,   607 F.2d 954, 957 [44 AFTR 2d 79-5843] (Ct. Cl. 1979); Bauer v. United States,   543 F.2d 142, 148 [38 AFTR 2d 76-5975] (Ct. Cl. 1976). An individual against whom the IRS has made a   section 6672(a) assessment ordinarily has the burden of proving, by a preponderance of the evidence, that at least one of the composite elements of liability under that section is absent. See Landau, 155 F.3d at 101; Cook, 52 Fed. Cl. at 68. And that burden squarely falls on plaintiff here.

A. Was Plaintiff a Responsible Person?

  Section 6672 of the Code adopts the term “person(s)” as used by   section 6671(b), which, in turn, defines person as: “includes an officer or employee of a corporation ... who as such officer, employee, or member, is under a duty to perform the act in respect of which the violation occurs.” Through   section 6672 and the definition contained in   section 6671(b), the United States seeks “to protect the government fisc by facilitating the collection of taxes from those who have both the responsibility and authority to avoid the default.”Cook , 52 Fed. Cl. at 68; see also White v. United States,   372 F.2d 513, 516 [19 AFTR 2d 683] (Ct. Cl. 1967);Salzillo , 66 Fed. Cl. at 32. It is a further bedrock principle that the determination whether a person is responsible “is a matter of substance not form and is determined by the coincidence of status, duty and authority” — with the duty to ensure that taxes are paid flowing from authority that enables one to do so. Cook, 52 Fed. Cl. at 68;see also Opliger v. United States ,   637 F.3d 889, 893 [107 AFTR 2d 2011-1518] (8th Cir. 2011); Michaud v. United States,   40 Fed. Cl. 1, 16 [80 AFTR 2d 97-8007] (1997); Ghandour v. United States,   36 Fed. Cl. 53, 60 [78 AFTR 2d 96-5217] (1996), aff'd,   132 F.3d 52 [80 AFTR 2d 97-7743] (1997) (table).

While determining responsibility perforce requires consideration of the totality of the circumstances, the Federal Circuit has outlined a number of relevant considerations:

[A] person's “duty” under   § 6672 must be viewed in light of his power to compel or prohibit the allocation of corporate funds. It is a test of substance, not form. Thus, where a person has authority to sign the checks of the corporation or to prevent their issuance by denying a necessary signature or where the person controls the disbursement of the payroll or controls the voting stock of the corporation he will generally be held “responsible.”

Godfrey v. United States,   748 F.2d 1568, 1576 [55 AFTR 2d 85-409] (Fed. Cir. 1984) (internal citations omitted); see also De Alto v. United States,   40 Fed. Cl. 868, 876 [81 AFTR 2d 98-2021] (1998). 18 The inquiry thus looks through the —

mechanical functions of the various corporate officers, to determine the persons having “the power to control the decision-making process by which the employer corporation allocates funds to other creditors in preference to its withholding tax obligations.” The inquiry required by the statute is a search for a person with ultimate authority over expenditure of funds since such a person can fairly be said to be responsible for the corporation's failure to pay over its taxes.

Godfrey, 748 F.2d at 1575 (internal citations omitted); De Alto, 40 Fed. Cl. at 875; see also Barrett,   580 F.2d 449, 452 [42 AFTR 2d 78-5381] (Ct. Cl. 1978);Bolding v. United States ,   565 F.2d 663, 670 [40 AFTR 2d 77-6057]–71 (Ct. Cl. 1977); Bauer, 543 F.2d at 148;White , 372 F.2d at 517 (“the courts are looking for the person who could have seen to it that the taxes were paid”).

Notwithstanding the “ultimate authority” language employed in Godfrey, the Federal Circuit and other courts have made clear that there can be more than one responsible person as “liability attaches to all those under the duty set forth in the statute.” Harrington v. United States,   504 F.2d 1306, 1311 [34 AFTR 2d 74-6082] (1st Cir. 1974);see also, e.g., Lubetzky v. United States ,   393 F.3d 76, 80 [95 AFTR 2d 2005-319] (1st Cir. 2004); Gephart, 818 F.2d at 473;Godfrey , 748 F.2d at 1574–75;Thibodeau v. United States ,   828 F.2d 1499, 1503 [60 AFTR 2d 87-5763] (11th Cir. 1987); White, 372 F.2d at 516;Scott v. United States ,   354 F.2d 292, 296 [16 AFTR 2d 6087] (Ct. Cl. 1965). “[T]he statute expressly applies to “any” responsible persons,” one court has explained, “not just to the person most responsible for the payment of the taxes,” adding that “[t]here may be — indeed, there usually are — multiple responsible persons in any company.” Barnett v. I.R.S.,   988 F.2d 1449, 1455 [71 AFTR 2d 93-1614] (5th Cir. 1993), cert. denied, 510 U.S. 990 (1993) (emphasis in original);see also Gephart , 818 F.2d at 476 (“[w]hile it may be that [other corporate officials] were more responsible than plaintiff, and exercised greater authority, this does not affect a finding of liability against the plaintiff” (emphasis in original)); Godfrey, 748 F.2d at 1575;Bolding , 565 F.2d at 671; White, 372 F.2d at 516; Ghandour, 36 Fed. Cl. at 61. Accordingly, that Mr. Puckrein has admitted to being responsible for DDI's failure to pay over taxes does not, in and of itself, preclude a finding that Mr. Jenkins is likewise responsible.

Plaintiff contends that he was not a “responsible person” within the meaning of   section 6672 for the periods in question. The record before the court, however, belies this assertion.

It reveals that Mr. Jenkins held various positions of significant authority within the corporation, including Chief Executive Officer and Chief Financial Officer of the corporation. He was, as well, the publisher of American Visions, the primary publication of the corporation. He sat on the company's board and, during the period in question, owned (together with his wife) at least fifty percent of the company's stock. In addition, Mr. Jenkins had the ability to sign checks on DDI's primary bank account and the ability to withdraw funds from those accounts. By virtue of his stake in the corporation and his role as a director, Mr. Jenkins also had the ability to precipitate reorganizations of the corporation's leadership. What is more, Mr. Jenkins possessed an additional entrepreneurial stake in DDI via his role in financing the company — he provided the initial operating funds for the company by directly extending credit to DDI, and negotiated financing transactions with, and encumbered his property to obtain credit from, third parties. Because of his diverse roles and owing to the explicit terms of the factoring agreement, plaintiff enjoyed the right to review the corporation's financial records, including records reflecting the company's payroll tax deposits. Last, but not least, plaintiff was the company's landlord, leasing it the building that was its principal place of business.

Owing to his multi-faceted role within the corporation and his role as a financier of first resort, plaintiff plainly had the leverage and authority to “avoid the default” and demand that the corporation not squander the taxes it withheld from its employees. See Feist, 607 F.2d 960 (“Any corporate officer, or employee with the power and authority to “avoid the default” or to direct the payment of the taxes is a responsible person within the meaning of   section 6672.”);White , 372 F.2d at 516; see also Thomas v. United States,   41 F.3d 1109, 1120 [79 AFTR 2d 97-668] (7th Cir. 1994);Jenson v. United States ,   23 F.3d 1393, 1395 [73 AFTR 2d 94-1976] (8th Cir. 1994).

In arguing otherwise, plaintiff makes several claims. First, he contends that the court should disregard his various titles, claiming that they did not give him the actual authority to ensure the satisfaction of the tax obligations of DDI. If, indeed, his titles were mechanical, plaintiff might be right.See Barnett , 988 F.2d at 1455–56;White , 372 F.2d at 516. But, this claim is contradicted by the various occasions on which plaintiff injected himself into the decision-making process of the corporation. A prime example is plaintiff's activities during the period of June 9–12, 1995. On the first of these days, when plaintiff allegedly discovered the depths of the DDI's withholding tax problems with the IRS, Mr. Jenkins locked DDI out of the S Street property, invoking the Treasury Department's name in doing so, and called a meeting of the board of directors to which he invited representatives of the IRS. And, at that directors meeting, Mr. Jenkins won approval of major changes to the corporation's structure — the firing of Mr. Puckrein, the hiring of a new corporate President, the creation of an Executive Committee of the Board to which he and his wife were appointed, and his designation as having signature authority on all of the corporation's bank accounts. These actions well-illustrate that Mr. Jenkins was no figurehead, but rather, as his wide experience in managing large organizations would suggest, one who could make his will felt within the corporation when he so desired.

Notwithstanding this, plaintiff stresses that he exercised no day-to-day decision-making authority regarding DDI's federal tax matters — he did not deal with payroll matters and thus had nothing to do with tax withholdings and federal payroll tax deposits; he did not sign any of the corporation's tax returns; and he did not decide whether vel non to pay the taxes owed. And, all this appears true — but irrelevant. For it is well-accepted that one need not actually perform these tax functions in order to be a responsible person under   section 6672. See Mueller v. Nixon,   470 F.2d 1348, 1349 [31 AFTR 2d 73-454] (6th Cir. 1972), cert. denied, 412 U.S. 949 (1973). The question, rather, is whether Mr. Jenkins possessed the effective power to pay the taxes or, at least, to force that action on the part of others. And he surely did. Indeed, any question in this regard is answered by plaintiff's dealings with Industrial Bank, which indicate that he had sufficient authority to direct the payment of funds to third parties and to withdraw funds from DDI's accounts as he deemed necessary. 19 Plaintiff could have wielded this authority — and more — to ensure that the IRS received the tax funds that had been withheld from DDI's employees. That he failed to do so does not make him any less responsible.

What the Court of Claims held forty years ago is apt here. In a case similar to this, it observed that “[a]s a general proposition it may be safely postulated that one who is the founder, chief stockholder, president, and member of the board of directors of a corporation ... is rebuttably presumed to be the person responsible under section [6672] of the Code ... in the absence of an affirmative showing by him that in actual fact he lacked the ultimate authority to withhold and pay the employment taxes in question.” McCarty v. United States,   437 F.2d 961, 967 [27 AFTR 2d 71-682]–68 (Ct. Cl. 1971);see also Feist , 607 F.2d at 960. Here, plaintiff was the founder, major stockholder, chief executive officer, publisher and member of the board of directors of DDI. He was also the corporation's primary financier and its landlord. And plaintiff has provided no affirmative showing that in actual fact he lacked the ultimate authority to avoid the corporation's default on its withholding tax obligations. He was then, irrebuttably — responsible.

B. Was Plaintiff Willful?

Even a responsible person is not liable for a penalty under   section 6672(a) unless his or her failure to collect, account for, or remit withholding taxes was willful.Godfrey , 748 F.2d at 1574. “Whether “the failure to pay the overdue taxes [is] willful has been seen ... as calling for proof of a voluntary, intentional, and conscious decision not to collect and remit taxes thought to be owing.”” Godfrey, 748 F.2d at 1576–77 (alterations in original) (quoting Scott v. United States,   354 F.2d 292, 295 [16 AFTR 2d 6087] (Ct. Cl. 1965)). The Supreme Court has indicated that willfulness requires some showing of “personal fault.” See Slodov, 436 U.S. at 254. “Mere negligence” is insufficient to constitute willfulness under   section 6672. Godfrey, 748 F.2d at 1577. On the other hand, “it is not necessary that there be present an intent to defraud or to deprive the United States of the taxes due, nor need bad motives or wicked design be proved in order to constitute willfulness.” White, 372 F.2d at 521;see also Monday v. United States ,   421 F.2d 1210, 1216 [25 AFTR 2d 70-548] (7th Cir.), cert. denied, 400 U.S. 821 (1970) (the individual's bad purpose or evil motive in failing to collect and pay the taxes “properly play no part in the civil definition of willfulness.”); Godfrey, 748 F.2d at 1577; Ghandour, 36 Fed. Cl. at 62.

Limning the appropriate standards to be applied herein, the Federal Circuit has held that willfulness may be shown in at least two ways: (i) “a deliberate choice voluntarily, consciously and intentionally made to pay other creditors instead of paying the [g]overnment” or (ii) “reckless disregard of a known or obvious risk that the taxes may not be remitted to the government.” Godfrey, 748 F.2d at 1577. Decisions of the Court of Claims are to similar effect.See Feist , 607 F.2d at 961; Bolding v. United States,   565 F.2d 663, 672 [40 AFTR 2d 77-6057] (Ct. Cl. 1977). Under the first of these prongs, a responsible person who pays net wages to employees with the knowledge that there are insufficient funds with which to pay the employment taxes commits a willful failure to collect and pay over under   section 6672. See Emshwiller, 565 F.2d at 1045; Sorenson v. United States,   521 F.2d 325, 328 [36 AFTR 2d 75-5659] (9th Cir. 1975). Under the second of these prongs, a responsible person is reckless if he knew or should have known of a risk that the taxes were not being paid, had a reasonable opportunity to discover and remedy the problem, and yet failed to undertake reasonable efforts to ensure payment. See Whiteside v. United States,   26 Cl. Ct. 564, 573 [70 AFTR 2d 92-5105]–74 (1992); Hammon v. United States,   21 Cl. Ct. 14, 27 [66 AFTR 2d 90-5256] (1990); see also Colosimo v. United States,   630 F.3d 749, 753 [107 AFTR 2d 2011-622] (8th Cir. 2011); Wright v. United States,   809 F.2d 425, 427 [59 AFTR 2d 87-467] (7th Cir. 1987). Under this latter prong, “if the facts and circumstances of a particular case, taken as a whole, demonstrate that a responsible individual knew or should have known that there was a risk that the taxes would not be paid, and failed to take available corrective action, with the result being that the government is not paid taxes to which it is entitled, that individual will be found to have willfully failed to pay over withholding taxes under   IRC § 6672(a).”Ghandour , 36 Fed. Cl. at 63; see also Feist, 607 F.2d at 961 (“Willfulness can be proved by showing that the responsible person recklessly disregarded his duty to collect, account for, and pay over the trust fund taxes or by showing that the responsible person ignored an obvious and known risk that the trust funds might not be remitted.”).

Plaintiff claims that he did not willfully fail to collect, account for or remit the withholding taxes owed by DDI because once he found out about that liability, he made every effort to assist the IRS in collecting what it was due. But, this claim proves too much.

For one thing, this claim pivots on the false notion that plaintiff was not obliged to facilitate the collection of the withholding taxes until he supposedly found documents on June 9, 1995, indicating that DDI had defaulted on its installment agreements with the IRS. In fact, the record demonstrates that, at least as early as April of 1995 — and perhaps well before that 20 — plaintiff knew that the collection of these taxes was at risk. By then, plaintiff knew not only that DDI had been experiencing employment tax problems and had entered into an installment agreement with the IRS to pay those taxes, but that Mr. Puckrein was unreliable in ensuring that proper and timely tax payments would be made. At least from this point, then, plaintiff should have monitored whether the taxes, in fact, were being paid, and taken corrective action if they were not. 21 He could no longer operate on the good faith belief that DDI and Mr. Puckrein would ensure that the back taxes were paid. See Conway v. United States,   647 F.3d 228, 237 [108 AFTR 2d 2011-5336] (5th Cir. 2011) (“we have repeatedly rejected the argument that a taxpayer's good faith belief that payments for the taxes had been arranged is a defense to personal liability under   § 6672”). Yet, that is exactly what plaintiff did, recklessly disregarding, in the court's estimation, a known risk that the taxes were not being paid.

At all events, “[e]ven if a “responsible person” is unaware that withholding taxes have gone unpaid inpast quarters, it is settled law that a responsible person who becomes aware that taxes have gone unpaid in past quarters in which he was also a responsible person, is under a duty to use all “unencumbered funds” available to the corporation to pay those back taxes.” United States v. Kim,   111 F.3d 1351, 1357 [79 AFTR 2d 97-2238] (7th Cir. 1997) (emphasis in original); see also Thosteson v. United States,   331 F.3d 1294, 1300 [91 AFTR 2d 2003-2468]–01 (11th Cir. 2003); Honey v. United States,   963 F.2d 1083, 1089 [69 AFTR 2d 92-1333] (8th Cir. 1992); Mazo v. United States,   591 F.2d 1151 [43 AFTR 2d 79-853] (5th Cir. 1979). This rule fully applies to this case. The duty so described extends not only to funds available to the corporation at the time the responsible person becomes aware of the arrearage, but also to any unencumbered funds acquired thereafter. Garskey v. United States,   600 F.2d 86, 91 [44 AFTR 2d 79-5111] (7th Cir. 1979); see also Kim, 111 F.3d at 1357. Failure to take action when there is knowledge of the tax liability constitutes willfulness. 22

Plaintiff manifestly failed to satisfy his duty to use unencumbered funds to pay back the IRS. True enough, there is little doubt that he had an earnest desire for DDI to pay the back and current taxes it owed the IRS — but only if did not adversely impact his own ability to recoup moneys owed him by DDI. It was in pursuit of the latter goal, and certainly not the former, that three weeks after the critical board meeting with the IRS, plaintiff wrote himself a check for $16,668.45 — the last of at least thirteen checks that he signed between April 12, 1995, and the day he closed out DDI's account at Industrial Bank. 23 Every time plaintiff signed one of these checks, he should have wondered, in light of DDI's history of delinquency, the company's modest size, and the lack of improvement in its bottom line, whether history was repeating itself and he was signing over to creditors (and himself) money that belonged to the United States. He could have confirmed whether this was the case, as he had the right to look at the company's books and the business experience to understand them. But, he did not.

Plaintiff claims that the funds he took were “encumbered” and thus unavailable for payment to the IRS. He argues that his factor lien took priority over the overdue withholding tax obligation, entitling him to any funds that the corporation received from third parties. But, as will be explained, the law does not allow a responsible person to avoid liability for unpaid withholding taxes by enforcing a security arrangement with his own corporation that favors his own interests over those of the United States.

As a threshold matter, a very good argument can be made that, as to at least some of the funds in question, plaintiff's factoring lien did not have priority over the interests of the IRS. It is well-accepted that   section 7501 of the Code impresses the taxes withheld from employees with a trust. See Begier, 496 U.S. at 60 (the act giving rise to tax liability,i.e. , the payment of wages, gives rise to a statutory trust in favor of the United States); Cabot v. United States,   38 Fed. Cl. 682, 693 [80 AFTR 2d 97-6154] (1997). 24 Various cases hold that where a corporation commingles the withheld taxes with its other funds and then uses the commingled funds to pay creditors, it should be treated like a trustee who has misappropriated trust funds. In the latter instance, courts may make “reasonable assumptions” to determine if a nexus exists between the taxes withheld and the funds remaining in the commingled account as of a given point in time.Begier , 496 U.S. at 65 (quoting 124 Cong. Rec. 32392, 32417 (statement of Rep. Edwards));see also In re Megafoods Stores, 163 F.3d 1063, 1068 (9th Cir. 1998); Drabkin v. District of Columbia, 824 F.2d 1103 (D.C. Cir. 1987). Under one of these “reasonable assumptions,” commonly known as the lowest intermediate balance test (LIBT), money that remains in the commingled account is presumed to belong to the beneficiary. 25 These principles have been extended to tax situations by courts concluding that where a corporation fails to turn over the withheld taxes funds, the minimum balance maintained in a commingled account is impressed by the trust created by   section 7501 and does not become the property of the corporation.See, e.g., City of Farrell , 41 F.3d at 102;Daniel , 887 F.2d at 987; In re Al Copeland Enters., Inc., 133 B.R. at 837. Under these cases, it would appear that plaintiff's factor lien took a backseat to the interests of the IRS at least insofar as the lowest intermediate balance of the commingled fund. 26

But even if plaintiff's factoring lien somehow had priority over the trust created under   section 7501, it remains well-established that, for purposes of establishing willfulness, funds are deemed “encumbered” only where “the taxpayer is legally obligated to use the funds for a purpose other than satisfying the preexisting employment tax liability.”Honey , 963 F.2d at 1090; see also Conway, 647 F.3d at 237 (“funds are encumbered when “restrictions preclude a taxpayer from using the funds to pay the trust fund taxes.””) (quoting Barnett, 988 F.2d at 1458); Bell v. United States,   355 F.3d 387, 394 [93 AFTR 2d 2004-369] (6th Cir. 2004); Kim, 111 F.3d at 1359. Here, of course, the factoring lien was possessed not by some third party, such as a bank, but by the responsible person himself — plaintiff. As such, that factoring lien, in no practical or legal sense, precluded plaintiff from using the corporation's otherwise available funds to address the outstanding trust fund taxes. Indeed, plaintiff's factoring lien did not prevent the company from using funds in its accounts to “make any expenditures ... in the ordinary course of business,” and that is exactly what plaintiff did on various occasions in disbursing corporate funds to utilities, other vendors, and his wife for her salary. 27 This same provision did not preclude plaintiff from disbursing corporate funds to pay DDI's taxes. 28 Rather, plaintiff — and plaintiff alone — made the choice to favor himself over the IRS. And he should not be heard to argue, on the basis of that choice, that the corporations funds were “encumbered” so as to excuse his failure to use those funds to satisfy DDI's employment tax liabilities. See Purdy Co. of Ill. v. United States,   814 F.2d 1183, 1191 [59 AFTR 2d 87-748] (7th Cir. 1987) (“The mere fact that some other creditor, including the taxpayer, might be owed a debt ... does not alter the general requirement that such funds be paid over against back taxes.”). To permit corporate officers to escape liability under   section 6672(a) via agreements that prefer themselves to the government would defeat the purpose of the statute, as it would be the rare officer, indeed, who would not be the effective maximizer of his own self-interest. See Kalb v. United States,   505 F.2d 506, 510 [34 AFTR 2d 74-6104] (2d Cir. 1974).

Discretion is power — a commodity to be prized. And plaintiff had ample power and ability to change the course of events here. But, he did not. His claims of obtuseness do not persuade. Hence, the court finds that plaintiff's nonfeasance, at a minimum, constituted ““a reckless disregard of a known or obvious risk that trust funds may not be remitted to the government.”” Oppliger, 637 F.3d at 894 (quoting Keller v. United States,  46 F.3d 851, 854 [75 AFTR 2d 95-721] (8th Cir. 1995)). As such, his conduct was “willful” within the meaning of   section 6672(a). 29

III. CONCLUSION

The court will not gild the lily. It understands that Mr. Jenkins is frustrated. Although the court cannot stand in his shoes, there is little doubt that he suffered grievous wrongs at the hands of others involved with the operations DDI. But, what happened to plaintiff, bad as it was, neither gave him license to engage in self-help insofar as the interests of the United States were concerned, nor relieved him of the overarching responsibility he had to ensure that DDI did not default on its tax obligations. Even in this context, “[t]wo wrongs do not make a right;” they “simply make two wrongs.”Minnick v. California Dept. of Corrections , 452 U.S. 105, 128 n.3 (1981) (Stewart, J. dissenting).

Mr. Jenkins was responsible for paying DDI withheld taxes over, he willfully failed to do so and, therefore, is liable for the 100 percent penalty assessed under   section 6672(a) of the Code. As such, the Clerk is directed to enter judgment dismissing plaintiff's complaint. No costs. 30

IT IS SO ORDERED.

Francis M. Allegra

Judge

1

  As Mr. Jenkins testified, American Visions was —

one of the premier books of aesthetic and cultural interpretation in the Black community, and it really was one of the places where writers, poets, educators had a chance to be heard without being stifled by editorial policies, and it became a beacon in the life of many educators for possible transmission of culture to younger-generation people.

2

  The record includes various checks suggesting that the counter-signing process described in this provision was never implemented.

3

  According to this ledger, it thus appears that, as of this time, Mr. Jenkins owned a majority share of the new corporation. At trial, however, Mr. Jenkins testified that, because of Mr. Puckrein's pending divorce, he agreed to hold temporarily fifty shares of stock initially issued to Mr. Puckrein, with the understanding that Mr. Puckrein could reacquire those shares at a nominal cost of $10. Describing the motivation for this transaction, Mr. Jenkins testified that he “was prepared to give [Mr. Puckrein] anything that he needed for external issues.”

4

  This lease was for a five-year term, commencing February 1, 1993. The rent, which was to be paid monthly by DDI, was $6,000 per month net, with an annual inflation escalation clause. DDI agreed to sublet the fourth floor of the S Street Property to TLJ International, another company owned by Mr. Jenkins, with an annual reduction in the aforementioned rent of $1,500 per month. The lease provided Mr. and Mrs. Jenkins with various remedies if DDI defaulted on its payment obligation.

5

  Indeed, it appears that Mr. and Mrs. Jenkins secured the printing agreement with Brown Printing by issuing a deed of trust of this property in the printer's favor.

6

  In his testimony, Mr. Jenkins described the purpose of the voting trust, thusly —

I think it actually was initially suggested by my wife as an additional degree of assurance that if the worst should come to worse, and if something perhaps would happen to Gary Puckrein, that I would be able to not be faced with estate managers and not be able to control the course of the corporation in order to get the reimbursement for our advances in the form of loans.

In this same vein, Mr. Jenkins testified that the document “was calculated that in circumstances [wh]ere they were in default, that we would be able to demand the additional shares necessary to have a majority of the corporate board and control the affairs of the corporation.”

7

  These checks are summarized in the following chart:

 -------------------------------------------------------------------------

Check

Number     Date        Payee     Amount            For/Memo

-------------------------------------------------------------------------

    237    8/17/92   American     $3,900.00   Genovese & Assoc, Ck.

                     Visions

-------------------------------------------------------------------------

   5715    8/28/92   American     $  766.90   Support Funds

                     Visions

-------------------------------------------------------------------------

    261   10/19/92   DDI          $6,000.00   Advance for Oct/Nov

                                              Factored Receivables

-------------------------------------------------------------------------

    341     2/3/93   DDI          $2,300.00   Loan to Advance Salaries

-------------------------------------------------------------------------

    360     3/1/93   DDI         $10,000.00   Brown Printing/Paper from

                                              LOC

-------------------------------------------------------------------------

    379    3/25/93   DDI         $40,384.00   Short Term Loan/Advance #3

-------------------------------------------------------------------------

    382     4/7/93   DDI          $1,500.00   Postage Advance

-------------------------------------------------------------------------

    485    9/27/93   DDI         $25,000.00   Six Month Loan at 10%

-------------------------------------------------------------------------

    548    3/28/94   DDI          $2,500.00   Compuserv Start-Up Loan

-------------------------------------------------------------------------

   5749    10/7/93   DDI         $40,000.00   60 Day Cir. Dev.

-------------------------------------------------------------------------

   5757   10/20/93   DDI         $49,000.00   Circulation Adv.

-------------------------------------------------------------------------

    564     5/9/94   DDI          $1,667.00   Adv. Payment to Lauren Gill

                                              (McClain)

-------------------------------------------------------------------------

    567    5/13/94   DDI         $61,453.00   Advance for Brown Printing

-------------------------------------------------------------------------

    674    11/9/94   DDI          $9,200.00   Payroll Adv. Against Cowles

                                              Payment

-------------------------------------------------------------------------

8

  While plaintiff denied this at trial, his testimony was contradicted by his prior deposition testimony in this case, as well as by the deposition testimony he gave in the 1996 lawsuit that he and his wife filed against DDI in D.C. Superior Court.

9

  The letter in question refers to a meeting of “shareholders,” but the context of the letter, as well as subsequent communications referring to the meeting, suggest that the meeting was one of DDI's directors.

10

  In this regard, Mr. Jenkins testified as follows:

Well, I had information I believe as early as April that there had been an IRS issue. And when I raised that with Gary, he explained that while there had been a lapse in the timely payment of withholding trust funds, that it had been remedied, and they had negotiated an installment agreement that he was then operating under with the approval of IRS. And hence there was no issue after that.

Nevertheless, under cross-examination, plaintiff admitted that he did nothing to verify Mr. Puckrein's claims that the taxes were being paid.

11

  Mr. Jenkins testified, at great length, that he did not know the full extent of DDI's employment tax problems until June 9, 1995. He claimed that, on that day, he discovered papers at DDI's offices indicating that “DDI had defaulted on its installment agreements with the IRS with regard to its trust fund payment” and revealing that Mr. Puckrein had been dealing with Revenue Officer Robert Bendery on this matter. While plaintiff claims that he had no prior contact with Mr. Bendery, other evidence in the record contradicts this claim. For example, in explaining why the handwritten message on the June 9 letter inviting the IRS to attend the board meeting was addressed to Mrs. Gardner, plaintiff testified that he had met with Mr. Bendery “on previous occasions, when Mr. Bendery had come to our offices,” and did not want him to come to the June 12 meeting unaccompanied. Mr. Jenkins' claim that he did not meet with Mr. Bendery prior to June 9, 1995, is also contradicted by the deposition that Mr. Jenkins gave in his D.C. Superior Court action against Mr. Puckrein, in which Mr. Jenkins admitted that he had met Mr. Bendery on several prior occasions.

12

  In response to the question — “[w]hat action did you take to see that the tax liabilities were paid?,” plaintiff responded — “[r]aised the issue with the President. Received oral assurances from the President that a payment plan acceptable to IRS had been negotiated and future accounts would be kept current.” This same form indicated that Mr. Puckrein was responsible for a number of other corporate functions, including hiring, managing and firing employees; directing the payment of bills; authorizing bank deposits and payroll checks; and reviewing and signing the company's tax returns.

13

  It appears that during this same general time period, Mr. Jenkins had a number of contacts with Revenue Officer Bendery in which Mr. Jenkins urged the revenue officer to seize various DDI resources in payment of the outstanding taxes. At trial, Mr. Jenkins testified that he also provided Revenue Officer Bendery with evidence that Mr. Puckrein was siphoning away funds from DDI in various ways.

14

  This check was the last of at least twenty-seven checks drawn on DDI's account at Industrial Bank that was signed by plaintiff. Plaintiff claims that as to the other twenty-six checks, which were dated between June 26, 1993, and May 10, 1995, he made no decision regarding who was being paid or whether the funds were owed, but merely signed checks prepared by DDI employees in the absence of Mr. Puckrein.

15

  In explaining why he did not use these funds to pay the past due employment taxes, Mr. Jenkins testified —

My effort was to seize, as a creditor, the funds that were the proceeds of Dialogue Diaspora, and I had a senior obligation for those funds, senior to the IRS claim, and I exercised it free and clear of any IRS obligation pursuant to my entitlement under the creditor's lien, and also the powers to seize proceeds in third parties, hands with or without legal process.

16

  In a plain vanilla refund suit, the assessment made by the IRS is presumed to be correct, placing an obligation on the taxpayer to come forward with evidence to rebut a presumption of correctness. United States v. Janis,   428 U.S. 433, 440 [38 AFTR 2d 76-5378]–41 (1976); Welch v. Helvering,   290 U.S. 111, 115 [12 AFTR 1456] (1933). Viewed in these terms, the presumption of correctness “is a procedural device which requires the taxpayer to come forward with enough evidence to support a finding contrary to the Commissioner's determination.” Rockwell v. Comm'r of Internal Revenue,   512 F.2d 882, 885 [35 AFTR 2d 75-1055] (9th Cir. 1975), cert. denied, 423 U.S. 1015 (1975). In addition, a taxpayer in a refund suit also has the burden of proof — the ultimate burden of persuasion. See Helvering v. Taylor,   293 U.S. 507, 515 [14 AFTR 1194] (1935). Where the presumption of correctness attaches to an assessment, the taxpayer generally also has the burden on any counterclaim raised by the government relating to the assessment. See Adams v. United States, 358 F.2d 986, 994 (Ct. Cl. 1966). For a lengthier discussion of these principles, see Cook v. United States,   46 Fed. Cl. 110, 113 [85 AFTR 2d 2000-1017]–19 (2000).

17

     Section 6672 originated as   section 1308 of the Revenue Act of 1918, 40 Stat. 1143, which established a three-tiered scale of penalties for failing to comply with federal excise taxes. See Slodov, 436 U.S. at 248–50. The most severe of these prongs imposed a criminal sanction, equal to 100 percent of the evaded or unpaid tax, on any person who “willfully refuses to pay, collect, or truly account for and pay over” certain specified excise taxes. This criminal provision later evolved first to cover Social Security taxes, see Social Security Act of Aug. 14, 1935, Pub. L. No. 74-271, ch. 531,   § 807(c), 49 Stat. 620, 638, and, ultimately, to reach the failure to pay over the withholding portion of income taxes,see Current Tax Payment Act of 1943, Pub.L. No. 68, ch. 120,   § 1627, 57 Stat. 126, 138. In enacting the 1954 Code, Congress severed this provision from the other criminal penalties, because it did not provide for imprisonment, and instead grouped it with other assessable noncriminal penalties, renumbering it as   section 6672 of the Code. Although both the House and Senate reports commented on this shift, neither otherwise described the purpose of what effectively became a civil penalty. See S. Rep. No., 1622, at 5245 (1954); H.R. Rep. No. 1377, at 4568 (1954).

18

  As noted in Salzillo, 66 Fed. Cl. at 32, some courts employ as many as seven factors, including whether the individual: (i) is an officer or member of the board of directors, (ii) owns shares or possesses an entrepreneurial stake in the company, (iii) is active in the management of day-to-day affairs of the company, (iv) has the ability to hire and fire employees, (v) makes decisions regarding which, when and in what order outstanding debts or taxes will be paid, (vi) exercises control over daily bank accounts and disbursement records, and (vii) has check-signing authority. See, e.g., Oppliger, 637 F.3d at 893; Erwin v. United States,   591 F.3d 313, 321 [105 AFTR 2d 2010-505] (4th Cir. 2010);Smith v. United States ,   555 F.3d 1158, 1163 [103 AFTR 2d 2009-880] (10th Cir. 2009); Vinick, 205 F.3d at 7;United States v. Rem ,   38 F.3d 634, 642 [74 AFTR 2d 94-6649] (2d Cir. 1994); United States v. Carrigan,   31 F.3d 130, 133 [74 AFTR 2d 94-5425] (3d Cir. 1994); Barnett v. Internal Rev. Serv.,   988 F.2d 1449, 1455 [71 AFTR 2d 93-1614] (5th Cir. 1993), cert. denied, 510 U.S. 990 (1993); Gephart v. United States,   818 F.2d 469, 473 [59 AFTR 2d 87-1099] (6th Cir. 1987).

19

  Those dealings also belie plaintiff's claim that he was unable to direct payments to the IRS because he did not have access to the DDI's checkbooks.

20

  On June 15, 1995, plaintiff signed an IRS Form 4180 (Report of Interview with Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Tax) that reflected that he first became aware of DDI's tax problems in reviewing the corporation's year-end financial statement for 1993. While plaintiff testified at trial that information was added to this form after he signed it, there was nothing to corroborate this claim and his counsel permitted the document to be admitted into evidence without challenging its authenticity.

Moreover, some of plaintiff's testimony at trial was consistent with the view that he knew about DDI's tax problems prior to June 9, 1995. Indeed, plaintiff, at one point, admitted that he met with Revenue Officer Bendery on several occasions prior to June 9, 1995, presumably based on concerns that DDI was not keeping current on either its new tax obligations or in making payments on its installment agreements. Moreover, plaintiff also testified that, n June 9, 1995, plaintiff invited Mr. Bender's supervisor to the June 12, 1995, board meeting because he was dissatisfied with his prior dealings with Mr. Bender. Of course, plaintiff could not have had that view of Mr. Bender if, as he contends now, he first discovered Mr. Bender's name while going through DDI's papers on June 9, 1995, the same day that he sent the meeting notice to the IRS. Indeed, in deposition testimony that Mr. Jenkins gave in the D.C. Superior Court case he filed against Mr. Puckrein, he admitted that there was “more than one” meeting with the IRS prior to the meeting of the board of directors on June 12, 1995.

21

  See, e.g., Keller v. United States,   46 F.3d 851, 854 [75 AFTR 2d 95-721]–55 (8th Cir. 1995) (holding that past tax problems should have alerted responsible person who did not have day to day control over finances that future taxes might go unpaid); Malloy v. United States,   17 F.3d 329, 332 [73 AFTR 2d 94-1569] (11th Cir. 1994) (holding that taxpayer disregarded obvious risk of non-payment where he was aware of prior failure to pay taxes and of the company's financial difficulties and the same person was still responsible for paying the taxes.);Vespe ,   868 F.2d 1328, 1335 [63 AFTR 2d 89-837] (3d Cir. 1989) (willfulness based in part on knowledge of subsequent tax problems which should have suggested possible problems with payment in past tax quarters); Wright, 809 F.2d at 427 (finding willfulness based in part on knowledge of past tax problems).

22

  To be sure, courts have held that if an individual becomes a responsible officer after a withholding tax accrues, that person is not willful if all the available funds to pay the tax are encumbered. See, e.g., Slodov, 436 U.S. at 259–60; Kenagy v. United States,   942 F.2d 459, 465 [68 AFTR 2d 91-5342] (8th Cir. 1991). Along similar lines, the Federal Circuit has held that a responsible person need not “order the impossible.” Godfrey, 748 F.2d at 1577;see also Ghandour , 36 Fed. Cl. at 62. But that is far cry from the case sub judice because, unlike in these cases, Mr. Jenkins was a responsible person at the time the taxes in question accrued and were not paid over.

23

  Two of these checks were payroll checks of $974.30 each for his wife, while a third check, dated April 28, 1995, was to himself for $3,483.77.

24

  Congress passed the predecessor of   section 7501 as   section 607 of the 1934 Revenue Act (c. 277,   § 607, 48 Stat. 768). In explaining the purpose of the statute, the accompanying report stated:

Existing law provides with respect to a number of taxes that the amount of the tax shall be collected or withheld from the person primarily liable by another person, who is required to return and pay to the Government the amount of the taxes so collected or withheld by him .... Under existing law the liability of the person collecting and withholding the taxes to pay over the amount is merely a debt, and he can not be treated as a trustee or proceeded against by distraint. Section [607] of the bill as reported impresses the amount of taxes withheld or collected with a trust and makes applicable for the enforcement of the Government's claim the administrative provisions for assessment and collection of taxes.

S. Rep. No. 558, 73d Cong., 2d Sess. 53 (1934).

25

  See In reMegafoods , 163 F.3d at 1066; United States v. Daniel (In re R&T Roofing Structures & Commercial Framing, Inc.),   887 F.2d 981, 987 [64 AFTR 2d 89-5835] (9th Cir. 1989); Matter of Wellington Foods, Inc.,   165 B.R. 719, 727 [73 AFTR 2d 94-1664]–28 (Bankr. S.D. Ga. 1994); see also City of Farrell v. Sharon Steel Corp.,   41 F.3d 92, 102 [74 AFTR 2d 94-6986] (3d Cir. 1994); In re Al Copeland Enters., Inc., 133 B.R. 837, 840 (Bankr. W.D. Tex. 1991), aff'd, 991 F.2d 233 (5th Cir. 1993) (applying LIBT to a Texas statute patterned after   section 7501). In In re Kountz Bros. , 79 F. 2d 98 (2d Cir. 1935), cert. denied, sub nom. Irving Trust Co. v. Los Angeles, 296 U.S. 640 (1935), the Second Circuit, in discussing the application of this trust principle to a bankruptcy trustee, observed —

Equity marshals the withdrawal against the fiduciary's own funds so long as it can because the result is deemed fairer. There is good reasons for this because the fiduciary's creditors have accepted the risk of his solvency while his cestuis have accepted only the risk of his honesty.

Id. at 102. For a further discussion of the common law roots of this rule, see Cunningham v. Brown, 265 U.S. 1, 12–13 (1924); Schuyler v. Littlefield, 232 U.S. 707 (1914); In re Columbia Gas Systems, Inc., 997 F.2d 1039 (3rd Cir. 1993),cert. denied , 510 U.S. 1110 (1994).

26

  Other Supreme Court decisions are not to the contrary. To be sure, in United States v. Randall,   401 U.S. 513 [27 AFTR 2d 71-930] (1971), the Supreme Court held that trust fund taxes could be used to pay the costs and expenses of the administration of a bankruptcy.Begier , however, pointed out that this rule, which was premised on the Court's construction of the interaction between the bankruptcy and tax laws, “did not survive the adoption of the new Bankruptcy Code.” Begier, 496 U.S. at 65. Likewise inapposite is Slodov. In that case, the Supreme Court held that an individual was not personally liable for withholding taxes under   section 6672, where he assumed control of the corporation after the time when the delinquency existed and the tax funds were dissipated. The Court held that this was true even though the corporation later acquired funds that could have been applied to the delinquency. 436 U.S. at 252–53. Here, however, plaintiff was a responsible person at all time during which the tax delinquency accrued. See Kinnie v. United States,   994 F.2d 279 [71 AFTR 2d 93-1979]. 285 (6th Cir. 1993).

27

  See Kim, 111 F.3d at 1361 (payment of unsecured creditors establishes that funds are not encumbered); Purcell v. United States,   1 F.3d 932, 939 [72 AFTR 2d 93-5821] (9th Cir. 1993) (deciding that the company's funds were not “encumbered” by a security interest when there was still flexibility on the use of the funds); In re Branagan, Jr.,   345 B.R. 144, 171 [97 AFTR 2d 2006-2642] (Bankr. E.D. Pa. 2006) (“If a corporation can use its funds to pay legitimate corporate obligations, then such funds are not encumbered.”). Notably, the Fifth Circuit has observed that the existence of secured transactions between a dominant stockholder and the corporation may be relevant in determining whether the stockholder willfully failed to ensure that the corporation's withholding taxes were paid. See First Nat. Bank in Palm Beach v. United States,   591 F.2d 1143, 1149 [43 AFTR 2d 79-900]–50 (5th Cir. 1979) (“that a dominant stockholder cast his advances to the controlled corporation in the form of a secured loan transaction may ... indicate that the corporation was under-capitalized, and that he in essence made the United States an involuntary and unwilling creditor of the corporation by placing on the government alone the risk that funds would be available for the payment of withholding taxes”).

28

  See Colosimo v. United States,   707 F. Supp. 2d 926, 944 [106 AFTR 2d 2010-6975] (S.D. Iowa 2010), aff'd,   630 F.3d 749 [107 AFTR 2d 2011-622] (8th Cir. 2011) (funds not encumbered where bank did not restrict company from using funds to pay trust fund taxes); In re Robertson,   354 B.R. 445, 452 [98 AFTR 2d 2006-7309]–53 (Bankr. W.D. Tex. 2006) (funds not encumbered where no evidence “that the bank would not let them pay the IRS”). Indeed, it should not be overlooked that DDI likely would not have generated the revenues from which plaintiff reimbursed himself had it not previously diverted funds owed to the United States to the payment of its employees and creditors. In this regard, it is often said that “the government cannot be made an unwilling partner in a floundering business.”Collins v. United States ,   848 F.2d 740, 741 [62 AFTR 2d 88-5038]–42 (6th Cir. 1988).

29

  In arguing that his conduct was not “willful,” plaintiff also asserts that the IRS did not vigorously pursue assets that he identified. The IRS, however, is not required to attempt collection against the corporation before assessing a penalty against a responsible person such as Mr. Jenkins. See Bradley v. United States,   936 F.2d 707, 710 [68 AFTR 2d 91-5174] (2d Cir. 1991); Calderone v. United States,   799 F.2d 254, 257 [58 AFTR 2d 86-5703] (6th Cir. 1986); Datlof v. United States,   370 F.2d 655, 656 [19 AFTR 2d 335] (3d Cir. 1966);United States v. Sage ,   412 F.Supp.2d 406, 414 [97 AFTR 2d 2006-865] (S.D.N.Y. 2006).

30

  Unfortunately, this is not the first time this court has had to deal with the loss of an IRS administrative file. Apart from the legal complexities introduced by such a loss, see, e.g., Cook, 46 Fed. Cl. at 120, there are the practical, factual problems posed by the absence of any record of communications between the IRS and a given taxpayer — an absence that, in this case, required the court to render factual findings that might otherwise have proven unnecessary. In the future, this court may well be required to determine whether the loss of such a file constitutes an act of spoliation. See, e.g., United Medical Supply Co. v. United States, 77 Fed. Cl. 257 (2007).

----------------------------------------------------------------

McCARTY, JR. v. U.S., Cite as 27 AFTR 2d 71-682 (437 F.2d 961), 02/19/1971

Lewis C. McCARTY, JR., PLAINTIFF v. U.S., DEFENDANT.

Case Information:

Code Sec(s):      

Court Name:      U.S. Court Claims,

Docket No.:        No. 229-62,

Date Decided:   02/19/1971

Tax Year(s):        Years 1952, 1953.

Disposition:        Decision for taxpayer.

Cites:     27 AFTR 2d 71-682, 194 Ct Cl 42, 437 F2d 961, 71-1 USTC P 9232.

HEADNOTE

1. ADDITIONS TO TAX AND PENALTIES—100% penalty—failure to collect or pay over tax—factors of determination—duties and authority of persons involved. Penalty not imposed on corp. president: he didn't have ultimate authority not to pay tax. Presumption of authority was rebutted by affirmative showing that president wasn't responsible person during years at issue. Due to financial difficulties, conduction of corporate business was carried over by others.

Reference(s): 1971 P-H Fed. ¶ 37,367.30(25).

OPINION

Stanley Worth, Scott P. Crampton, Worth & Crampton, 888 17th St., N.W., Wash., D.C., Attys. for Plaintiff.

Johnnie M. Walters, Asst. Atty. Gen., David J. Gullen, Philip R. Miller, Joseph Kovner, Tax Div., Dept. of Justice, Wash., D.C., Attys. for Defendant.

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

Opinion

Judge: SKELTON, Judge delivered the opinion of the court:

We are indebted to Trial Commissioner C. Murray Bernhardt in this case for his findings of fact and conclusions of law and also for his opinion in which he held that the plaintiff was entitled to recover and that defendant's counterclaim should be dismissed. We have adopted his findings of fact with minor changes and have reached the same result on questions of law but for different reasons. The opinion of the court follows.

This is an action brought under the provisions of 28 U.S.C. § 1491, and   § 2707(a) of the Internal Revenue Code of 1939, reenacted as   § 6672 of the 1954 Code, 1 to recover $9,370.14 of penalties paid by plaintiff on account of withholding taxes, including Federal Insurance Contribution Act taxes, due from his principal, Marine Aircraft Corporation (hereinafter "Marine"), for 1952 and through the third quarter of 1953. By counterclaim the Government seeks a judgment for $201,257.70 for the unpaid balance of the penalty assessments against plaintiff for the same period. This figure results from crediting against the $219,678.65 assessed plaintiff the sum of $9,370.14 paid by him and an abatement of $9,050.81, as reported in finding 12, infra.

[1] The facts in this case are as follows: In 1948 plaintiff and one Felio incorporated Marine to exploit certain inventions made by them and to engage in manufacturing and aeronautical engineering. Starting on a modest scale in New York City with six to eight employees, Marine moved to larger quarters in Texas in 1949 with the cooperation of the Navy. Its business increased rapidly, ultimately involving a total of approximately 29 Navy and Air Force contracts and subcontracts aggregating in excess of $5,000,000, accompanied by an expansion of personnel to a 1952 payroll peak of about 700.

Plaintiff was responsible for obtaining [pg. 71-683] the bulk of Marine's contract work. At the outset he held over 70 percent of Marine's stock. As of late 1952 he and Felio collectively held the majority of Marine's stock. Plaintiff held 40 percent plus of the stock from April through October 1952, and 28 percent plus thereafter through October 1953.

Marine's increased workload was financed by a loan agreement arranged in August 1951 with the Forth Worth National Bank (hereafter "Bank") setting up a revolving credit in the initial amount of $250,000, later increased to $400,000 in February 1952, and to $650,000 in August 1952. The loan was secured by an assignment of payments under the contracts. Borrowings against the credit were made weekly or whenever Marine needed funds, and were obtained by submission of a certificate of investment disclosing Marine's net investment in contract performance as reduced by progress payments to derive a borrowing base, plus Marine's promissory note if the borrowing base exceeded the outstanding loan balance, subject always to the credit limit. After August 1952 Marine could borrow up to 100 percent of its unreimbursed inventory cost. The Navy guaranteed the loan by a V-loan Guarantee Agreement with the Bank. Through November 11, 1952, payments on the assigned contracts when received by the Bank were applied to the loan balance.

Marine was perennially short of funds to meet its obligations. This condition was brought about by inadequate capitalization, rapid expansion, delays in collections (particularly the standard 15 percent retainages from Government progress payments), and losses under many contracts due to poor cost estimates or poor management, or both. Plaintiff kept close watch over Marine's current and prospective financial status and instructed its treasurer to accord priority to bills for materials and payroll, to the apparent neglect of withholding tax bills, in order that the company could stay in business. By the end of July 1952 Marine owed about $130,000 in withholding taxes, a condition with which all members of its board of directors were not familiar until it was formally disclosed at a board meeting on August 5, and steps then were taken to negotiate a deferred payment arrangement with the Internal Revenue Service (hereafter "Service"). The Navy knew in August 1952 of Marine's tax arrears, and thereafter is charged with such knowledge at all times, even though prior to November 1952 it may not have known specifically of the tax liens filed by the Service.

Those portions of Marine's bylaws which are in the record contain no specific authorization as to payment of bills, including taxes. By resolution of the board of directors company checks required dual signatures from a list of several designated company officials, including plaintiff as president. Plaintiff's authority to pay Marine's bills lost some of its autonomy for practical purposes starting as early as June 9, 1952, when Harry Vollmer was elected as chief executive officer to run the company and set its policy, while plaintiff participated therein but concentrated in the main on production problems and scouting new business. In the next few months plaintiff signed about half of Marine's checks and Vollmer the rest, along with a cosigner's signature in each case. It is reasonable to conclude that the financial condition of Marine was such in this period, and its withholding tax arrears so sizable, that as a practical matter plaintiff would not, after June 9, 1952, have paid the tax arrears on his sole initiative without approval of the board of directors, even though at times there was enough cash in the till and there was nothing tangible disclosed by the record which would have literally prohibited plaintiff from such payment, except for the pressure of operating expenses. Subsequently, plaintiff's authority to pay Marine's bills on his own initiative was further curtailed and eventually terminated as we shall see.

Marine's general counsel negotiated an agreement with the Service dated October 1, 1952, which, after reciting the tax arrears of approximately $130,000 through July 31, 1952, provided that the tax liens would not be enforced if Marine would pay up the arrears at the rate of $8,000 monthly starting October 1, 1952, and would also meet its current taxes when due. The Service's policy was not to interfere with the war effort by enforcing its tax liens against Marine. Marine's board of directors approved the agreement on October 6, 1952, and plaintiff signed it for the company. A copy of this agreement is attached to defendant's brief. It provided, in pertinent part, in addition to the foregoing, that: [pg. 71-684]

Whereas, the notices of Federal Tax liens which are in the process of being filed by the Collector of Internal Revenue in Tarrant County, Texas or elsewhere against Marine *** will operate against machinery and equipment owned free and clear of any other liens by Marine *** with an acquisition value after depreciation of $98,000, and a present resale value due to the emergency need for this type of equipment of substantially in excess of that sum,

Now, Therefore, it is agreed by and between the parties hereto as follows:

1. The Collector of Internal Revenue for the Second Texas District shall file notices of tax liens in the proper office in Tarrant County, Texas or elsewhere against Marine *** covering the full amount of unpaid internal revenue taxes owing from that corporation to the United States Government.

2. The Collector of Internal Revenue *** so long as the conditions of Paragraph 3 and 4 of this Agreement are adhered to by Marine *** [i.e., the payment of all current withholding taxes and old age benefit payments plus $8,000 per month on past due taxes plus interest, beginning October 1, 1952], shall refrain from enforcing said federal tax liens by distraint or seizure action, other than as set forth in Paragraph 1 above.

5. In the event that for any reason whatsoever, Marine *** shall fail to make any of the payments or comply with any of the agreements contained herein, then and in any such event The Collector of Internal Revenue *** may at his discretion take such steps of distraint or seizure or otherwise as in his judgment he may deem advisable and necessary to protect the interest of the United States Government as outlined herein.

The facts also reflect that the IRS had filed three tax liens on Marine's property through July 25, 1952, all of which except the last had been discharged. It filed eight tax liens thereafter from October 17, 1952, through January 5, 1954. The trial commissioner found that the Fort Worth National Bank, the Federal Reserve Bank of Dallas, and the Navy knew or should have known of these eight tax liens filed by the IRS.

The above described agreement for the payment by Marine of its delinquent taxes was similar to an agreement made in 1951 between Marine and the IRS for the payment of Marine's earlier tax arrears for 1949 and 1950, which was fully carried out.

On the basis of cash forecasts and prospective improvements in production efficiency, Marine's officers responsibly believed that, although its financial situation was serious in 1952, its cash picture would improve each month to enable it to meet the terms of its agreement with the Service and cure its financial situation by late 1953. In view of Marine's default in deliveries and losses under most of its contracts there was perhaps little reason to be sanguine.

Marine made four payments of $8,000 each from October 1, 1952 to January 2, 1953, against the pre-August 1 tax arrears in accordance with the agreement with the Service, plus a payment of $17,920.84 on October 10, 1952, for September 1952 payroll taxes (August taxes having been paid previously). An additional check in the amount of $23,360 for October 1952 taxes was drawn and dated November 10, 1952, but was withdrawn from the mail at plaintiff's direction when he learned that the Bank would not honor the check despite the fact that a note had been signed at the Bank that morning against the V-loan credit authorization in order to provide funds to cover the check in question, as well as pay other operating expenses.

The reason for the Bank's refusal to honor the November 10 check was that on or about that date the Bank called upon the Navy to take over the unpaid balance (then $629,477.75, plus interest and fees of $1,011.19), which the Navy paid the Bank on November 12, 1952. The principal cause for the Bank's demand for the loan to be taken over by the Navy was that a recent increase in the discount rate by the Federal Reserve Bank (from which commercial banks borrow at favorable rates to loan to customers at a higher rate) had made the loan unprofitable to the Bank, since it had to share the interest income with the Navy in return for the latter's guarantee of payment, as well as to [pg. 71-685] share what small interest was left with the co-lender Bankers Trust Company. Moreover, the Bank was skeptical of Marine's solvency. At that time the loan was not in default and its due date was December 31, 1952.

With the takeover of the V-loan by the Navy, Marine's "entire picture was drastically changed to the utmost disadvantage of the company", according to the chairman of its board of directors. Thereafter the loan ceased to function as a normal revolving credit. New credit was not extended, that is, no further advances were made, but instead funds generated under assigned contracts were released to Marine upon certification of its investment in contracts, similar to the borrowing certificate formula described earlier. Whereas prior to November 12, 1952, Marine did not have to obtain approval of the Bank for withdrawals to pay bills, thereafter Marine had to receive approval by Mr. Stone of the Bank. The Bank in turn had to obtain approval from the Federal Reserve Bank of Dallas, as agent for the Navy. The Bank continued to act as agent for the Navy, through the Federal Reserve Bank of Dallas, in receiving payments under the assignments and administering the loan. The Navy wanted Marine to find another bank to refinance the V-loan, but Marine was unable to do so. From November 12, 1952 through July 1953 sums totaling $1,167,120.77 were released to Marine for payroll and other purposes (including the two $8,000 payments to Internal Revenue for pre-August 1 tax arrears), not counting another $466,492.22 which was retained by the Navy from March through July 1953 and applied against the loan balance.

At the urging of the Navy that it improve its financial position, on December 5, 1952, Marine entered into an agreement with Messrs. Lynch, Flocks, and Gerron whereby, in exchange for a sizable amount of Marine's stock representing payment for the premium, plus enough proxies to control 51 percent of the voting stock, the consortium put up a $1,000,000 bond guaranteeing Marine's performance of the subcontracts with McDonnell and providing assurance to the Martin Company regarding an orderly termination of its subcontracts with Marine. Under that agreement an Executive Committee was formed, composed of plaintiff and Messrs. Vollmer, Lynch, Flocks and Gerron, empowered to make all management decisions for Marine until its McDonnell subcontracts were completed and the performance bond discharged. Pursuant to the agreement Gerron was appointed comptroller of the company on December 13, 1952, with "full authority in the allocation of funds, the handling of accounts receivable and payable, countersigning all checks and, with the approval of the executive committee, [he] will handle all financial transactions." (Emphasis supplied.) In the view of a responsible Navy official who testified, the execution of the performance bond on December 23, 1952, gave the Navy's loan "a new lease on life", which probably accounts for the fact that no contract payments were withheld and applied to the overdue note until March 6, 1953, in order to facilitate the completion of the McDonnell subcontracts which by March 1954 provided funds to completely pay off the loan.

Following Gerron's appointment as Marine's comptroller on December 13, 1952, the Navy regarded him thereafter as Marine's spokesman and duly authorized official who supervised the release of funds from the Navy on a need basis for payrolls, suppliers, and general administrative expenses. Clearly after December 13, 1952, plaintiff had no effective authority to pay bills such as Marine's withholding and F.I.C.A. taxes, for Gerron held the veto power.

Beyond this there is little present relevancy to Marine's Chapter X bankruptcy reorganization in August 1953, a claim filed therein by the Internal Revenue Service aggregating $247,216.49 for taxes and interest, and Marine's ultimate bankruptcy in March 1954. At no time during this period did plaintiff have the authority to pay Marine's tax arrears although he remained on to supervise the company during the receivership.

In 1954 the trustee in bankruptcy filed two suits in the Court of Claims (numbered 117-54 and 118-541), seeking damages aggregating $733,530.45 growing out of contracts with the Air Force and the Navy. The Government filed counterclaims. In February 1956 the trustee filed his "report of compromise and settlement and order thereon" in which he recommended that the two suits, including the counterclaims, be dismissed with prejudice, that certain other claims [pg. 71-686] against the Government arising under five contracts between Marine and the Government be waived, and that the sum of $7,251.42 be accepted from the Government in settlement of the claims dismissed and/or waived. The Referee in Bankruptcy approved the recommendation on May 26, 1956, and order was entered by the District Court of the United States for the Northern District of Texas, Fort Worth Division, confirming the trustee's recommendation. Thereupon, the petitions in the Court of Claims were dismissed. It is not considered necessary or advisable to ascertain in this action whether the settlement of the contract claims was on a justifiable basis fair to Marine. The aggregate of the claims was far in excess of Marine's unpaid tax liability had the full amount been realized.

In addition to the assessment of a penalty against plaintiff, similar assessments covering portions of the same period were made against Lynch, Flocks, Gerron, and Vollmer. The assessment against Vollmer was abated in full. No penalties were assessed against Law and Strong, who had been treasurers—consecutively—of Marine during 1952 and 1953.

Responsibility for collecting the taxes imposed by   section 1400 of the 1939 Internal Revenue Code was placed on the employer by means of deducting or withholding from wages, as authorized by sections 1401 and 1622(a). Section 2707(a) provided that—

Any person who willfully fails to pay, collect, or truthfully account for and pay over the tax *** , or willfully attempts in any manner to evade or defeat any such tax or the payment thereof shall *** be liable to a penalty of the amount of the tax evaded or not paid, collected, accounted for and paid over, *** .

The term "person" as used in the foregoing abridgment of subsection (a) of section 2707 was defined in subsection (d) thereof to include—

*** 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.

For the purposes of the statute the individual must be responsible and his failure willful. Responsibility without willfulness is not enough. Where responsibility is not established the issue of willfulness becomes moot. So the issue of responsibility is for first determination. This problem of who is the responsible person has engrossed scores of courts 3 and legal savants, including this court's compendium of authorities and criteria in White v. United States,   178 Ct. Cl. 765,   372 F.2d 513, 516 [   19 AFTR 2d 683] (1967), where it was stated at p. 771:

The purpose of the section is to permit the taxing authority to reach those responsible for the corporation's failure to pay the taxes which are owing. Dillard v. Patterson,   326 F.2d 302 [   13 AFTR 2d 301] (5th Cir. 1963); United States v. Graham,   309 F.2d 210 (9th Cir. 1962). Accordingly, the section is generally understood to encompass all those officers who are so connected with a corporation as to have the responsibility and authority to avoid the default which constitutes a violation of the particular Internal Revenue Code section or sections involved, even though liability may thus be enforced on more than one person. See Linda Scott v. United States,   173 Ct. Cl. 650, 657,   354 F.2d 292, 296 [   16 AFTR 2d 6087] (1965), citing Scherer v. United States,   228 F. Supp. 168, 170 [   13 AFTR 2d 790] (D. Idaho 1963).

In reaching a determination with respect to the person or persons upon whom to impose responsibility and liability for the failure to pay taxes, the courts tend to disregard the mechanical functions of the various corporate officers and instead emphasize where the ultimate authority for the decision not to pay the tax lies. For this reason *** a responsible person is most frequently defined as a person who has "the final word as to what bills or creditors should or should not be paid and when." (Citations omitted.)

After mentioning two approaches which different courts have used, the White opinion continues, p. 772:

Both approaches would seem to [pg. 71-687] amount to the same thing—a search for a person with ultimate authority over expenditures of funds since such a person can fairly be said to be responsible for the corporation's failure to pay over its taxes. *** [ 372 F.2d at 517.]

White reiterates at p. 775 that "more than one individual may be a responsible person". In the case under consideration others of Marine's officials besides the plaintiff were actually assessed penalties as responsible persons.

The broad definition of "person" in section 2707(d) of the Code leaves no doubt that the party subject to the penalty provisions of section 2707(a) is the individual having control of the funds of the taxpayers and failing to pay the withholding taxes. This is not always or necessarily an official of the taxpayer, as in Pacific National Ins. Co. v. United States,   270 F. Supp. 165 [   20 AFTR 2d 5189], (D.C.N.D. Cal. 1967) where a surety controlling the tax-delinquent contractor's funds was held liable to the penalty for willfully failing, as the responsible person, to pay the contractor's withholding taxes. The key question here, therefore, is whether the plaintiff had control of the funds of Marine up to November 10, 1952, with which he could have paid the withholding taxes, but willfully failed to do so. The defendant admits that plaintiff is not liable for the taxes that accrued after November 10, 1952. This narrows the issue to the pre-November 10, 1952, period.

As a general proposition it may be safely postulated that one who is the founder, chief stockholder, president, and member of the board of directors of a corporation (such as the plaintiff) is rebuttably presumed to be the person responsible under section 2707 of the Code and is thus liable for the penalty, in the absence of an affirmative showing by him that in actual fact he lacked the ultimate authority to withhold and pay the employment taxes in question, or that his omission was not willful in the statutory sense.

In addressing this issue the plaintiff directs the inquiry to two periods, one before and the other after November 10, 1952, when the Navy took over Marine's V-loan from the Bank and in effect substituted its funds for those of the Bank. As to the earlier period it is significant that the plaintiff does not really deny that during such period he was the person responsible for collecting and paying Marine's withholding taxes; he merely seeks to avoid the penalty assessed him by pleading the agreement with the revenue authorities as providing a reasonable cause for nonpayment of the delinquent taxes. So long as Marine had funds sufficient to pay its taxes the plaintiff, as the person responsible for their payment, was obligated to pay them ahead of other creditors on pain of exposing himself to the risk of being personally liable for them. At various times up to November 10, 1952, the plaintiff could have written a check for taxes and secured a cosigner's signature, instead of which he used available funds to pay other creditors. That he felt he had the power to pay taxes in this period is shown by his aborted effort on November 10, 1952, to make a substantial payment on Marine's current taxes, and reaffirmation of such authority is reflected by the agreement which plaintiff signed in October 1952 with the approval of Marine's board of directors, to meet its delinquent and current taxes according to a time schedule endorsed by the Internal Revenue Service.

However, the unusual and exceptional facts of this case as evidenced by the agreement, the lack of its enforcement, the waiver of the tax liens by the IRS, the policy of the IRS not to collect the tax from the responsible officers of a company if the taxes can be collected from the company (as discussed later) and the prejudicial treatment of the plaintiff by two arms of the government, in our opinion permits the plaintiff to avoid the statutory penalty for the period to November 10, 1952. The White case, supra, at pp. 778 and 779 defines willfulness to mean—

*** a deliberate choice voluntarily, consciously and intentionally made to pay other creditors instead of paying the Government, and that it is not necessary that there be present an intent to defraud or to deprive the United States of the taxes due, nor need bad motives or wicked design be proved in order to constitute willfulness. *** [ 372 F.2d at 521.]

Standing alone, that definition would leave the impression that knowledge and [pg. 71-688] failure to pay together amount to willfulness per se. However, in discussing willfulness at pp. 778, et seq., White recognizes that knowledge of unpaid withholding taxes plus failure of a responsible person to pay them does not make that person's willfulness in the failure absolute where there is reasonable cause for the failure, citing instances where reasonable cause was found in reliance on advice of counsel that taxes were not due (Gray Line Co. v. Granquist,   237 F.2d 390 [   50 AFTR 288] (9th Cir. 1956), cert. denied, 353 U.S. 911 (1957)), and where the responsible person had instructed subordinate personnel to pay the taxes but, without the superior's knowledge, they had not been paid. (Levy v. United States,   140 F.Supp. 834 [   49 AFTR 1138] (W.D. La. 1956), Belcher v. United States,   6 A.F.T.R. 2d 5495 (W.D. Va. 1960), and Wiggins v. United States,   188 F. Supp. 374 [   6 AFTR 2d 5668] (E.D. Tenn. 1960)).

However, the court in Monday v. United States,   421 F.2d 1210 [   25 AFTR 2d 70-548] (7th Cir. 1970), cert. denied, 400 U.S. 821, narrowed the definition of "willfulness" when it said:

The standard of willfulness should not be construed to include lack of "reasonable cause" or "justifiable excuse." These concepts tend to evoke notions of evil motive or bad purpose which properly play no part in the civil definition of willfulness. *** [Cases omitted.] In addition, "reasonable cause" and "justifiable excuse" invite consideration of such misleading and improper factors as the financial condition of the business or the demands of creditors. *** [Id. at 1216.]

The court in that case went on to define "willfulness" in a charge it said should have been given to the jury as follows:

"An act is willful if it is voluntary, conscious, and intentional. If you find that plaintiff and/or third-party defendant knowingly used available funds to prefer other creditors over the United States then you must find that he acted willfully." [Id. at 1216.]

Both the defendant and the plaintiff agree that this is a correct definition of "willfulness," and we are in accord. But the acceptance of this definition does not settle all the issues in the case, as will be seen below.

The agreement between Marine and the IRS for the installment payment of Marine's delinquent taxes drastically changed plaintiff's position with respect to his immediate personal liability for the payment of such taxes. True, the agreement did not cancel nor erase his contingent liability for the taxes, but it did have the effect of suspending his liability until the taxes could be collected from Marine by the carrying out of the agreement.

This agreement was a solemn contract between Marine and the United States, acting through its duly authorized agent, the IRS. It was for the benefit of both Marine and the plaintiff, as well as the United States. All parties had a right to expect the contract to be fully carried out. The record shows that the plaintiff adhered to the terms of the agreement and made the payments on schedule as long as he had authority to do so, but his authority was terminated on November 10, 1952, when the Navy took over the financial management of the company. Thereafter, the responsible officer or employee of the company who was charged with the responsibility of carrying out the agreement and paying the delinquent taxes as well as those currently due was someone other than the plaintiff, who was under the complete domination and control of the Navy.

When the Navy took over the management and control of the company on November 10, 1952, it knew about the agreement made between Marine and the IRS as to the payment of the delinquent taxes and recognized it as a binding agreement of the United States, as shown by the payment by the Navy of two installments of $8,000 each on December 1, 1952, and January 3, 1953, on the pre-August 1 tax arrears, in full compliance with the agreement. But after these two payments had been made, the Navy caused Marine to breach the agreement by not allowing it to make any further payments on the delinquent taxes in accordance with the agreement. This was actually a breach of the contract by the United States, acting through the Navy as its authorized representative. [pg. 71-689]

Furthermore, the Navy wrote the IRS on August 14, 1953, and advised it that the tax indebtedness due the IRS would be paid out of any excess funds left over after all claims of the Air Force and Navy, including the latter's loan, had been paid in full. The IRS agreed to this plan as shown by its complete inaction and its failure to foreclose its tax liens on Marine's unencumbered property worth more than $98,000, as shown above. This amounted to a waiver by the IRS of its tax lien and this had the effect of absolving the plaintiff of liability for the delinquent taxes to this extent. This is true for the obvious reason that taxes equal to the value of Marine's property could have been collected by IRS had it foreclosed its tax liens upon default of the payments of the tax arrears as provided in the agreement with Marine. The record shows that the IRS never foreclosed its tax liens on Marine's property even in Marine's bankruptcy proceedings, and by such failure completely waived such liens, all to the detriment of the interests of the plaintiff, as well as the IRS.

The following facts showing the earnings of Marine after the Navy took over on November 10, 1952, until the end of Marine's bankruptcy proceedings, reveal that the delinquent taxes could have been collected by the government from Marine during such period. This was possible not only from Marine's earnings, but also to a large extent from the value of Marine's property which was subject only to the tax liens of the IRS for such taxes, and which was worth over $98,000. From November 12, 1952, to August 4, 1953, when Marine petitioned for bankruptcy reorganization, a total of $1,633,612.99 was generated by Marine's contract earnings. As source, custodian and dispenser of these funds under contract assignments, the Navy retained $466,492.22 to apply to the principal and interest on the note, while it authorized the release of $1,167,217.87 for the payment of Marine's operating expenses, including $16,000 for application to Marine's pre-August 1 tax arrears under its agreement with the IRS of October 1, 1952, as already observed. The Navy supervised directly or indirectly Marine's use of the $1,167,217.87 released to it during this period, and significantly none of it was used to pay Marine's tax backlog which is the subject of this suit.

It is interesting to note that from November 12, 1952 to March 6, 1953, the Navy did not apply any contract proceeds to the note, and this is explained by the fact that during this period the Navy continued to hope that Marine would be able to find another bank to take over the loan through the offices of the group that supplied the surety performance bond. When it appeared that this was not going to materialize, the Navy proceeded forthwith to make heavy reductions of the note balance by retention of contract earnings due Marine, so that from March through July 1953 contract proceeds totaling $466,492.22 were applied to the principal and interest on the note, while contract proceeds totaling $551,744.26 were turned over to Marine for closely supervised payment of selected bills for labor and materials. Following August 4, 1953, when Marine applied for bankruptcy reorganization, which eventually ripened into bankruptcy, all of the contract proceeds received thereafter ($181,928.55) were applied to liquidate the principal and interest on the note held by the Navy as a preferred creditor, while nothing was applied to Marine's remaining indebtedness, including its accrued taxes. Obviously, it could not be said that, during the pendency of the bankruptcy proceedings, plaintiff had any responsibility or authority whatsoever to direct the payment of Marine's tax obligations.

The defendant argues that the decisions in Monday v. United States, supra, and Spivak v. United States,   370 F.2d 612 [ 16 AFTR 2d 357] (2d Cir., 1967), cert. denied, 387 U.S. 908, require our decision in this case to be in favor of the government and against the plaintiff. We do not agree. The facts in those cases differ from the facts in the instant case. Each case must be decided according to the facts involved therein. We think there is language in the decisions in those cases which support the plaintiff's position under the peculiar facts of this case. Both cases hold, in effect, that if the delinquent withholding taxes can be collected from the company, the responsible officer thereof, who would otherwise be liable, is released from such liability. For instance, in Spivak, the court said:

Had the government's claim in the bankruptcy been defeated by an [pg. 71-690] adjudication that the payments should have been credited to Lincoln, [the company] the government concedes that it would be bound to release appellants, [the responsible officers] for it is its practice not to attempt enforcement of § 6672 liability if the corporate obligation is met, *** . [Id. at 615.]

To the same effect is the statement of the court in Monday v. United States, supra, where the court said:

*** While the referee's order in this case cannot satisfy or remove the officer's liability, it might nevertheless bar action against the Mondays were they to show that an administrative practice existed, such as referred to in Spivak, that the Government would not press its claim against the responsible officers where the corporate obligation has been met. Cf. 370 F.2d at 615. *** [Id. at 1218, n. 7.]

After oral argument in this case, the court's secretary, acting on instruction from the court, inquired by letter of the Department of Justice whether or not at any time or times relevant to the refund claim in this case the IRS had a policy or practice which was the same as, or comparable to, the policy or practice described or referred to in the above quoted portions of the Monday and Spivak cases. The Attorney General answered this inquiry as follows:

The answer to this question is that during this period the Government did have the same or a comparable policy and practice, i.e., not to attempt enforcement of Section 6672 liability (Sec. 2707(a), 1939 Code) of a responsible officer if the corporate obligation was met. This policy was stated in an internal memorandum, IR-Mim. No. 56-46, dated April 9, 1956, copies of which are enclosed herewith. We also enclose 12 copies of this letter for the convenience of the Court. [Ltr. from Justice Dept. dtd. Nov. 20, 1970.]

An examination of said Internal Memorandum No. 56-46, shows that it contains the following in pertinent part:

Assertion Of the 100 Percent Penalty Against Responsible Officers or Employees

Section 7. Policy

.02 It has been the administrative policy of the Internal Revenue Service, and such policy is hereby reiterated, to use the 100 percent penalty provided by   section 2707(a) of the 1939 Code and 6672 of the 1954 Code primarily as a collection device, and to assert it against responsible officers or employees of a corporation only when it is determined that the taxes involved cannot be collected from the corporation itself; *** . [Emphasis supplies.]

.03 It is not necessary to wait until it has been fully determined whether a corporation is or is not going to pay the employment taxes due before asserting the 100 percent penalty against the responsible corporate officers or employees. Such action may be instituted at any time if it has been determined that the corporation is continuing to file Forms 941 without remittance and there are no tangible assets against which distraint can be made. [Emphasis supplied.]

Section 8. Procedure for the Assertion

of the 100 Percent Penalty

.01 When the collection officer determines that collection of employment taxes cannot be made from the corporate-taxpayer he will make an investigation to determine whether collection can be made from the responsible officers or employees by the assertion of the penalty for the portion of the taxes required to be withheld. *** [Emphasis supplied.]

.02 A full report of the collection officer's findings will be prepared and submitted to the group supervisor for approval. This report should be as complete as possible and should contain the following information: *** (8) a detailed statement by the collection officer as to why the tax cannot be collected from the corporation; *** . [Emphasis supplied.]

******

.04 If the taxpayer agrees to the assessment without requesting a conference, a letter (see Exhibit B) will be used in transmitting to him that portion of the report which outlines the reasons why the tax could not be [pg. 71-691] collected from the corporation, *** . [Emphasis supplied.]

******

Section 10. Collection Procedure

.01 If a 100 percent penalty is asserted against one or more responsible corporate officers or employees equal to the withheld portion of the corporate employment tax liability and that portion of the tax is subsequently collected in full or in part from the corporation, the 100 percent penalty or penalties may be abated or if collected may be refunded in an amount equal to the amount collected from the corporation for the same periods from which the penalty arose, providing the claim is filed within the applicable statutory periods.

******

It may be seen from the foregoing memorandum that the policy of the IRS set forth therein is the identical policy mentioned in the Monday and Spivak cases that would bar the collection of the taxes from a responsible corporate officer "if the corporate obligation has been met." A careful reading of the portions of the memorandum quoted above shows that the test is not whether the corporate obligation has been met, but whether the taxescannot be or could not be collected from the corporation and whether there are no tangible assets against which distraint can be made. The record here shows that after the Navy took over the management of Marine's financial affairs and plaintiff's authority as a responsible officer of the company was terminated, Marine earned and collected $1,633,612.99 up to the date it filed its petition in bankruptcy. The sum of $181,928.55 was collected after the bankruptcy proceedings were filed. From these figures, it is clear that the delinquent taxes could have been collected from Marine. Had this been done, under the admitted policy of the IRS, the plaintiff would have been released from his obligation to pay the taxes and the present action against him for such taxes would have been barred.

But the Navy did not collect the taxes, and, instead, paid itself $648,420.77, which included $18,943.02 as interest on its note. By paying itself interest, the Navy actually made a profit on the transaction.

In the meantime, the IRS did nothing to foreclose its tax liens on Marine's property. Had it done so, plaintiff would have been released from his tax obligation to the extent of the amount realized from such foreclosures, as is provided in the above policy memorandum of the IRS.

Normally, we would not readily substitute our discretion for the Commissioner's as to when the taxes are to be collected from the corporation. But here the facts are such because of the inter-departmental dealing that the Commissioner abused his discretion in failing to collect the tax from the corporation.

Furthermore, in the Monday case, the court indicated that the responsible officers of the company would have been relieved of their responsibility for the taxes if they had shown any action by the government upon which they could reasonably have relied as the grounds for their failure to collect and remit any of the withholding taxes withheld from their employees. In this connection, the court said:

*** The taxpayers have failed to disclose any action by the Government upon which they could reasonably have relied as the grounds for their failure to collect and remit any of the taxes wtihheld from their employees. [Citing the Spivak case.] [ 421 F. 2d at 1218.]

By contrast, the record in this case is replete with acts of commission and failure to act on the part of the government upon which plaintiff could reasonably have relied as grounds for his failure to collect and remit the taxes, all of which are detailed herein. As a matter of fact, after the Navy took over Marine on November 10, 1952, the Navy made it impossible for plaintiff to collect and remit the taxes. After that date, the Navy had a special obligation to collect and remit the delinquent taxes from the earnings of Marine in monthly installments of $8,000 each as provided in the government's agreement with Marine. The Navy had no right to cause the government to breach this agreement after making only two monthly payments of the tax arrears. It seems to have been the attitude of the Navy that it did not have to carry out the agreement because it was made by another department of the government (the IRS). This is too slender a reed to justify the Navy's acts which caused the breach of the agreement. [pg. 71-692] After all, both departments are agencies of one government, namely the United States. The Navy was obligated to respect and carry out the agreement made by the IRS in accordance with its authorized powers, when it was within the power of the Navy to do so. It had no right to pay itself and other creditors under these circumstances without paying the taxes due the IRS as required by the agreement.

By reason of all of the foregoing, the plaintiff was released from his liability for the payment of the delinquent withholding taxes and the government is barred from collecting them from him.

Accordingly, judgment is entered for plaintiff on his petition, with the amount to be determined by further proceedings under Rule 131(c), and the counterclaim of defendant is dismissed.

Judge: Davis, Judge, concurring in the result: I agree with the judgment, as well as with the court's positions that (a) plaintiff was the responsible "person" under the statute for the period prior to November 10, 1952, (b) he was not, as the defendant admits, such a responsible "person" beginning with November 10th; (c) he acted "willfully", within the meaning of the statute, during the time he was the responsible "person"; but (d) under the Internal Revenue Service's policy he was not liable for any of the unpaid taxes (accrued before November 10th) because they could all have been collected from the company. This separate opinion is written because I cannot concur in the interpretation the court makes of, and the implications it draws from, the agreement between the company and the Service (dated October 1, 1952). The court's opinion treats that agreement as if, by itself, it covered plaintiff, immunized him, and was made for his benefit. My view, to the contrary, is that this agreement related solely to the relations between the company and the Service, and did not by itself affect the separate and independent liability of the responsible "person" (plaintiff in this instance) under the "penalty" provisions of the legislation. This seems to me to follow from the teaching of the cases up to this one, 1 as well as from the plain fact that plaintiff was not a party to the agreement, which nowhere mentions him or his separate liability, either expressly or by fair implication. If there were no Service policy applicable to this case, I would have to hold—particularly under the reasoning of the latest cases: Monday v. United States,   421 F. 2d 1210 [   25 AFTR 2d 70-548] (C.A. 7, 1970), cert. denied, Oct. 12, 1970; Spivak v. United States,   370 F. 2d 612 [   19 AFTR 2d 357] (C.A. 2), cert. denied, 387 U.S. 908 (1967); and Newsome v. United States,   431 F. 2d 742 [   26 AFTR 2d 70-5078] (C.A. 5, 1970)—that the October 1st agreement had no effect on plaintiff's distinct and independent obligation for the unpaid taxes accruing in the earlier period. We have, however, now determined that the IRS policy mentioned in Spivak and Monday also existed in this case, and that crucial policy makes the difference. As Judge Skelton points out, the policy forbids collection of the "100 percent penalty" from the responsible person where the taxes involved can be collected from the corporation itself. In this instance, the taxes could clearly have been collected from Marine if the IRS had wished to do so, either from the company's earnings or out of its distrainable property. The Service elected not to do so, but that was its own choice, apparently out of regard for the Navy's desire to have contract performance continue and to recover back the Navy-guaranteed loan. If all the parties to the transactions, except IRS, had been private firms, the Service could (and probably would) have insisted on collecting the unpaid taxes. If it had refrained, as it did here, out of leniency or to allow production to continue or to help the private lender, the formal IRS policy would certainly have precluded collection from the responsible individual. It makes no difference that here the Navy happened to be the lender. The IRS had the same choice of whether to collect or not—it could have insisted on getting its taxes from the company—but it chose not to. The same consequences should follow as if the lender were a private bank. [pg. 71-693] From this viewpoint, I need not (as the court does) hold the Navy to blame or delve into the complex problem of when one agency of the Federal Government stands in the shoes of another. The focus is and should be on the IRS, not on the Navy. The latter was not a part of the October 1st agreement between Marine and the IRS; and I assume that the Navy acted lawfully, under the explicit terms of its V-Loan Guarantee Agreement, when it insisted, as any lender will if it can, that money coming into the company's hands be first used to repay the Navy's loan. But the Internal Revenue Service was not forced to agree to that order of priority, as it would not have been forced if a private bank were the creditor. The Service decided for itself to acquiesce in the Navy's wishes, and that Service decision automatically brought into operation the policy against collecting from the responsible person where the tax can be collected by IRS from the corporation but is not. Cf. Spivak v. United States, supra, 370 F. 2d at 615; Monday v. United States, supra, 421 F. 2d at 1218 nn. 7-8. There is no reason implicit in the policy, or demanded by justice, for allowing the Navy to collect its debts first, without affecting the liability of the responsible person, if a private creditor would not have the same power.

Judge: NICHOLS, Judge, concurring: I agree generally with Judge Skelton's handling of this case and therefore concur in his opinion, but I would somewhat shift the emphasis and spell out some matters he takes for granted. The issue is, as I see it, one of statutory construction and one for application of our old friend Church of The Holy Trinity v. United States, 143 U.S. 457 (1892). That case is at times mis-cited, and perhaps it has been by me, but on mature reflection about it what it stands for I believe is: The Congress can enact a statute that appears in unambiguous language to assess Draconic penalties for actions, some of which may be quite innocent, but it can count on the executive and judicial branches to take note of what it really meant to accomplish and exclude the law from application to cases not within Congressional contemplation. The 1956 mimeograph referred to by the court shows that without any express warrant in the statute the IRS has restricted the assessment of penalties under   § 2707 of the 1939 Code and   § 6672 of the 1954 Code to cases where the tax cannot be collected from the corporation, and only to the extent of the employee's portion of the withholding. It has used the penalty "primarily as a collection device." When these practices started we are not informed, nor whether they are still in effect. The copy supplied us shows the mimeograph is now superseded by a provision of the Internal Revenue Manual. The Secretary of the Treasury has express power to remit forfeitures and penalties incurred under the customs and navigation laws under 19 U.S.C. § 1618, and   IRC § 7327 extends this to forfeitures under the Internal Revenue laws. There may perhaps exist other authority of that kind, but the mimeograph does not purport to be an exercise of any authority of that kind. This "policy" as it is called, is also not a regulation. Congress gave no authority to write one under these particular sections, which were meant to be automatic in their application, although it is true that Internal Revenue penalties, under   IRC § 6671, are payable only on notice and demand. We must presume they thought they had a right to do this, and therefore, though called a "policy" it does reflect a construction of the statute by the administering agency. It is a reasonable construction in light of Holy Trinity, and thus one we should adopt. I do not think, however, that it would be proper for the courts to mitigate the application of penalties without independent consideration, whenever the circumstances were shown to be circumstances under which the IRS did not normally demand payment. Cf. Wagner v. United States,   181 Ct. Cl. 807,   387 F.2d 966 [   21 AFTR 2d 1585] (1967). Conversely, I think that in the totality of circumstances proven here the Holy Trinity precedent would make our holding the proper one even if there were no mimeograph. I was prepared so to hold before I heard of the mimeograph, as our commissioner, of course, recommended. The mimeograph is a now-you-see-it-now-you-don't kind of thing. Apparently the court in Monday v. United States,   421 F.2d 1210 [   25 AFTR 2d 70-548] (7th Cir. 1970), cert. denied, 400 U.S. 821 got [pg. 71-694] a clue to its existence from Spivak v. United States,   370 F.2d 612, 615 [   19 AFTR 2d 357] (2d Cir. 1967), cert. denied, 387 U.S. 908, but declined to take judicial notice of it. I commend the Government counsel herein because they divulged it ungrudgingly on our request, but it seems to me that such a thing as this mimeograph ought to be notified by publication to all courts and litigants and it is not fair for it to benefit one court or litigant and not another. The business of giving effect like regulations to all sorts of papers emanating from the executive branch, is one that should cause concern. The "agreement" quoted in the opinion is shown in the findings (which will not be reproduced in F.2d) to have been altered (before delivery?) by the signing Government officer. He tore out his signature for fear he lacked authority to sign it. But it was carried out for a time, as found, just as if it were effective and authorized. The commissioner found it was "an agreement", and defendant did not except. I would call this a conclusion of law. My approach to the case does not oblige me to rely heavily on this "agreement". I would not be able to do so without further study than I deem necessary as things are, and I do not rely on it, except as a part of the total circumstances.

Findings Of Fact

The court having considered the evidence, the report of Trial Commissioner C. Murray Bernhardt, and the briefs and arguments of counsel, makes findings of fact as follows:

(1.) Nature of suit. This is an action to recover $9,370.14 of penalties paid on account by plaintiff with respect to withholding and social security taxes for all of 1952 and the first three quarters of 1953. It is brought under the provisions of 28 U.S.C. § 1491, and   § 2707(a) of the Internal Revenue Code of 1939, reenacted as   § 6672 of the 1954 Code. The Government counterclaims for $201,257.70, the unpaid balance of the assessments described in the petition.

(2.) Assessment against plaintiff of Marine's unpaid employment taxes. Marine Aircraft Corporation (hereinafter "Marine") withheld from wages paid to its employees during the four quarters of 1952 and the first three quarters of 1953 Federal income and Federal Insurance Contribution Act taxes (hereinafter "F.I.C.A." taxes), which were reported on Forms 941, designating Marine as the employer. Marine's treasurer (T. G. Law or his successor, William W. Strong) prepared the returns for all quarters involved except the third quarter of 1953, which was prepared by Michael Feiring, Trustee in Bankruptcy under Marine's Chapter X Reorganization Proceedings. Plaintiff was personally assessed $219,678.65 for Marine's failure to pay over to the Government the withholding and F.I.C.A. taxes for the stated quarters. Plaintiff paid $9,370.14 and received abatement credits of $9,050.81, leaving a balance of $201,257.70 unpaid, the subject of the Government's counterclaim.

(3.) Marine's origins. Plaintiff, in association with one Harold Felio, was the prime mover and incorporator of Marine, a Delaware corporation organized in April 1948 to exploit certain inventions made by plaintiff and Felio and to engage in manufacturing and aeronautical engineering. Starting with six to eight employees in a small basement location in New York City, in 1949 Marine moved to a surplus airport in the Dallas-Fort Worth area of Texas which had been made available to it by the Navy. During its life Marine entered into approximately 29 Defense Department contracts or subcontracts involving engineering, manufacturing and supply work costing in excess of $5,000,000. These contracts included prime contracts for the Navy and Air Force and subcontracts for the McDonnell Corporation and Glenn Martin Company. Plaintiff was primarily responsible for negotiating these contracts and subcontracts for Marine. After moving to Texas Marine's personnel expanded quickly to over 500 because of the Korean War, and to over 700 during the period in controversy here. Plaintiff was president of Marine from its organization in 1948 through 1953.

(4.) Plaintiff's stock in Marine. Originally plaintiff held over 70 percent of Marine's stock. Until late 1952 plaintiff and Felio together held the majority of Marine's stock. Plaintiff's 43,284 shares represented 40 percent plus of Marine's issued and outstanding stock from April through October 1952, and 28 percent plus thereafter through October 1953.

(5.) Marine's officers. Marine's key officers were as follows: [pg. 71-695]

   Office                      Name                  Period

President..............  Lewis C. McCarthy, Jr..  1948-1954.

Vice President.........  John B. Jacob..........  1948-Sept. 1952.

Executive Vice

  President............  Harold G. Felio........  1948-Sept. 1952.

Treasurer..............  T. C. Law..............  May 1950--Aug. 1952.

Treasurer..............  William W. Strong......  Aug. 1952--Dec. 1953.

(6.) V-loan. By a loan agreement dated August 14, 1951, Marine obtained from the Fort Worth National Bank a revolving credit in the initial amount of $250,000 (later increased to $400,000 on February 28, 1952, and to $650,000 on August 7, 1952). The loan was secured by Marine's assignment to the bank of payments under its defense contracts and subcontracts. Until November 12, 1952, borrowings or advances within the credit limit were made to Marine based upon the submission on each occasion of a certificate as to its then current investment in defense contracts. Each certificate of investment, which was audited by the Navy, disclosed the current expenditures in labor, material, general and administrative expense, and overhead, reduced by progress payments made to date by the Government, the remainder being the borrowing base. If the borrowing base certified by Marine exceeded the outstanding balance of the loan a new promissory note was executed to obtain funds which were then deposited to Marine's account. Such borrowings were permitted on a weekly basis or such other time interval as Marine needed money. The aggregate unpaid principal amount of Marine's notes outstanding at any one time was limited to 100 percent of inventory cost in connection with the assigned contracts (canceled or otherwise), plus 90 percent of amounts due Marine on delivered and accepted products. 1 Bankers Trust Company of New York was added to the agreement as a lender in February 1952. The Navy, acting through the Federal Reserve Bank of Dallas as Fiscal Agent, guaranteed the above loan by a V-loan Guarantee Agreement with the Fort Worth National Bank dated August 16, 1951.

(7.) Assignment of contracts. All of Marine's Government contracts and subcontracts were assigned to the Bank as security for the loan. A typical form of assignment provided in part as follows:

The Borrower does hereby irrevocably authorize and empower the Bank to demand, receive, and receipt for all sums of money to which this assignment related; to commence, maintain, or discontinue any action, suit, or other proceeding which it deems advisable to collect or enforce payment of the amount assigned; to compromise, compound, and settle the same; to endorse in the name of the Borrower any checks, drafts, or other instruments payable to the Borrower that may be issued in whole or partial payment in connection with the contracts.

In accordance with the terms of the loan, through November 11, 1952, payments on the assigned contracts when received by the Bank were applied to the reduction of the outstanding indebtedness under the Loan Agreement, and advances were made periodically to Marine against its notes based upon the limits referred to in finding 6, supra.

(8.) Undercapitalization. Marine never had sufficient funds to pay its creditors currently, despite an infusion of about $100,000 in new capital in early 1952. Meeting of obligations was of constant concern, and was due to such factors as inadequate capitalization, rapid expansion, and delays in collecting moneys due under Government contracts. 2 Bills for materials and payroll claimed priority in payment over other bills so Marine could continue performance of its contracts. This cash-short condition continued throughout Marine's life until it was declared bankrupt on March 16, 1954. (Cf. finding 22, infra.) During 1952 and 1953 plaintiff had frequent discussions [pg. 71-696] with Marine's treasurer (Law, later Strong) as to the corporation's finances and payment of bills. Forecasts of cash requirements for future operations were prepared from time to time and presented to plaintiff as president, on the basis of which he established Marine's financial policy and issued instructions accordingly to the treasurer. However, subsequent to June 9, 1952, plaintiff's authority in this respect was curtailed by force of circumstances related in finding 9.

(9.) Plaintiff's authority to pay bills. The situation as to authority of plaintiff to pay Marine's bills in 1952 and 1953 is somewhat confused. It may be discussed in three aspects, viz: authority under bylaws, authority under corporate resolutions, and actual practice.

((a)) Authority under bylaws. Marine's corporate bylaws described the duties of its president and treasurer, inter alia. As president, plaintiff was authorized by the bylaws to have "general control of the business of the corporation", "supervise the work of the other officers", "sign in the name of the corporation, any and all contracts or other instruments authorized either generally or specifically by the Board". The treasurer was authorized by the bylaws to "have custody of all moneys and securities of the company", "keep *** regular books of account", "account to the President and directors, whenever they may require it, in respect of all his transactions as Treasurer and of the financial condition of the corporation, and shall perform all other duties that are assigned to him by the President or the Board". On August 5, 1952, the bylaws were amended to provide that the Chairman of the Board (Harry F. Vollmer) would serve as chief executive officer "to collaborate with the President in the supervision of the corporation", and to "sign in the name of the corporation, any and all contracts or other instruments authorized either generally or specifically by the Board". Vollmer had actually assumed duties as chief executive officer on or before June 9, 1952. The complete corporate bylaws are not in evidence. Those sections that are in evidence describe the duties of the officers but do not treat specifically the question of authority to sign checks for the corporation.

((b)) Authority under resolutions. Throughout the life of the corporation resolutions of its board of directors directed that its checks be signed by any two of designated officers and employees. Plaintiff's name was always on the list of such authorized officers, as were certain other individuals. Marine's board of directors approved a resolution at a meeting on December 13, 1952 (ratified by stockholders' meeting of January 17, 1953), which, in accepting the offer of Messrs. Lynch, Flocks and Gerron to solve a financial crisis (see finding 16, infra, specified that all of Marine's checks be cosigned by either Lynch, Flocks or Gerron. Presumably this last resolution remained in force until Marine field its Chapter X Bankruptcy Reorganization Proceedings as described in finding 20, infra. 3

((c)) Actual practice. W. W. Strong, who became acting treasurer of Marine by board action of August 5, 1952 (he was made treasurer October 6, 1952), had been engaged as Marine's chief accountant by Harry F. Vollmer, chairman of Marine's board. Strong looked to both Vollmer and plaintiff for instructions as to payment of bills, depending on which one happened to be available, but primarily to Vollmer because he had hired him. Plaintiff was absent from company headquarters much of the time on company business or due to illness, and on such occasions was not available for instructions to Strong. Approximately half of Marine's checks were cosigned by plaintiff. Strong, as treasurer and chief accountant of Marine, would make the initial selection of bills to pay in most instances. The situation as to approval of bills for payment was altered by the circumstances of the takeover of Marine's V-loan by the Navy on November 10, 1952, as related in finding 14, infra, and by the appointment of a management committee for Marine on December 13, 1952 (ratified by stockholders' meeting of January 17, 1953), as related in finding 16, infra. After the takeover of the V-loan by the Navy on November 10, 1952, the credit no longer revolved, no [pg. 71-697] further funds were advanced from the V-loan, therefore no notes were signed for advances, and all bills required approval for payment by Mr. Stone of the Fort Worth National Bank, which was acting as banking agent for the Navy through the Federal Reserve Bank of Dallas. Stone did not quibble over Strong's selection of bills for payment. Upon the appointment of a management committee for Marine in December 1952, that committee had effective veto control over payment of bills through its chairman, W. J. Gerron, who was Marine's newly appointed Comptroller and whose signature as cosigner was required on all checks. 4 Thus, following November 12, 1952, plaintiff continued to be an eligible cosigner of Marine's checks, but his authority as to ultimate approval of bills for payment was curtailed or diminished because of the events described above. In fact, plaintiff's authority with respect to payment of bills was diminished as early as June 9, 1952, when Vollmer was elected as chief executive officer of Marine by the board of directors to run the company and set its policy while plaintiff concentrated on problems of production and finding new contracts. Marine's serious financial straits during 1952 worsened as the year wore on and there was an increasing shortage of funds to meet current bills, and a correspondingly increased degree of supervision over plaintiff's authority to pay bills in his own discretion. After December 13, 1952, it is reasonable to conclude that Gerron's authority over Marine was paramount to plaintiff's or Vollmer's. It is also reasonable to conclude that the financial condition of Marine and the size of its withholding tax arrears were such that as a practical matter plaintiff would not, particularly after June 9, 1952, have paid the tax arrears on his own initiative without approval of the board of directors, which approval ultimately took the form of the board authorizing its general counsel, MacNeil Mitchell, on August 5, 1952, to effect an arrangement with the Bureau of Internal Revenue (hereafter "Bureau") for a systematic repayment of tax arrears over a period of time, as related in finding 11, infra.

(10.) Knowledge of tax arrears. Plaintiff was aware at all times that Marine's withholding and F.I.C.A. taxes which had been withheld were not being currently paid to the Government. On July 29, 1952, the then treasurer of Marine, T. G. Law, resigned his position through concern over the possibility of his personal liability for the tax arrears as a responsible officer. Not all of the members of Marine's board of directors were aware of the tax arrears situation until a board meeting of August 5, 1952, when it was discussed and Marine's general counsel, MacNeil Mitchell, was authorized to negotiate a plan for repayment of tax arrears and current taxes with the Bureau. The Bureau was kept informed of Marine's financial difficulties which caused the tax arrears and, while filing a series of tax liens from November 1951 through January 1954 covering the unpaid taxes, elected not to foreclose on Marine because it did not wish to interfere with the war effort by putting a defense contractor out of business. Until November 6, 1952, neither the Fort Worth National Bank, the Federal Reserve Bank of Dallas, nor the Navy had notice of the three tax liens filed through July 25, 1952, all of which except the last having been previously discharged, but they knew or should have known of the eight tax liens filed thereafter by the Bureau from October 17, 1952 through January 5, 1954. Regardless, however, of this lack of knowledge of the filing of certain tax liens, the Navy knew in August 1952 that Marine was in arrears for withholding taxes in the approximate sum of $120,000 and subsequently waived the V-loan default which the filing of tax liens constituted. Thereafter the Navy is charged with knowledge of Marine's tax arrears situation because the V-loan required constant surveillance and was administered on an almost day-to-day basis by the Fort Worth National Bank and the Federal Reserve Bank of Dallas as agents for the Navy. 5

(11.) October 1, 1952 agreement with [pg. 71-698] Collector of Internal Revenue. During the incumbency of T. G. Law as Marine's treasurer, Marine was perennially short of working capital, which condition worsened in 1952 and prevented Marine from paying its overdue withholding and F.I.C.A. taxes without shutting down its contract operations, a condition with which the Bureau of Internal Revenue was familiar. Plaintiff instructed Law not to make any payments of such taxes without his approval. Following Law's resignation on July 29, 1952, and pursuant to authorization by Marine's board of directors on August 5, 1952, its general counsel, MacNeil Mitchell, in company with plaintiff, conferred with the Bureau of Internal Revenue to effect an agreement for the repayment of its tax arrears and current taxes. Previously in 1951 Mitchell had successfully negotiated an agreement with the Bureau with respect to payment of Marine's earlier tax arrears for 1949 and 1950, which was carried out. As a result of Mitchell's conferences with the Bureau an agreement dated October 1, 1952, was arrived at between Marine and the Collector of Internal Revenue for the Dallas district. This agreement, after reciting Marine's arrears of approximately $130,000 for withholding and social security taxes through July 31, 1952, and that the Collector would file notices of tax liens, provided that the liens would not be enforced if Marine would adhere to its agreement to pay $8,000 monthly on its tax arrears commencing October 1, 1952, and to meet its current taxes when due. After the agreement was signed by plaintiff for Marine and by a representative of the Collector of Internal Revenue, Dallas District, the latter tore off his signature because of uncertainty as to the extent of his authority to enter into such an agreement. However, Marine's board of directors approved the agreement on October 6, 1952, and contemporaneous correspondence, together with the conduct of the parties thereafter, confirm the fact of an agreement despite the removal of the signature of the Government representative from the formal instrument.

(12.) Tax payments pursuant to October 1 agreement.Pursuant to the agreement with the Collector of Internal Revenue, Marine made payments of $8,000 each on October 1 and 31, 1952, December 1, 1952, and January 2, 1953, against the tax arrears, plus a payment of $17,920.84 on October 10, 1952, for September 1952 payroll taxes, August taxes having been paid previously. An additional check in the amount of $23,360 for October 1952 taxes was drawn and dated November 10, 1952, but was withdrawn from the mail at plaintiff's direction when he learned that the Fort Worth National Bank would not honor the check (despite a note being signed that morning against the V-loan credit authorization in order to provide funds to cover the check in question and other operating expenses) because on that day the Navy had purchased the loan balance from the Bank under the V-loan Guarantee Agreement, at the Bank's request, as explained in finding 14, infra. In sum, for the year 1952 and the first three quarters of 1953, Marine reported the following amounts of withholding and F.I.C.A. taxes as being due and owing to the Government, against which it made the following payments.

           Quarter    Tax Reported Due  Amount Paid  Balance Due

1st Q 52.............  $ 36,055.75        $530.65        $35,525.10

2nd Q 52.............    54,763.13            .00         54,763.13

3rd Q 52.............    57,647.41      38,240.22         19,407.19

4th Q 52.............    65,964.25            .00         65,964.25

1st Q 53.............    38,440.33            .00         38,440.33

2nd Q 53.............    26,517.54            .00         26,517.54

3rd Q 53.............     5,138.21            .00          5,138.21

                       -----------     ----------    --------------

     Totals..........  $284,526.62     $38,770.87    $<*>245,755.75

-----

<*>Not including $36,069.21 for Federal Unemployment taxes which were

assessed Marine but not plaintiff. Plaintiff was assessed $219,678.65, of

which he paid $9,370.14. A credit abatement of $9,050.81 was made due to

payments by Messrs. Flocks and Lynch, leaving unpaid the sum of $201,257.70

for which the Government has filed its counterclaim.

(13.) Marine's financial prospects, August 1952. Although the financial situation of Marine as of August 5, 1952 was recognized by its officers as being [pg. 71-699] serious, it was responsibly believed by them that, on the basis of cash forecasts and prospective improvements in production efficiency, the cash picture of Marine could reasonably be expected to improve each month until by late 1953 it should be able to achieve a vastly improved credit standing, provided planned improvements could be achieved in labor turnover, overhead ratio, internal reorganization, and production efficiencies. Most of Marine's small accounts payable had been liquidated and negotiations were in progress with major creditors for funding their bills by paying 20 percent in cash and the balance in notes, so that Marine could enjoy normal 30-days' credit with its suppliers. In view of the fact that Marine was in default in deliveries under current contracts, and was losing money on most of its pending contracts because of assorted business difficulties, there was not much cause for optimism. Additional equity capital was badly needed and efforts to find it were being expended, including efforts to increase the limit of the V-loan. Marine was also concerned over its delinquent taxes at that time and hoped to be able to fund their repayment over a long period by agreement with the Collector of Internal Revenue, as described in findings 11 and 12, supra. It was believed that Marine's financial crisis, while acute, might be weathered and survived, especially when additional funds materialized from receipt of withheld retainages under Government contracts and settlement of certain claims under other Government contracts. (Cf. finding 23, infra.)

(14.) Repurchase of V-loan by Navy. On or about November 10, 1952, the Fort Worth National Bank called upon the Navy to take over the unpaid balance (then $629,477.75) 6 of Marine's V-loan under the terms of the V-loan agreement between the Bank and Navy (Cf. finding 6, supra). The transfer was effected November 12, 1952. The principal reason for the request was that a recent increase in the discount rate by the Federal Reserve Bank (from which commercial banks borrow at low rates to loan to customers) had made the loan less profitable to the Bank, since it had to share the interest income with the Navy in return for the latter's guarantee of payment, as well as to share what small interest was left with the co-lender Bankers Trust Company. Moreover, the Bank was concerned over Marine's insolvency. Marine had no knowledge of the proposed transfer until November 10, 1952, when a check drawn that morning to apply to tax arrears was withheld from mailing (at plaintiff's directions) upon advice from the Bank that, at the direction of the Navy, it would not be honored despite a note to cover it that had been deposited against the V-loan. At this time the V-loan was not in default, and its due date was December 31, 1952. 7 Upon purchase of the V-loan balance by the Navy the Bank transferred the note and collateral to the Federal Reserve Bank as agent for the Navy, but continued to act as agent for the Navy in receiving payments under the assignments and in administering the loan. Prior to November 10, 1952, Marine did not have to obtain the approval of the Bank for withdrawals to pay bills, but thereafter Marine had to receive approval by Mr. Stone of the Fort Worth National Bank, which, in turn, obtained approval from the Federal Reserve Bank of Dallas, as agent for the Navy, concerning approval for payment of bills submitted by Marine. The Navy recommended that Marine find another bank to refinance the V-loan, but Marine was unable to do so.

(15.) Effect of repurchase of V-loan by Navy. According to the chairman of Marine's board of directors, as reported in a board meeting of December 13, 1952, Marine's "entire picture was drastically changed to the utmost disadvantage of the company by the entirely unheralded and unanticipated action of the Fort Worth National Bank in demanding that the U.S. Navy repurchase from it the $650,000 V-loan". Following purchase of the V-loan by the Navy on November 12, 1952, the loan ceased to function as a normal revolving credit. New credit was not extended (i.e., no further advances were made under the loan) but instead funds generated under assigned contracts were released to Marine upon certification of its investment in contracts similar to the borrowing certificate formula described in finding 6, supra. The loan matured and became payable in full December 31, 1952, but in order [pg. 71-700] to avoid an interruption of business assigned payments were continued to be released. It was to the advantage of the Navy to permit Marine to finish its contracts, despite the maturity of the V-loan. The principle for applying and releasing funds could be described as a self-liquidating type of credit. After November 12, 1952, the Fort Worth National Bank administered the plaintiff's account and the V-loan as agent for the Navy, once removed, rather than acting in its own behalf as principal which it had theretofore been. At a meeting between Marine and the Navy on November 13, 1952, it was agreed that, until a financial plan for the future had been developed, Marine would curtail the issuance of miscellaneous checks and would give priority to the payment of wages and salaries. 8 Thereafter the Bank took orders from the Navy as to release of funds to Marine. There is no probative evidence that, following November 12, 1952, the Navy prohibited Marine from issuing checks in payment of its current withholding taxes out of contract proceeds as they were deposited in the Bank and thence doled out by the Bank to Marine on a borrowing certificate formula as described above for the payment of bills submitted with each request. It is manifest that Marine, with the Navy's tacit acquiescence, concentrated on using all available cash to pay bills for materials and payroll which were indispensible to remaining in business and performing its existing contracts, and that there was insufficient money to pay more on its taxes than those payments listed in finding 12, supra. The Navy permitted Marine to make two $8,000 payments to the Bureau of Internal Revenue on December 1, 1952 and January 2, 1953, pursuant to Marine's agreement with the Bureau as to payment of tax arrears. From November 12, 1952 through August 4, 1953 sums totaling $1,167,120.77 were released to Marine for payroll and other purposes, not including an additional $466,492.22 retained by the Navy from March through July 1953 and applied against the loan balance from March 6 through July 1953. From March through July 1953 contract proceeds of $551,744.26 were turned over to Marine for closely supervised payment of selected bills for labor and materials. After August 4, 1953, all of the contract proceeds received thereafter ($181,928.55) were applied to liquidate the Navy's note. Both the Navy and the Bank, as the Navy's agent, knew or are charged with knowing that Marine had failed to pay its current withholding taxes as they became due, but it cannot be ascertained reliably from the record whether Marine at any time specifically requested authorization and approval for payment of its current tax bills, which were carried on Marine's books as liabilities. Although the Navy had the prerogative of withholding from contract proceeds due Marine sums to apply against the outstanding V-loan balance, no such payments were applied against the V-loan balance following the takeover of the loan by the Navy on November 12, 1952, until March 1953, presumably because in the interim Marine was endeavoring to find a new bank to underwrite the loan.

(16.) Executive Committee. On December 5, 1952, pursuant to the urgings of the Navy to improve its financial position, Marine entered into an agreement (signed by plaintiff as president of Marine on December 23, 1952, and approved by Marine's stockholders at a meeting on January 17, 1953), providing that MacDonald Lynch, W. R. Flocks and W. J. Gerron would put up a $1,000,000 performance bond guaranteeing Marine's performance of the McDonnell subcontracts and providing assurance to the Martin Company regarding an orderly termination of its subcontracts with Marine. Under the agreement an executive committee (commonly referred to as the management committee) was created, composed of the plaintiff and Messrs. Vollmer, Lynch, Flocks and Gerron. The committee was vested with—

full authority to operate the company, and make all management decisions until such time as the contracts in question are fully performed and we [Lynch, Flocks and Gerron] are relieved of further liability in c nection therewith [referring to the [pg. 71-701] $1,000,000 surety bond provided by Lynch, Flocks and Gerron].

Lynch, Flocks and Gerron were to receive 43,000 shares of Marine's stock to cover payment in full of the bond premium, plus proxies sufficient to give them 51 percent control over Marine's voting stock until completion of the McDonnell subcontracts. Plaintiff and Felio were to contribute 17,000 shares of their common stock toward the 43,000 shares to be transferred to Lynch, Flocks and Gerron. Lynch, Flocks and Gerron agreed to devote time as required to operation of Marine (without compensation, except expenses), to assist in securing repricing agreements under the McDonnell subcontracts, to help with arrangements for repurchase from the Navy by a bank in Texas of the V-loan balance, and to find new business. The agreement also provided:

A comptroller, satisfactory with us [Lynch, Flocks and Gerron], will be appointed by the company. He will have full authority in the allocation of funds, the handling of accounts receivable and payable, countersigning all checks and, with the approval of the executive committee, will handle all financial transactions.

Gerron was appointed as comptroller on December 13, 1952, pursuant to the foregoing provision of the agreement. It was agreed that three members of the committee would constitute a quorum and a majority vote by those present, in person or by proxy, would control. Plaintiff and Vollmer agreed to devote their full time to performance of their duties for Marine, subject to the direction of the executive committee until the McDonnell subcontracts were performed and the Martin subcontracts terminated.

(17.) Performance bond. Pursuant to the agreement of December 5, 1952, described in finding 16, and by letter dated December 29, 1952, signed by plaintiff for Marine, Marine transmitted to McDonnell Aircraft Corporation a performance bond in the amount of $1,000,000 executed by Marine as principal and Gerron, Lynch and Flocks as sureties, executed December 23, 1952. The Navy representative, who was responsible for administering plaintiff's V-loan, testified that the "performance bond provided to McDonnell and Martin gave our loan here a new lease on life for this very reason, that our payoff is contingent upon the performance of the contract, and if McDonnell now has a performance bond wherein the three parties named would guarantee the performance, then all we required to do is to be sure that the balance due by Martin and McDonnell don't exceed this credit, because under the assignment of payments we will receive the funds and we would apply them."

(18.) Gerron's role as Marine's responsible officer.Following his appointment on December 13, 1952, as Marine's comptroller, Gerron was in constant touch with the Navy to obtain release of funds on a need basis for payrolls, general administrative expenses, and payments due vendors and suppliers. The procedure followed was for Gerron to obtain the approval of the sureties on the bond for the payment of particular bills, then consult the Navy which, through the Federal Reserve Bank of Dallas, would authorize the Forth Worth National Bank to honor Marine's checks for the approved bills. The Navy regarded Gerron as the spokesman and duly authorized official of Marine during this post-December 13, 1952, period.

(19.) Liquidation of V-loan. While from November 12, 1952 to March 6, 1953, the Navy refrained from applying any of the payments under the assigned contracts to the V-loan balance, thereafter it held back $648,420.77, of which $629,477.75 was applied to the principal and $18,943.02 to interest and fees, until the loan was liquidated in March 1954. The policy of the Navy with reference to applying all contract proceeds to the loan balance before permitting use of any such proceeds for the payment of Marine's tax arrears is shown in the following paragraph of a letter dated August 14, 1953, from the Navy to the Commissioner of Internal Revenue:

As security for the above mentioned loan the bank obtained an assignment of the company's defense production contracts and the Navy through the purchase of the loan is now, in effect, the assignee. As of this date the unpaid principal of this loan aggregates $165,650. It is anticipated that further payments may be received which will further reduce the amount of this debt. In the event that it is repaid in full and that the Navy and Air Force then have no [pg. 71-702] other claims against Marine Aircraft Corporation, any payments to be made by the Government in excess of those required to liquidate this loan will be withheld in order that they may be applied in liquidation of the tax indebtedness. *** .

(20.) Bankruptcy reorganization. A petition for corporate reorganization under Chapter X of the Bankruptcy Act filed on behalf of Marine Aircraft Corporation (No. 2290) was approved by order of the United States District Court, Southern District of New York, dated August 4, 1953, pursuant to which Michael Feiring, Esq., was appointed Trustee on August 10, 1953. Said proceeding was assigned Docket No. 89,556. On behalf of Ellis Campbell, Jr., District Director of Internal Revenue at Dallas, Texas, a "Claim of United States for Taxes" executed August 10, 1953, was filed in the aggregate amount of $247,216.49.

(21.) Contract performance during receivership. Plaintiff remained on to supervise the company during the period of receivership. Prior to receivership Marine had completed a prime contract with the Navy, and the Martin contract was terminated before receivership. The McDonnell contract in which Marine was subcontractor was 80 percent completed prior to receivership, and was terminated and settled during the receivership.

(22.) Bankruptcy. No plan of reorganization having been filed, on March 16, 1954, in the District Court of the United States for the Northern District of Texas, Fort Worth Division, in No. 2290, Marine Aircraft Corporation was adjudged a bankrupt, Michael Feiring was discharged as Trustee in the reorganization proceeding, and the proceeding was referred to Glenn Smith, Referee in Bankruptcy.

(23.) Settlement of contract claims. In 1954 Marine's trustee in bankruptcy filed petitions numbered 117-54 and 118-54 in the Court of Claims seeking damages of $403,605.72 and $329,924.73, respectively, growing out of contracts with the Air Force and the Navy. The Government filed counterclaims. On February 9, 1956, the trustee in bankruptcy filed his "Trustee's report of compromise and settlement and order thereon" in which he recommended that the two suits in the Court of Claims, including the counterclaims, be dismissed with prejudice, that certain other claims against the Government arising under five contracts between Marine and the Government be waived, and that the sum of $7,251.42 be accepted from the Government in settlement of the claims dismissed and/or waived. The Referee in Bankruptcy approved the trustee's recommendation, and on May 26, 1956, an order was entered by the District Court of the United States for the Northern District of Texas, Fort Worth Division, confirming the trustee's recommendation. The petitions in the Court of Claims were dismissed accordingly.

(24.) Plaintiff's salary. During the fiscal years ending March 31 in 1952 and 1953 plaintiff's salaries paid by Marine, but not all in cash, were $24,416.67 and $24,999.84, respectively. He was also reimbursed expenses.

(25.) Individual assessments. In addition to the assessment of a penalty against plaintiff (finding 2, supra), similar assessments covering portions of the same period were made against W. R. Flocks, W. J. Gerron, MacDonald Lynch, and Harry F. Vollmer, Jr. The assessment against Harry F. Vollmer was abated in full. No assessment of penalty was made against William W. Strong or his predecessor as treasurer, Theodore G. Law.

Conclusion of Law

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiff is entitled to judgment in an amount to be determined by further proceedings under Rule 131(c), and that the counterclaim is dismissed.

1

  A minor disagreement exists between the parties as to whether the applicable statutory provisions are sections 6671(b) and 6672 of the 1954 Code, as plaintiff avers, or predecessor   and   sections 2707(a) and (d) of the 1939 Code, as defendant states. The language of the respective code provisions is not materially different and, in view of paragraph 1 of the stipulation of the parties on file, the 1939 Code provisions will be employed in this discussion.

3

  Extensively footnoted in Boughner, The 100% Withholding Tax Penalty: How to Fight it Successfully, Journal of Taxation, Vol. 28, No. 4, p. 236, April 1968.

1

  See Monday v. United States,   421 F. 2d 1210 [   25 AFTR 2d 70-548] (C.A. 7, 1970), cert. denied, Oct. 12, 1970; Newsome v. United States,   431 F. 2d 742 [   26 AFTR 2d 70-5078] (C.A. 5, 1970); Spivak v. United States,   370 F. 2d 612 [   19 AFTR 2d 357] (C.A. 2), cert. denied, 387 U.S. 908 (1967); Kelly v. Lethert,   362 F. 2d 629 [   18 AFTR 2d 5059] (C.A. 8, 1966); Singer v. District Director of Internal Revenue,  354 F. 2d 992 [   17 AFTR 2d 154] (C.A. 2, 1966); Cash v. Campbell,   346 F. 2d 670 [   15 AFTR 2d 1057] (C.A. 5, 1965).

1

  Prior to August 1952 the borrowing limits were 90 percent of receivables and inventory.

2

  The Government withheld 15 percent of each progress payment pursuant to contract. In addition, plaintiff had claims under certain contracts which it ultimately did not recover. See finding 23, infra.

3

  These conclusions, drawn from authorizing board resolutions, do not exactly correspond with other facts in the record upon which defendant's requested finding 8 is based, but the differences are not material.

4

  The agreement between Marine and the management committee dated December 5, 1952, provided that the Comptroller would have to countersign all checks, although the resolution adopted by Marine's board of directors on December 13, 1952, required countersigning of all checks by either Lynch, Flocks or Gerron. Cf. finding 16, infra.

5

  In a letter dated December 27, 1957, from the Navy to Congressman Albert Thomas, in response to the latter's inquiry of November 15, 1957, the Director of the Finance Division stated that the Navy was not aware of the fact that Marine was not paying its withholding taxes, presumably speaking with reference to the period from about November 1952 to mid-1953. Any lack of awareness by the Navy, as claimed, would have been through its own negligence or inattention, under the circumstances.

6

  With certain adjustments for interest and fees the Navy paid the bank $630,488.94.

7

  Technically the loan agreement was in default whenever plaintiff had unpaid taxes.

8

  The paraphrased text of this agreement is given in stipulated Exhibit 13 as "Marine would, until a longer range plan had enfolded, curtail the issuance of miscellaneous checks and would give priority to the payment of wages and salaries." Since wages and salaries are synonymous, their juxtaposition is redundant and gives rise to speculation as to whether the parties did not intend to say "wages and materials", since expenditures for each were essential to Marine's continued performance.

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