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June 14, 1993


The opinion of the court was delivered by: ROBERT P. PATTERSON, JR.


 Plaintiffs Spyros Skouras ("Skouras") and Spyros Skouras, Jr. ("Skouras Jr. ") seek a refund each of $ 1,031.63 for payments each made personally toward the withholding tax obligation of Prudential Lines, Inc. ("PLI"), and an abatement of the 100% penalty, equal to the unpaid balance of the withholding taxes of PLI totalling $ 566,704.94, assessed against them by the Internal Revenue Service ("IRS") pursuant to section 6672 of the Internal Revenue Code, 26 U.S.C. § 6672 ("§ 6672"), for the first quarter of 1986. The Government filed counterclaims against each plaintiff, seeking from each the 100% penalty assessment for failure to pay the employer's portion of federal employee income taxes ("FIT") and Federal Insurance Contribution Taxes ("FICA") withheld from the wages of PLI employees for the first quarter of 1986. The Government now moves for summary judgment pursuant to Rule 56 of the Federal Rules of Civil procedure. For the reasons set forth below, the Government's motion is granted.


 A. The Plaintiffs

 The plaintiffs were officers and members of the Board of Directors and management of PLI, a corporation which operates a fleet of merchant vessels.

 Plaintiff Skouras was PLI's Chief Executive Officer, President and Chairman of PLI's six-member Board of Directors from 1972 and throughout the relevant period. Def.'s 3(g) statement P 1, Exh. A; Skouras Dep. at 4. PLI's corporate by-laws vested in him, as Chief Executive Officer, "general charge of the business and affairs of the Corporation" and provided him with power to "employ and discharge employees and agents of the Corporation." Bylaws, Art. IV, § 3, Bell Decl., Exh. 7. Skouras regularly reviewed monthly, quarterly and annual reports prepared by PLI's Financial Department. Skouras Dep. at 5-9.

 Plaintiff Skouras Jr. was one of PLI's two vice presidents from November 1980 and through the relevant period. In July 1984, Skouras Jr., in his capacity as vice president, also assumed responsibility for supervising PLI's Finance Department, Def.'s 3(g) Statement P 5, as well as PLI's sales, marketing, operations and administration departments. Skouras Jr. Dep. at 15-16. William Fleming, PLI's controller in 1986, directed the Finance Department and reported directly to Skouras Jr.. Def.'s 3(g) Statement P 5; Skouras Jr. Dep. at 15-16.

 PLI maintained approximately 14 corporate checking accounts during the first quarter of 1986. Bell Decl., Exh. 1. With respect to each of PLI's bank accounts, checks under $ 1,000 could be signed by one person and checks for more than $ 1,000 could be signed by two persons. Skouras and Skouras Jr. each were authorized to sign checks on every account maintained by PLI. On most accounts, the only two other people who could sign checks were either Martin Ytuarte, PLI's Executive Vice President, or Zaida Hertan, PLI's Assistant controller. *fn1" Skouras Jr. frequently signed PLI's checks, while Skouras also occasionally signed PLI's checks. Def.'s 3(g) statement P 4.

 PLI had a cash Management Committee consisting of Skouras Jr., Ytuarte, and Nicholas Curcio, PLI's Treasurer. The Cash Management Committee met at least once a week for the purpose of overseeing PLI's finances. At such meetings, Curcio would advise the Committee of PLI's outstanding payables and receivables and the funds available to PLI. Either Skouras Jr. individually or the Cash Management Committee collectively would then determine, based on whether the receivables were actually collected, which payables would be paid. Skouras Jr. Dep. at 19-20; Ytuarte Dep. at 8-10. Checks would be signed at the meeting in accordance with those determinations. Skouras Jr. Dep. at 19.

 B. The ODS Contract

 PLI received income primarily from two sources: (1) payments from customers for transport of cargo and (2) payments of Operating Differential Subsidy ("ODS") made by the United States Maritime Administration ("Marad") on behalf of the United States. The ODS payments were made pursuant to a congressionally mandated 20-year ODS contract dated December 29, 1977 ("ODS Contract"), between PLI and the United States *fn2" under a program created by the Merchant Marine Act of 1936, 46 U.S.C. §§ 1101 -1294 (1975) ("ODS program"), which is intended to help American merchant vessel fleets from the United States compete with foreign fleets. As an operator of an American merchant vessel fleet, PLI was required under the Merchant Marine Act to enter into an ODS contract obligating it to participate in the ODS program in order to maintain its merchant vessel fleet. Pursuant to the ODS contract, Marad made the ODS subsidy payments to PLI to reimburse it for the higher wages and wage related costs of its United States crews compared to those of foreign lines.

 PLI's ODS Contract, as well as ODS contracts into which PLI had entered prior to December 1977, have at all times been with the United States. Marad has administered the ODS program since its inception, including individual subsidy/ODS contracts with various United States merchant marine fleets, and Marad's actions have at all times been required to be in furtherance of the Merchant Marine Act.

 Beginning in 1984, Marad followed the practice of paying ODS reimbursements of over $ 800,000 *fn3" to PLI upon presentation by PLI of a reimbursement voucher whenever a PLI vessel arrived in New York after the completion of a roundtrip voyage to designated travel points in the Mediterranean. Thus, the ODS payments were reimbursements for costs already incurred by PLI with respect to a voyage that had been completed pursuant to the ODS Contract, not advance payment of those expenses. Zok Dep. at 31; Compl. P 30. PLI's operation depended on the prompt payment of ODS reimbursement payments by check or wire transfer each time a PLI vessel completed its roundtrip voyage and arrived in New York Harbor. *fn4"

 Specifically, PLI came to rely on the ODS payments to pay certain of its day-to-day operating expenses, including employees' wages, suppliers and other creditors, as well as the employer's portion of withholding taxes due on PLI employee wages, which the ODS payments to PLI were also designed to reimburse pursuant to section II-20(a)(1) of the ODS Contract. Zok Dep. at 82-83.

 Section II-18 of the ODS Contract provides for the "Withholding and Reduction of Subsidy Payments." Subsection (b) of section II-18 allows the United States to withhold ODS payments while PLI "is in default in any payments due the United States on account of any construction loan or construction agreement, charter party, ship sales mortgage notes, or any other obligation due the United states. The United States shall apply the amount so withheld to the satisfaction of such debt." ODS Contract § II-18(b), Ferrer Decl., Exh. B. Subsection (c) states that the amount of ODS reimbursement payment "shall be reduced under such terms and in such amounts as the United States shall determine for any periods in which any subsidized vessel is laid up." Id. § II-18(c).

 The ODS contract also authorizes the United States to:

examine and audit the books, records, and accounts of [PLI and its affiliates] whenever it may deem it necessary or desirable, including but without limitation an analysis of the surplus and all supporting accounts. [PLI] agrees that any and all auditors, inspectors, attorneys, and other employees designated by the United States, shall have full, free and complete access at all reasonable times to all vessels owned by [PLI] when in port . . . and to all books, records, papers, memoranda or other documents of [PLI] wherever located . . . .

 Id. § II-17(b).

 Although Marad had inspection authority over PLI's finances, there was no representative or current employee of Marad on PLI's Board of Directors, Cash Management Committee, or management. Nor did any representative of Marad have any check signing authority at PLI. Def.'s 3(g) statement P 7.

 Furthermore, except for requiring that PLI's ships sail and return to New York before a subsidy was disbursed, there is no evidence on the record that Marad generally limited the manner in which PLI, as the subsidy recipient, could use the ODS subsidy payments that Marad actually made to it.

 By 1986, PLI operated three vessels which it was authorized to use in its subsidized liner operations: the Lash Atlantico, the Lash Pacifico and the Lash Italia. PLI owned the Lash Italia, and it leased the Lash Atlantico and the Lash Pacifico pursuant to two 25-year bareboat charters. PLI had specifically constructed each vessel pursuant to its obligation under its ODS contract with the United States to replace PLI vessels after the statutory economic life of those vessels. ODS Contract § I-9, Ytuarte Dep., Exh. 3. The vessels had designated trade routes between ports on the East coast of the United States and ports in the Mediterranean Sea. Skouras Jr. Dep. at 91.

 C. PLI's Worsening Financial Condition

 Starting in 1981, James Zok, then director of financial management at Marad, became aware that PLI was experiencing financial difficulty. Zok Dep. at 22. Between February 13, 1981, and November 30, 1982, in order to enable PLI to continue operating, Marad extended twenty-nine working capital loans totalling $ 8.7 million to PLI while continuing to make its usual ODS subsidy payments. Zok Decl., Exhs. 3-31. PLI provided Marad with promissory notes for repayment of each such loan. Id.; Bell Decl., Exh. 24.

 Marad also guaranteed shipbuilding loans by banks to PLI to finance the building of the Lash Atlantico, Lash Italia, and Lash Pacifico. Thus, in the event of PLI's default of these shipbuilding loans, Marad was liable for the balance of the notes. Skouras Jr. Dep., 47-49.

 By 1985, PLI had repaid only two of the original twenty-nine working capital loans from Marad to PLI. Pursuant to section II-18(b) of the ODS contract, Marad, due to PLI's increasing debt to it, exercised a tighter review of PLI's corporate financial matters by exercising its right to receive detailed financial reports and audits and to inspect PLI's finances. In addition, by letter dated July 9, 1985, Zok informed PLI that Marad would begin unilaterally and automatically offsetting $ 40,000 from each ODS payment to PLI, to go toward repayment of the remaining working capital loans. Zok's letter stated that "while [Marad] is mindful of [PLI's] financial condition, recent difficulties in gaining your voluntary compliance with ...

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