The opinion of the court was delivered by: BARTELS
This is a consolidation of two cases arising out of a joint and several 100% penalty assessment by the Government under Sections 6671 and 6672
of the Internal Revenue Code of 1954, 26 U.S.C.A., against John Muller (Muller), president, Ogden M. Sherwood (Sherwood), secretary and treasurer, and Leonardo Casanova (Casanova), a major stockholder and employee, of Gillmors, Inc. (Gillmors) as responsible persons liable for the employees' withheld income taxes and Federal Insurance Contributions Act (FICA) taxes not paid to the Government for the first and second quarters of 1957.
Sherwood instituted a suit against the Government to collect a refund of $47.14, one unit of the assessment made against him and to quiet title to a trust fund against which Federal tax liens had been filed, to which suit the Government filed a counterclaim for $40,700.64. The other action was instituted by the Government against Muller and Casanova to collect penalty assessments of the same sum. The same corporation and the same issue being involved in both suits, the two cases were consolidated.
The contested issue is whether Muller, Sherwood and Casanova are liable under Sections 6671 and 6672 of the Internal Revenue Code of 1954 as persons charged with the duty to collect the taxes specified, and whether their failure to do so was willful.
After hearing the testimony and examining the exhibits and the proposed findings of fact and conclusions of law submitted by counsel, the Court makes the following findings of fact and conclusions of law:
1. Muller was president of Gillmors during the first and second quarters of 1957 but became sick on June 7, 1957 and did not act in that capacity thereafter. Muller was the chief executive officer and general manager with authority to borrow money and to sign checks without a counter-signature.
2. William S. Gillmor was assistant to the president during the first and second quarters of 1957 and after the president's illness on June 7, 1957, acted as the chief executive officer of Gillmors.
3. Sherwood was secretary and treasurer of Gillmors during the first and second quarters of 1957 and was authorized to sign checks in payment of bills without a counter-signature.
4. Casanova was a major stockholder of Gillmors but held no executive position and did not interfere with the control and management of Gillmors by its officers. He made loans to Gillmors and acted as its salesman but had no knowledge that the withholding taxes due to the Government had not been paid, and he exercised no authority as to payment of creditors and taxes owed by Gillmors or in any other way participated in the decision making process.
5. During the first six months of 1957 Gillmors had a "revolving credit account" with the Long Island National Bank of Hicksville (Bank), whereby loans were made to Gillmors upon promissory notes which were secured by a pledge of accounts receivable as collateral. The cash and checks taken to the Bank by Sherwood, Muller and William S. Gillmor were applied by the Bank to the reduction of the principal amount of the loan. Sherwood was authorized to sign assignments of accounts receivable given as collateral for the loans, and to collect accounts receivable and to carry invoices and records of indebtedness and checks from customers to the Bank. All checks from Gillmors' customers were deposited by the Bank in a special account and applied in reduction of the loans and all credits in the regular checking account of Gillmors were the net proceeds of the loans made by the Bank. All deposits in the general account originated from loans advanced, so that all checks brought to the Bank by Gillmors went through the loan account. All deposit slips in both accounts were written and prepared by Joseph A. Reinhardt (Reinhardt), the Bank's cashier.
6. On April 30, 1957 Sherwood signed the Employer's Quarterly Federal Tax Return (Form 941) prepared by the bookkeeper Rose Schober, showing income and FICA taxes for the first quarter of 1957 of $23,864.14, and also a corporate check on the Bank payable to the District Director of Internal Revenue for $23,864.14, for which there were not to his knowledge sufficient funds in the Bank.
7. On May 8, 1957 Sherwood notified Muller of the insufficiency of funds in the checking account with the Bank to cover said check, whereupon Muller, in the company of William S. Gillmor, borrowed $25,000 from the Amsterdam Overseas Corporation. This check was deposited in the Bank and Reinhardt crdited the amount against Gillmors' loan and did not place it in the general account. On May 10, 1957 there were available to Gillmors additional loans from the Bank of approximately $35,000. On May 10, 1957 the Bank advanced to Gillmors $24,000, and on May 24, 1957 another $23,400, against Gillmors' notes. These funds were ample to pay the Government if Muller so chose.
8. On May 24, 1957 the check of April 30, 1957 for $23,864.14 payable to the District Director of Internal Revenue, was presented to the Bank, at which time the balance in Gillmors' account was only $10,070. Thereupon Reinhardt notified Muller of the deficiency and the latter ordered Reinhardt to stop payment on the check.
9. In the first week of June of 1957 Sherwood and William S. Gillmor, at the direction of Muller, obtained a 45-day extension of time from the District Director of Internal Revenue within which ...