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May 2, 1966

Ben D. Spivak and David S. Shapiro, Plaintiffs,
United States of America, Defendant

Levet, District Judge.

The opinion of the court was delivered by: LEVET

LEVET, District Judge.

This is a controversy concerning so-called "100% penalties" pursuant to Sections 6672, 6671(b), Internal Revenue Code of 1954. The government has made 100% penalty assessments against plaintiffs by reason of allegedly unpaid income withholding and FICA ("social security") taxes due for the first quarter of 1955 and the first quarter of 1956 from Lincoln Industries, Inc., a corporation of which the plaintiffs were officers. Plaintiffs paid what they allege are the taxes due for one employee for each period ($50 and $60, respectively), and sue for a refund of that amount. The government counterclaims for $27,192.27, the balance of the 100% penalty unpaid. *fn1"

 Trial was to the court without a jury. After hearing the witnesses, studying the exhibits, the briefs, the proposed findings of fact and conclusions of law submitted by the parties, I make the following Findings of Fact and Conclusions of Law:

 Findings of Fact

 1. At all times here relevant Lincoln Industries, Inc. ("LI") was a Virginia corporation engaged in the manufacture of furniture in the city of Damascus, Virginia. (41; *fn2" Complaint par. 4; Answer, par. 4)

 2. In June, 1954, plaintiff Ben D. Spivak ("Spivak") became Treasurer of LI, a position which he held until May, 1956, when he resigned. (41, 49) Spivak is an accountant and has been such since 1931.

 3. In June, 1954, plaintiff David S. Shapiro ("Shapiro") became President of LI, a position which he held until May, 1956, when he resigned. (41, 106/107)

 4. LI was adjudicated a bankrupt on July 16, 1956. (Complaint par. 5; Ans. par. 5)

 5. In the proceedings in bankruptcy of LI the government filed a Proof of Claim for unpaid withholding, FICA, unemployment taxes in the amount of $107,135.02, including penalties and interest due thereon. (Exs. 1, 2)

 6. On February 22, 1960, the Bankruptcy Court approved a settlement of the government's tax claims against LI. The settlement provided for the payment by LI's trustee in bankruptcy of $42,971.26 to the government. After providing the periods to which the payment should be specifically credited, the settlement went on as follows:

"In consideration of the payments above specified, the United States of America is to assert no further claim for Withholding taxes, FICA taxes, or FUTA [federal unemployment] taxes, penalties, or interest against the bankrupt or its Trustee herein.
"The offer [accepted by the government] is to be without prejudice to the United States in the assessment and collection of any outstanding assessments for penalties against former officers of said Lincoln Industries, Incorporated, on account of said Withholding and FICA taxes."

 Due notice of the hearing before the Bankruptcy Court on the settlement was given to plaintiffs here. (25-28; Exs. 1, A)

 At the date of the settlement, the trustee had sufficient funds on hand to pay the entire claim of the government. (22, 39; Ex. 4)

 7. The penalty sought by the government in its counterclaim is in respect of a portion of the taxes claimed in the bankruptcy proceedings. (Exs. 1, 2, 8)

 8. Prior to the time Spivak and Shapiro became officers of LI, a bona fide dispute existed between LI and the Internal Revenue Service ("IRS"). LI claimed that certain payments made by the Reconstruction Finance Corporation ("RFC") to IRS in respect of certain defense contracts of LI should be credited to the tax liabilities of LI, not to the tax liabilities of Virginia-Lincoln Corporation ("Virginia-Lincoln") as they were over LI's objection. (159; Mathis' Dep. p. 13; Exs. 12, 13, 19, 20)

 I find that the payments here disputed total $101,558.70, the last of which payments was made at approximately the date at which plaintiffs became officers of LI. (Ex. 19) I find that had this fund been applied to the credit of LI it would have been sufficient, when added to the other payments by LI (even excluding the payments from the bankruptcy proceedings), to pay all LI's taxes of the type here involved (income withholding and FICA) for the entire period of alleged failure to pay, through and including the periods in respect of which the 100% penalties are here sought (first quarter of 1955 and first quarter of 1956), but excluding the second quarter of 1956, not involved herein. (Exs. 1, 2, 8)

 9. Spivak and Shapiro learned of this dispute shortly after they took office in June, 1954. (56-64, 108-111) They contacted an attorney "in order to assist us in reapplying these funds properly." (64)

 10. The amounts here claimed by the government (withholding and FICA taxes for the first quarter of 1955 and the first quarter of 1956) were not withheld and paid over to the government when due. (117-118; Exs. 8, C, and D)

 11. Plaintiffs Spivak and Shapiro were responsible persons whose duty it was to collect and pay over the withholding and FICA taxes here involved.

 Spivak and Shapiro were both authorized to sign checks. They also authorized two others to sign checks. (106, 112) Both were aware of the financial operations of the business, including the fact that taxes were not being paid over. (84, 111-112, 117-118) Either could have authorized the payment of taxes. (128) Both spent approximately two weeks per month at the plant. (55, 118)

 During the period involved in this suit, other bills were paid for raw materials and labor, while taxes remained unpaid. This was pursuant to the direction of Spivak and the approval of Shapiro. (84, 100, 111-112, 117-118, 123, 124, 129, 130) Spivak worked out a plan with each creditor pursuant to which other corporate employees made payments. No payments were made except under these plans. (98-99) After these payments, taxes were paid when money therefor had been accumulated. (84) Spivak ordered and Shapiro approved the above procedure for the payment of taxes and creditors. (111-112) Shapiro continued to order raw materials. (129)

 12. Plaintiffs voluntarily, consciously, and intentionally preferred other creditors of the corporation over the United States.

 13. Plaintiffs preferred such creditors over the United States in order to keep the business functioning as long as possible. The plaintiffs paid only for labor and materials which they needed for production. The bona fide dispute which existed with the IRS was no part of the reason for their failure to pay over the taxes. Indeed, some taxes were paid over when "sufficient" funds were available. (83, 84, 100-101, 118)

 14. On October 2, 1952, Virginia-Lincoln wholly owned LI and another corporation, United Stores, Inc. ("United"). The officers and directors of the three corporations were identical. (189)

 Leon BeVille was Vice President and Treasurer of LI, Virginia-Lincoln and United from at least 1951 until some time in 1954. Mr. BeVille's responsibilities were acting for Virginia-Lincoln, United and LI as "the comptroller of the company and operation of the fiscal affairs, taxes and insurance matters." (188-189) He was also a director. He sat in on meetings of the Board of Directors and took part in financial negotiations with IRS and RFC. (202, 204)

 15. On October 2, 1952, LI had defense contracts. On the same date Virginia-Lincoln had no defense contracts. (138-142) On October 2, 1952, Virginia-Lincoln owed IRS sums for deficiencies in taxes which amounted to over $600,000. (189-190; Exs. 12, 19)

 16. On October 2, 1952, an agreement was entered into between IRS, Virginia-Lincoln and United. (Ex. 12) The agreement is described further in this opinion.

 17. At the time the said agreement of October 2, 1952 was entered into, LI needed working capital in order to perform its defense contracts. In order to secure such capital, LI sought a loan from RFC. RFC refused to make such a loan unless some provision were made for the payment to IRS of large outstanding tax liabilities of Virginia-Lincoln, then the parent corporation of LI. RFC was concerned with possible interruption of LI's performance of its contracts due to possible action by IRS due to the tax liabilities of Virginia-Lincoln. The agreement of October 2, 1952 with IRS was entered into as a result of the RFC position. After execution, a copy of the October 2, 1952 agreement was sent to RFC. Thereafter, certain loans were granted by RFC, and LI assigned its defense contract invoices to RFC. (138, 154, 189-192, 203-205; Exs. 12, 19, E, F, G(1), G(2))

 18. Paragraph (2) of the said agreement dated October 2, 1952 between IRS, Virginia-Lincoln and United, described further in the opinion, was intended to be effective until the defense contracts referred to therein were completed. The defense contracts referred to therein were LI's defense contracts. (138, 154, 191-192, 203, 205; Exs. 12, E, F, G(1), G(2))

 19. Plaintiffs have failed to sustain the burden of proving by a fair preponderance of the credible evidence that the assessments against them are erroneous.

 20. Plaintiffs have failed to sustain the burden of proving by a fair preponderance of the credible evidence that the sums they paid were in fact the taxes due for one employee for each quarter here involved. (70-73, 119)


 Section 3101, Internal Revenue Code of 1954, provides in pertinent part that in addition to other taxes there shall be a tax on the wages of employees. This tax is the Social Security (FICA) Tax. Section 3102 requires the employer to collect the tax imposed by Section 3101 by withholding it from the wages of the employee. Section 3402, Internal Revenue Code of 1954, requires employers making payment of wages to deduct and withhold from such wages a percentage of the wages as income tax withheld at the source. Section 3403 makes the employer liable for the payment of the withheld income tax.

 This suit revolves around the provisions of Section 6672, Internal Revenue Code of 1954. That section provides:

"§ 6672. Failure to collect and pay over tax, or attempt to evade or defeat tax
"Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. No penalty shall be imposed under section 6653 for any offense to which this section is applicable."

 Section 6671(b) defines "person" as follows:

"(b) Person defined. - The term 'person', as used in this subchapter, includes 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."

 Plaintiffs Spivak and Shapiro have paid fifty and sixty dollars respectively to the United States, and now sue for a refund. The government counterclaims for over twenty-seven thousand dollars, the unpaid amount of 100% penalty assessments. *fn3"

 Preliminarily, the government challenges this court's jurisdiction over the subject matter of plaintiffs complaint. Plaintiffs have purported to act pursuant to 28 USC § 1346(a)(1) and Steele v. United States, 280 F.2d 89 (8th Cir. 1960). This case held that the taxes involved herein are "divisible" taxes, and that in a suit such as the instant one the tax due for a single employee for one period might be paid and an action maintained for a refund of just that amount. The government does not question this doctrine, but does question whether plaintiffs have proved the presence of even these jurisdictional facts.

 After a close study of the record, I conclude that I must dismiss plaintiffs' complaint for lack of jurisdiction over the subject matter. While plaintiffs have proved that they paid fifty and sixty dollars, respectively, they have wholly failed to prove the amount of the tax due for one employee for one quarter involved herein. Since proof that plaintiffs have paid the amount of tax due for one employee for one period is absent, plaintiffs have not shown facts necessary to the subject matter jurisdiction of this court, and I hold that their complaint must be dismissed. *fn4"

 The next question becomes, then, whether the court retains subject matter jurisdiction over the counterclaim. It is well settled that, although the complaint be dismissed, jurisdiction over the counterclaim may be retained when it seeks affirmative relief and an independent basis of federal subject matter jurisdiction exists. See Switzer Bros., Inc. v. Chicago Cardboard Co., 252 F.2d 407 (7th Cir. 1958); Isenberg v. Biddle, 75 U.S. App. D.C. 100, 125 F.2d 741 (D.C. Cir. 1941); 3 Moore, Federal Practice, P. 13.15 (2d ed. 1964). The counterclaim here seeks affirmative relief. An independent basis of federal jurisdiction exists. 28 USC §§ 1340, 1345, 1346; 26 USC §§ 7401, 7402, 7403(a). See, e.g., United States v. Harris, 223 F. Supp. 309 (S.D. Fla. 1963), aff'd per curiam 337 F.2d 856 (5th Cir. 1964). I conclude that the court has subject matter jurisdiction over the counterclaim by the government and I proceed to determine that counterclaim on the merits.

 Certain of the questions relating to the liability of Spivak and Shapiro on the counterclaim have been determined in the Findings of Fact. Three ...

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