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June 27, 1968

Regan & Company, Inc. (formerly C. W. Regan, Inc.), Plaintiff,
United States of America, Defendant. United States of America, Plaintiff, v. Charles W. Weisman, Defendant

Rosling, District Judge.

The opinion of the court was delivered by: ROSLING

ROSLING, District Judge.

In the first of the two cases consolidated for trial the plaintiff, Regan & Company, Inc., ("Regan"), sues to reclaim from the government taxes and interest assessed and collected pursuant to Section 6672 of the Internal Revenue Code of 1954, ("IRC 1954"), as in force at the time (26 U.S.C. 1964 Ed., Sec. 6672). *fn1" The relevant taxes are withholding and social security taxes *fn2" for the second and third quarters of 1959 referable to the wages earned by employees of Vince's Concrete Company, Inc. ("Vince"). The sum which is sought to be recovered by Regan is $14,361.* ($14,318. in taxes and $42. in accrued interest). This sum was paid on July 23, 1962, on which date Regan also filed a claim for a refund with the District Director.

 The second of the consolidated actions is brought by the government against Charles W. Weisman to reduce an assessment of like origin against him to judgment upon an allegation of liability generated under the same Code provisions.

 The issues *fn3" presented to the court for its resolution are whether the Regan company and Weisman each was a "person" *fn4" required to collect, truthfully account for, and pay over the withholding and social security taxes with regard to Vince for the quarters involved, and whether as such persons they willfully failed in fulfilling the several obligations thus enjoined upon them.

 The facts hereinafter reported as found represent either those facts stipulated by the parties and adopted in their pretrial order or as to which there is no substantial dispute in the evidence, and when the respective versions are in conflict or disparate inferences may be drawn, the version or inferences sponsored by the government *fn5" have been adopted.

 The Regan corporation was de facto a joint venture comprised of Nager Electric Company (the "Nager") and Weisman Construction Company, Inc., (the "Weisman Company"). The agreement which gave birth to the Regan was entered into July 10, 1958. Regan was formed to execute and perform a prime contract with the United States Army for the construction of a radar warning network at Lockport, New York. Defendant Weisman was president of the Weisman Company and owner, together with his wife, of all its outstanding stock. He became president of the Regan company at its inception. The precise date of his resignation from that office is uncertain. He testified it occurred about June 1959, but the circumstance is not established by credible proof. The government's legal position in this suit, however, is unaffected by such uncertainty. For irrespective of his official designation Weisman continued to function in fact as managerial head of Regan with duties and authority undiminished throughout the project until full performance of the contract, a point reached late in 1959 or early 1960. In part his presence at the Lockport site was motivated by a desire to protect his own financial interest in the Weisman company whose profits from Regan were drawn in the form of the salary he personally received from Regan.

 Weisman was in over-all charge of the radar project, with complete responsibility for running the job. He negotiated all subcontracts, coordinated the efforts of subcontractors, made provision for supplies and dealt with vendors, planned the construction work and functioned as business manager.

 On September 3, 1958, the Regan company, *fn6" represented by Weisman as negotiator, entered into a subcontract with the Vince company for performance by Vince of concrete work at Lockport. Representing Vince was its president D'Innocenzo. Thereafter the subcontract was administered for the joint venture by Weisman with the collaboration of his job superintendent, Jack Prahl, who in all his conduct in the Lockport operation acted as agent for the Regan. Vince's contract with Regan called for it to set the forms in place and finish the concrete. Weisman told D'Innocenzo to do his job and assured him the necessary monies would be made available to him. Financial matters were not to be D'Innocenzo's concern.

 In the initial stages of its performance the Vince company maintained two bank accounts with the Manufacturers and Traders Trust Company in Niagara Falls. One was a general account and the other a payroll account. D'Innocenzo alone was authorized to draw checks on these accounts. At first the Regan company would make payment to the Vince by check. Later the procedure was changed whereby funds would be made available to the subcontractor by means of bank transfers from the Regan company account in New York City to Vince's Niagara Falls accounts. The amount of money to be transmitted from Regan in New York to the Vince Niagara Falls bank accounts was based on Weisman's requests. Remittances were made weekly. Using the Vince accounts, D'Innocenzo paid the Vince bills, including those for taxes payable to the Internal Revenue Service.

 From October 14, 1958, through November 3rd of the same year the Regan had made direct check payments to the Vince totalling $26,731. An additional payment of $7,135 was made on November 3, 1958, by Regan to a materialman for Vince's account.

 Eleven bank transfers of funds from the Regan New York City account to the Vince Niagara Falls accounts totalling $74,000 were made during the period between November 13, 1958, and March 9, 1959. Shortly after the latter date in consequence of a conversation between Weisman and D'Innocenzo a change in the financial procedures of the two companies, shortly to be noted, was effected. The circumstances which prompted Regan's action were testified to by Weisman with a vagueness which left the Court with the distinct impression that it was Regan's purpose at the time to take an ambiguous position so that future action by Regan might not be encumbered by a prior "hard" decision.

 Weisman felt, so he testified, that Vince had at that point, namely in March of 1959, been overpaid by Regan relative to the dollar value of the concreting completed. The excess he estimated as amounting to between twelve and fifteen thousand dollars. Weisman professed to believe that the subcontractor had from the sums received by it from Regan been using a part to pay expenses and bills on jobs other than the one covered by the subcontract between the parties. The proof on the subject was less than complete. The record as made, however, appears to favor the Regan-Weisman claim, but even if accepted by the Court as appropriate for a finding, as motivating Regan's closer involvement in Vince's affairs than had theretofore been the case, it does not follow that Regan is to be exonerated from § 6672 liability based on its own conduct in the handling of Vince's funds.

 Weisman in the March 1959 discussions with D'Innocenzo directed him to close out the two Niagara Falls Vince accounts. As a consequence of the discussion Regan on March 16, 1958, caused a new account to be opened in Vince's corporate name at the Lockport branch of the Manufacturers bank. With respect to such account Weisman and Prahl were the only persons authorized to sign. A single signature sufficed.

 D'Innocenzo, as secretary of Vince, executed the customary attestation forms for filing with the bank. In practice it was Prahl alone who signed the Vince checks thereafter drawn. The Regan company following the closing of the two Vince Niagara accounts and the opening of the Vince Lockport account continued to make bank transfers to Vince, but by directing them to the Vince Lockport account for deposit controlled the earmarking of their disposition. In all there were twenty-six such transfers, the first being made on March 13, 1959, and the last on August 28, 1959. The transfers aggregated $140,000.

 When the change in financial procedure had been effected with no resistance on D'Innocenzo's part, D'Innocenzo and the Vince bookkeeper were removed from that corporation's payroll by the simple expedient of not earmarking any funds for salary payment to them from the Lockport account. The natural and not unanticipated consequence was that D'Innocenzo took on some minor jobs, presumably to keep body and soul together. What is clear from the record as a whole is that after March 16th there was not the slightest likelihood that the Vince company would be able to pay withholding and social security taxes on the wages of its Lockport laborers unless Weisman or Prahl drew a Vince company check on the Lockport corporate bank account and deposited Regan money to meet it.

 It is the Regan-Weisman contention that they could without becoming liable under Section 6672 oust the Vince financial management in the fashion they did, crawl into the Vince corporate shell, utilize the corporate facilities and labor to complete the Regan prime contract with the defense department, and in the meantime provide only such funds for labor and other charges as would keep Vince going, without making provision for the accruing withholding and social security tax obligations. The time lag pending the institution of government enforcement procedures would enable the intruding Regan to utilize the corporate carapace and facilities for Regan's purposes before Vince was put out of business by such enforcement. Now when called upon to make good these tax claims that surely were integral to Vince's performance as an arm of Regan, Regan seeks to insulate itself from Vince's tax liability by insisting upon the independent existence of each of the corporate entities.

 Regan's intrusion into Vince's affairs with Weisman as its agent plenipotentiary has been too deep and its involvement too gross to permit of escape from section 6672 liability. Let us consider in this connection the incidents of such involvement.

 After March of 1959, D'Innocenzo ceased to appear regularly on the job. Vince's superintendent attended as in the past, but it was Prahl who gave the orders for work to be done, including extras not specifically covered by the subcontract.

 The laborers hired by Vince continued in their employment, and the Vince job clerk would as he had previously done prepare the payroll sheets. On the basis of these records Regan would provide a round sum sufficient to cover the take-home pay of these workers. The money remitted by Regan to meet the Vince payrolls would be deposited in Vince's Lockport bank account. Against the balance in the account Prahl would draw a check and deliver it to D'Innocenzo. Mary Prahl, wife of the Regan superintendent, would thereupon accompany D'Innocenzo to the bank where the payroll check would be cashed. She would then help him stuff the individual pay envelopes of the workers with their net wages. It does not appear to have been part of her practice, however, to be present at the actual distribution of the wages to the men.

 The payment of Vince's bills for materials and of charges other than for labor in the manner just described was similarly funnelled through the Regan controlled Lockport bank account of Vince with Vince's checks being issued to only those creditors whom the Regan-sponsored signatories, Weisman and Prahl, approved and nominated for payment. During this period Vince continued to maintain the requisite records reflecting the withheld income and social security taxes accruing in respect of the wages of the workers who were completing its subcontract with Regan. Vince also prepared the necessary schedules, including the form 941 quarterly returns for the second and third quarters of 1959. These were submitted by D'Innocenzo to Regan for payment. Weisman, however, refused to authorize such payment. His refusal was based upon his determination that Vince had been overpaid for its partial performance calculated to date under the subcontract. And so the tax liabilities remained unsatisfied. *fn7" Realistically, under the procedure established and enforced by Regan no other source for payment of these obligations was available to Vince.

 Regan finally in September 1959 "defaulted" Vince and undertook as its direct operation the completion of the work called for by the Vince subcontract. *fn8"

 Weisman makes a showing which the court accepts that by September 1959 the total of all forms of payment by Regan to or for the account of Vince exceeded by almost $50,000 the value of the concrete work in place.

 The subcontract was explicit in its requirement obligating Vince to pay, among other liabilities the taxes for the nonpayment of which the assessments sub jud. were filed. But the parties may not by the contract between them avoid the section 6672 liability to which their conduct subjects them.


 Pacific National Insurance Company v. United States, 270 F. Supp. 165 (N.D. Cal. 1967), presents a circumstantial picture approximating that here under consideration. The case provides the most recent exposition of the legal principles to which the courts resort in determining whether a section 6672 liability such as is here asserted by the government exists. The "person" liable under that provision, the Pacific opinion points out, "is not limited to the employer * * *. Rather, it is the one whose discretion is exercised in finally deciding which creditors are to be paid and when." (In Pacific the "person" was the plaintiff surety which had "assumed absolute** control of all of the funds available to the contractor" in respect of whose employees the unpaid withholding and FICA taxes had accrued.)

 Pacific cites in support of its thesis White v. United States, 178 Ct. Cl. 765, 372 F.2d 513 (Ct. Cl. 1967), from which it quotes the following (id. p. 516):


"* * * 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.' To that effect, see, e.g., United States v. Graham, [309 F.2d 210 (1962)] supra; Bloom v. United States, 272 F.2d 215 (9th Cir. 1959), cert. denied, 363 U.S. 803, 80 S. Ct. 1236, 4 L. Ed. 2d 1146 * * *."

 The Regan-Weisman activities which the government argues subject them to section 6672 liability are to be considered and interpreted in light of what their specific objectives were and how they set about achieving those objectives. It is fairly inferable from the evidence adduced that their primary objective was the completion of the subcontracted segment of the Regan prime contract by the use of a competent labor force immediately available which, however, could be utilized by Regan at minimum cost. Vince had such competent labor force on the job.

 Corollary to such objective was an answer to the question as to how to circumscribe Regan's involvement in Vince's affairs while at the same time keeping that force working at such minimum cost. Manifestly, if the men were not paid they would not work. They, therefore, had to be given their takehome wage. Yet, if Regan were to pay each man his earnings directly, the relationship between Regan and the men might "jell" into the legal status of employer and employee, with a resultant direct obligation on Regan as "employer" to comply with an employer's obligation to withhold and pay under 1954 Code Section 3102, (Social Security), and Sections 3402 and 3403 (Withholding Tax).

 If, on the other hand, Regan were merely to advance to Vince sufficient moneys for it to meet its net labor costs and other bills, the prompt payment of which could not be avoided if the job were to go forward Regan might under a well-recognized principle *fn9" be held to be no more than a lender of moneys to Vince, with no obligation to lend a sum in excess of what it chose to provide, nor to provide funds for purposes other than those it designated as a condition of the advances made. That Vince, without significant resources other than those provided by Regan, would inevitably become delinquent in the payment of the withholding taxes that accrued while Regan's concrete work went forward was obvious from the outset. Regan must have been aware of that immediately, or studiously refrained from inquiry so as not to learn that which to a business man of Weisman's astuteness surely would at once have been apparent.

 Regan argues that it was not until Code Section 3505, *fn10" "Liability of third parties paying or providing for wages", added Pub. L. 89-719, Title 1, § 105(a), Nov. 2, 1966, 80 Stat. 1138, became effective on January 1, 1967, with respect to wages paid on or after such effective date, that one who stood in the Regan-Weisman relationship to the Vince company could be held liable, although technically not an employer or a section 3401(d)(1) quasi-employer, for withholding and social security taxes accruing. Such argument appears to contemplate acceptance of the thesis that section 6672 does no more than reiterate and duplicate what section 3102 declares concerning employer liability for Social Security deductions and sections 3402 and 3403 enjoin respecting income tax withholdings.

 We have, however, in such successive enactments no meticulous articulation of segregated provisions, each intended to operate only within its own sharply defined grouping of taxable entities in an appropriate legal relationship of persons and events. Instead there is a not unusual measure of overlapping of the several provisions as Congress sought to plug the loopholes against the limitless ingenuity of those whose metier it is to search for crevices between mortise and tenon in the infinitely complex definition and imposition of obligations in the Revenue Code. Congress' purpose, however, is never in any doubt. It was to get into the public treasury that part of a worker's wage that has been earned by him, but has been withheld by another, to offset the credit which the government stands committed to give the worker irrespective of whether the sums withheld were in fact remitted by the withholder to the government.

 Manifestly such a system cannot function unless the law, initially statute, but in the course of time accreted by decisional gloss, were to focus upon some one person, broadly defined, and, when necessary, judicially determined ad hoc, as responsible for withholding and remittance to the fisc.

 Thus section 3401(d)(1) designates as the responsible person the one for whom an individual performs services as an employee except in the situation where the person whom the individual serves does not have control of the payment of wages for such services. In such latter event the responsible person means the person having control of the payment of such wages. Illustrative of the operation of such proviso is the imposition upon a trustee in bankruptcy who pays preferred wage claims for services rendered by the claimants to the bankrupt, of the status of an employer. The trustee as surrogate for the employer is required to withhold and remit with respect to the "wages" he has paid for services rendered to the bankrupt. See United States v. Curtis, 178 F.2d 268 (6th Cir. 1949); United States v. Fogarty, 164 F.2d 26, 174 A.L.R. 1284 (8th Cir. 1947). See also Federal Tax Regulations, section 31.3401(d)-1(f) (1968).

 Section 3401 of the 1954 Code is derived from similar provisions in section 1621 of the 1939 Code, subdivision (d)(1), of the latter section being reenacted substantially without change. Section 6672 of the 1954 Code, however, deriving from a number of 1939 Code provisions, shows no such continuity of scope or effect. Whereas section 6672 functions throughout the income tax title, the source provisions of the 1939 Code are specific and restricted in their application to narrowly defined areas. Thus section 1718 of the earlier code provides a section 6672 type penalty with respect to 1939 Code Chapter 10 "Admissions and Dues" imposts; section 1821 (a)(3) applies only to Chapter 11 which provides for levies on "Documents, Other Instruments, and Playing Cards"; 1939 Code section 2557(b)(4) fixes liability for payment of the chapter 23 tax on "Narcotics", subchapter A "Opium and Coca Leaves"; and section 2707(a), the fourth and last of the source provisions, deals with the tax levied under the single section 2700 upon pistols and revolvers.

 It is to be noted that in none of these earlier provisions is the relationship of employer and employee declared to be relevant to the duty to collect the tax, pay it, keep records, file returns or remit. When section 6672 was enacted, its sweep was deliberately widened and generalized so that it embraced every one of the infinite variety of taxable situations encompassed by Title 26 in which some individual or entity was placed under a duty to collect and remit a tax to the government. The concept of withholding, which represents a post-1913 accession to the methodology of tax collection, is by now a well recognized and proper tool for insuring that others than the taxpayer who retain the tax accruing on his gross wage turn it in to the Treasury. It is inappropriate for this Court to strain at gnats to effectuate a scheme whereby the one who in a substantial sense has received the benefit of all the services of the worker, can escape liability for the part to be withheld by providing only the residue of the wage which is demanded by the worker for his continuing toil.

 Section 6672 may well be read so that it is in part duplicative of section 3401(d) in situations involving employers in the accepted sense and "employers" who are held to be such only by virtue of the exception in section 3401(d)(1). But the reach of section 6672 is of a far broader scope, encompassing in most general language the activities of one whose involvement in the taxpayer's affairs is such that he can and does thwart the payment out of the taxpayer's funds into the Treasury in satisfaction of its preferred claim by disposing of those funds for the other purposes not so preferred. The Regan-Weisman absorption of the Vince company's functions falls fairly within the ambit of what section 6672 was intended to cover, though it may lie beyond that which sections 3102, 3402 and 3403 purport to regulate.

 Section 3505 ploughs new ground. Theretofore under decisional law it had been legally possible for a bank or a surety to maintain a circumspect position outside the business structure of a shaky employer and to transfuse funds into the enterprise which enabled it to meet its payroll, but made default as to the withholding taxes inevitable by providing no funds to which the employer might resort to satisfy those obligations. The bank or surety would thereby gain time for the employer to reduce or liquidate its new advances, expenditures and outstanding arrears to them from progress payments earned in part by the current labors of its workforce and received pending the employer's inevitable collapse; and when that collapse occurred it would be found that the bankrupt employer, now delinquent as to his withholding taxes and without resources, had operated for the private advantage of the lender bank or surety confronting liability under a completion bond with the government's unpaid withholdings as the insolvent's working capital.

 Under case law (see infra p. 478, fn. 9) banks and sureties were held not liable for the unpaid withholdings provided they had maintained a sufficient aloofness, real or contrived, in their contacts with the day-to-day activities of the employer despite the patent fact that they knew that improvement in their position was a function of the worsening of the government's vis-a-vis the employer. Section 3505 sought to plug that tax loophole, but its inapplicability by reason of its effective date does not save Regan-Weisman from liability under section 6672. Regan sought to steer a middle course in which it would assume effective control of the Vince company for Regan's immediate advantage, namely, the completion of its government contract in respect of the portion sublet to Vince, and to insure the application of the funds that such completion was generating for Vince to only such obligations of Vince as Regan designated. These obligations did not include the subject tax items.

 The performance by Vince between March of 1959 and the September "default" saw the cost of completion deficit grow from an initial twelve or fifteen thousand dollars at the takeover to $50,000 at its conclusion. During the same period the utilization by Regan of the services of the Vince workers earned for them the wages, the payment of which in turn obligated the Vince company to withhold the taxes now in litigation, and exposed D'Innocenzo to section 6672 liability in respect of them. Someone had to qualify as obligated under that provision for the role of one required "to collect, truthfully account for, and pay over" these taxes, and if the Regan-Weisman team were successful in a disclaimer, only D'Innocenzo would remain as an eligible candidate for the dubious distinction.

 D'Innocenzo, it is manifest, had nothing to gain and much to lose if he were to turn over his company for Regan's sole aggrandizement without receiving assurance from Weisman that the withholding would be taken care of by Regan. It would have been wiser otherwise for him to discharge his workers than to incur an increasing liability without current benefit or prospect of any. D'Innocenzo says he received such assurance, and it is found by the Court that by explicit promise or clear implication Regan committed itself to meet the tax indebtedness in question.

 It is the Court's further view that the Weisman vagueness in his testimony as earlier adverted to concerning the circumstantial context of the March 1959 expropriation by Regan coupled with D'Innocenzo's ready acceptance of his ouster, harmonizes with the absence of any writing defining the relationship of the parties, individual and corporate, affected by the transition. They support the conclusion that D'Innocenzo was being cajoled by the assurances he claims Weisman gave him concerning the withholdings, past and future, with Regan meanwhile contriving to keep the situation flexible and malleable against the day when that company might in some setting or litigation arising out of its post-takeover activities be called upon to declare precisely what its status had been vis-a-vis the Vince.

 In an assessment of the relationship between Regan and Vince during the critical period any equivocal conduct on Regan's part must be considered by the Court for its bearing upon the burden of proof which weighs upon Regan and Weisman, or of carrying it forward. Nor is that burden any lighter as we consider Justice Holmes' memorable aphorism that "[men] must turn square corners when they deal with the Government." (Rock Island, A. & L.R. Co. v. United States, 254 U.S. 141, 143, 41 S. Ct. 55, 56, 65 L. Ed. 188 (1920).)

 It is true that Regan and Weisman were not "employers" of Vince's employees in any technical sense, but employment is not the touchstone of liability under section 6672. It suffices for liability to attach under that provision that the summation of the activities of a person charged with the duty under the provision may constitute a willful attempt "in any manner to evade or defeat any such tax or the payment thereof." It is consonant with the intent of the provision that one be held liable thereunder who in his self-interest and clothed with the taxpayer's mantle of authority frustrates payment by the exercise of a substantial control of the employer. Regan and Weisman burrowed too deeply in Vince's affairs to escape such liability. They warmed themselves too closely to the fire to avoid being singed. See Pacific National Insurance Co. v. United States, supra; White v. United States, 178 Ct. Cl. 765, 372 F.2d 513, 516 (Ct. Cl. 1967); Melillo v. United States, 244 F. Supp. 323 (E.D.N.Y. 1965).

 The willfulness which section 6672 stipulates as a condition precedent for imposition of its sanctions is here present. See Spivak v. United States, 370 F.2d 612 (2d Cir.), cert. denied, 387 U.S. 908, 18 L. Ed. 2d 625, 87 S. Ct. 1690 (1967); Bloom v. United States, 272 F.2d 215 (9th Cir. 1959), cert. denied, 363 U.S. 803, 4 L. Ed. 2d 1146, 80 S. Ct. 1236 (1960); White v. United States, supra. Regan and Weisman as "persons," responsible for collection and payment of the taxes voluntarily, consciously, and intentionally preferred other creditors of Vince over the United States. That suffices to establish the element of willfulness.

 The complaint of Regan against the United States is accordingly dismissed on the merits. Judgment for the sums assessed, to wit, $14,318.60 with interest from July 15, 1960, is awarded to the United States against defendant Weisman. Inasmuch, however, as the sums assessed have already been paid and satisfied by Regan as assessee, the judgment awarded against Weisman is conditional only, and such payment shall inure to the benefit of Weisman in the event that the judgment denying recovery to Regan shall become final upon any appeal taken, or, if no appeal is taken, upon expiration of the time for the taking of an appeal.

 Submit proposed judgment to the Court to be settled upon notice.

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