The opinion of the court was delivered by: MINER
MEMORANDUM-DECISION and ORDER
Invoking the jurisdiction conferred upon this Court by the provisions of 28 U.S.C. § 1346(a)(1) and § 7422 of the Internal Revenue Code of 1954 ("I.R.C."), plaintiff Hassan Kadah ("Kadah") seeks to recover the 100% penalty assessment he has paid pursuant to I.R.C. § 6672 in discharge of the unsatisfied withholding and Federal Insurance Contributions Act ("FICA") tax liabilities of Custom Technology Corporation ("CTC") for the third and fourth quarters of 1976 and the first quarter of 1977.
The trial was conducted without a jury on May 3rd and 4th, 1984
and no post-trial submissions were received other than a letter from the Government filed on May 14, 1984 and a supplemental trial memorandum filed by plaintiff on May 21, 1984. In response to an inquiry from the Court on September 26, 1984, both sides declined the opportunity to file further post-trial submissions. There follow the findings of fact and conclusions of law mandated by Fed. R. Civ. P. 52(a).
At all times relevant to this action, Kadah owned and operated Omnetics, Inc., located in Syracuse, New York. Omnetics was organized in 1971 and is a corporation engaged in the manufacture of electronic timers and phase controls. CTC was incorporated in 1974 in Santa Clara, California by Daniel Schell, William Robson and Richard Brewer. Its business involved the design and development of integrated circuits and microelectronic chips for other companies. In connection with his operation of Omnetics, Kadah required the services of design firms such as CTC from time to time. Although he had never transacted any business with CTC, Kadah learned about that company through his contacts at Monosil Corporation, another Santa Clara corporation engaged in electronic design work. Through these contacts, it came to Kadah's attention that CTC had cash flow problems and needed capital for expansion. Sometime in July of 1976, Kadah met with Schell and Robson at the CTC premises and reviewed with them the operations and financial needs of their company. Apparently convinced that Omnetics would benefit thereby, Kadah decided to purchase a controlling interest in CTC and to provide it with necessary funds.
By resolution adopted on July 22, 1976 and agreed to in writing on the same date by the plaintiff, CTC authorized the sale of 520,000 of its shares to the plaintiff for the sum of $52,000. According to the resolution, plaintiff was to provide the corporation with "expansion capital" in the amount of $100,000, the sale was subject to verification that the short term liabilities of the company were not in excess of $50,000 and plaintiff was to have the opportunity to review unaudited balance sheets and profit and loss statements.
Issuance of the shares to plaintiff was subject to the approval of the Commissioner of Corporations of the State of California. At the time of the adoption of the resolution, the Board of Directors consisted of Daniel Schell, William Robson, Richard Brewer, Joseph Brenner and Harold Robson.
In an application dated August 11, 1976, CTC sought the approval of the transfer of shares to plaintiff. Government's Exhibit ZZ. The application was signed by Daniel Schell as president and listed the name of plaintiff as Chairman of the Board of Directors of CTC.
Although stock certificates were not delivered to him until some time later, it appears that plaintiff became the owner of his shares after state approval of the transfer sometime in early October of 1976
and that he began to direct the affairs of the company in his capacity as Chairman of the Board on or about October 5, 1976. On that day, plaintiff forwarded an inter-office memo to various employees with the request that they indicate their choice between a profit sharing and a stock option plan. Government's Exhibit Q. He also asked for the cooperation of the employees in the operation of the business of CTC. By letter dated October 19, 1976, plaintiff accepted the resignation of Mr. Schell as president, Government's Exhibit N, and, on October 21, 1976, plaintiff notified all CTC personnel of the Schell resignation, appointed an executive committee to manage operations, and made the following announcement: "As chairman, I shall seek filling the position of a president that [sic] can manage the affairs of CTC in a business manner. Until then I am assuming the responsibility of communicating with the executive committee to conduct the operations of CTC." Government's Exhibit M. On the same date, plaintiff furnished written instructions on operating procedure to the executive committee and advised committee members that "other matters relating to decisions effecting [sic] corporate directions on major committments [sic] and overall policy shall be directed to the attention of the chairman for disposition." Government's Exhibit L. William Robson was designated as chairman of the executive committee and reported to plaintiff.
In addition to his duties as Chairman of the Board, plaintiff assumed the duties of chief executive officer and so notified John Luke, vice president of American Microsystems, Inc., in a letter dated October 19, 1976. Government's Exhibit O. Signing as Chairman of CTC, plaintiff wrote to the president of Computervision Corporation on October 20, 1976 regarding the development of a computer-aided design system for CTC. Government's Exhibit BB. By corporate resolution dated November 12, 1976, and filed with the Bank of America, plaintiff was designated as president of CTC with check signing authority. Although he customarily delegated this authority to others, plaintiff was empowered to sign corporate checks either as chairman or president in several resolutions adopted during his tenure as a stockholder. Plaintiff actually drew checks on CTC accounts on only three occasions during the entire time he was associated with the company. During the period November, 1976 through March, 1977, payments were made by CTC to creditors other than the United States in sums of approximately $50,000 a month.
Sometime in mid-November, 1976, William Robson introduced plaintiff to George Earl Avery at a meeting held at the San Francisco airport. Avery recently had concluded a ten-year discussion centered around the possibility of Avery's employment as president of CTC. About ten days after the airport meeting, Avery flew to Syracuse at plaintiff's request to observe the Omnetics operation. He remained there for two days, and plaintiff told him that he wanted him to understand how the business of Omnetics was complementary to that of CTC. Plaintiff suggested that Avery be paid as a consultant to Omnetics for the purpose of evaluating CTC. In early December, 1976, plaintiff introduced Avery to CTC personnel as a consultant for Omnetics, although CTC ultimately paid the consulting fees. Plaintiff announced that CTC employees should turn to Avery for technical decisions in his absence, and he directed Avery to familiarize himself with the work, developmental activities and personnel at CTC. Avery maintained frequent telephone contact with plaintiff and discussed the status of various jobs with him.
On the occasion of a visit by plaintiff to San Diego in mid-December, 1976, Avery brought to plaintiff's attention the monthly financial reports of CTC showing the unpaid taxes. Plaintiff said he was aware of the situation and would address the problem in the near future. The annual shareholders meeting of CTC was held on December 28, 1976 at the offices of the corporation. Just before the meeting, Avery discussed the financial status of the corporation with plaintiff and expressed his concern with the past due taxes and with the company's failure to meet current payroll taxes. Plaintiff responded that he would take care of the situation and that Avery should be satisfied with plaintiff's directions in the matter. Plainiff chaired the stockholders meeting, and he was elected to the Board of Directors along with Avery and Richard Brewer. Government's Exhibit T. The Board then met and appointed Avery as president, William Robson as vice president, Herbert Green, an attorney, as secretary-treasurer and plaintiff as chairman. Government's Exhibit S. A discussion concerning unpaid federal taxes ensued. Mr. Green was assigned to contact the Internal Revenue Service to develop a schedule for the payment of the taxes. Plaintiff issued a direction that no payments were to be made until such a schedule was defined. Plaintiff was concerned with the corporation's cash flow in general and required that no creditor be paid until the last possible moment.
Following the December meetings, Avery remained in close contact with plaintiff regarding the affairs of the corporation. These contacts occurred by telephone and on the occasions of plaintiff's visits to CTC headquarters. Plaintiff specified which creditors should be paid and which creditors should not be paid. He was concerned not only with the cash flow situation but also with the progress of each job in which CTC was involved. A number of Omnetics employees were placed on the CTC payroll at plaintiff's direction while they performed work for Omnetics. Avery wanted to bill Omnetics for overhead plus a normal profit margin, but plaintiff advised that only the overhead would be paid. When Avery protested that Omnetics was paying only fifty percent of overhead, plaintiff said that he owned the company and would do as he pleased. Plaintiff involved himself in negotiating contracts for CTC and in directing the work relating to those contracts.Avery continued to express his concern about the unpaid taxes and became increasingly anxious after the visit of an IRS representative in mid-January of 1977. Plaintiff again directed him not to make any payments until a payment schedule was negotiated by Herbert Green. Avery was unable to locate Green until mid-February of 1977 and then pressed him to resolve the tax issue. On March 4, 1977, Green wrote to plaintiff regarding the fiscal problems of CTC requiring plaintiff's "immediate attention." Among the items listed in the letter was the amount then due the Internal Revenue Service for 1976 payroll taxes -- $38,877.50. Government's Exhibit G.
Troubled by the possibility of personal liability for the payroll taxes, Avery called plaintiff in Syracuse on March 11 to inquire about the mounting tax arrears. Plaintiff said that he would handle the matter on his next visit to California. Avery advised that he would resign if more specific information were not forthcoming and plaintiff refused to make any commitment at that time. Accordingly, by letter dated the same day, Avery tendered his resignation to the Board of Directors, Government's Exhibit F, with copies to plaintiff and Herbert Green.
The resignation of William W. Robson as vice president of CTC was also tendered on March 11, 1977. Government's Exhibit E. Among the reasons given by Robson for his resignation was CTC's "inability to pay outstanding debts, including, but not limited to, back taxes to both Federal and State Governments. . . ." The first item in the final status report addressed to plaintiff by George Avery relative to various matters pending at CTC was the following: "1. A meeting scheduled with Mrs. Freed of the I.R.S. for last Thursday was postponed and should be re-established this week. Herb Green and I were to meet with her to discuss current status of CTC's past due obligations." Government's Exhibit D.
On March 15, 1977, a special meeting of the Board of Directors was held at the corporate headquarters at Santa Clara, California. Plaintiff was present, along with Richard Brewer and Herbert Green, the corporate secretary. The resignations of Avery and Robson were accepted, Brewer was appointed president of the corporation, and necessary changes were directed regarding authorized signatories on the CTC bank accounts. Government's Exhibit V. Negotiations for the sale of plaintiff's interest in CTC to Brewer followed the Board meeting and culminated, on March 21, 1977, in an agreement for the sale of shares. Government's Exhibit W. In accordance with the terms of the agreement, the following events took place on March 21: Plaintiff transferred his 520,000 shares to Brewer and Brewer executed a promissory note, payable in one year, in the amount of $52,000 in payment therefor; and a promissory note, in the sum of $30,500, representing the CTC indebtedness to plaintiff, was executed by CTC to plaintiff and guaranteed by Brewer, payable in one year with interest at nine percent.Government's Exhibit II. The agreement of sale required plaintiff to lend to Brewer or Brewer's designee the sum of $20,000, within ninety days after execution of the agreement, upon the receipt of promissory notes personally executed by Brewer. The notes representing this loan were to bear interest at nine percent per annum, with payment to be made within one year after execution. In the agreement, Brewer represented that he was ...