William W. Adams v. United States of America, and Third Party v.lakeshore Commercial Finance Corporation, Third Party

GRANT, Senior District Judge.

During the second and third quarters of 1970, The Skobis Company (hereinafter “Skobis”) withheld federal income and employment taxes from the wages of its employees. However, the amounts so collected by Skobis during that period were never paid over to the government as required by law. Accordingly, the Commissioner of Internal Revenue, under the authority of Title 26 U.S.C. § 6672 of the Internal Revenue Code of 1954, assessed the statutory penalty equal to 100% of the amount not paid over against William W. Adams, an officer of Skobis, and against Lakeshore Commercial Finance Corporation (hereinafter “Lakeshore”), a creditor of Sko-bis. The penalty was first assessed against Adams in the amount of $44,152.80. After he paid a portion thereof ($405.68), he filed a claim for refund, which was eventually disallowed. He then instituted the present action for a refund of the amount paid and for a determination adjudicating the abatement of the penalties assessed against him. The government, in turn, counterclaimed against Adams for the unpaid balance of the penalty and then filed a third party complaint against Lakeshore alleging that Lakeshore was liable for the payment of the taxes due under § 6672 “as a person who willfully failed to pay over federal income and employment taxes withheld from the wages of employees of the Skobis Company” in the amount of $43,747.12, the difference between the original amount assessed against Adams and the amount which Adams paid. The district court, however, granted Lakeshore’s motion for summary judgment and determined that Lakeshore was not a “person” within the meaning of § 6672. The court held, therefore, that as to Lakeshore there existed no substantial factual issues for trial. This is an appeal from that judgment.

The government (herein the appellant) contends, in essence, that the district court was in error when it concluded that there was no issue of triable fact as to whether Lakeshore (a lender) is a “person” who willfully failed to pay over taxes withheld from the employees of Skobis under § 6672. First of all, appellant contends that a lender (such as Lakeshore) can be a “person” responsible for the debtor’s failure to pay over withheld taxes under § 6672 if the lender exercises substantial control over the critical functions of the debtor corporation. In the present ease, appellant argues that Lakeshore did, in fact, become so involved in the business affairs of Skobis with respect to the disbursal of funds that it was responsible for the failure of Skobis to pay over withheld taxes. This contention is grounded upon the existence of a certain revolving loan agreement between Lakeshore and Sko-bis whereby Lakeshore, during a period of six months, made continuous advances of funds to Skobis (61 in all) which were secured by the latter’s accounts receivable and inventory and which funds were, at one time during the period, allegedly restricted by Lakeshore for payment to the Intex-nal Revenue Service in satisfaction of various amounts that Skobis owed for employee withholding *75taxes. In any event, appellant maintains that the conflicting affidavits of William Adams and Lawrence R. Appel, the president of Lakeshore, as to whether or not Lakeshore had any control over the disbursement of Skobis’ funds undoubtedly presents a substantial fact question as to Lakeshore’s responsibility for the failure of Skobis to pay over withheld taxes to the United States. It is appellant’s position, therefore, that the district court’s action granting summary judgment for Lakeshore should be reversed and remanded for trial since a genuine issue of material fact does exist with respect to Lakeshore’s liability under § 6672.

On the other hand, Lakeshore attacks the sufficiency of the Adams affidavit, calling it vague and conclusory, and contends that the affidavit of Lawrence Ap-pel establishes that Lakeshore was not an officer or employee of Skobis; that no one affiliated with Lakeshore was ever affiliated with Skobis; and that Lakeshore had no control over the financial affairs of Skobis beyond the making of loans pursuant to the agreement. Although Lakeshore admits that, during the period in question, it made 61 advances to Skobis in which certain cheeks were issued jointly to Skobis and the tax authorities, and that one cheek, as a matter of fact, was issued to another secured creditor, nevertheless appellee emphasizes that once it transferred funds to Skobis’ checking account, it had no further control over the disbursal of the funds. Its authority, it is maintained, included only the collection of accounts receivable pursuant to the loan agreement and the determination of the amounts of the advances to Skobis. Beyond this, says appellee, the funds were available for those persons managing the corporate affairs of Skobis to distribute by determining “which creditors were to be paid, and when.”

The thrust of Lakeshore’s position, then, is that since it lacked the necessary control over the funds of Skobis relative to the disbursal of those funds to creditors, the district court correctly held that it was not a person” under § 6672 liable for Skobis’ failure to pay over the taxes withheld from its employees. Therefore, it is argued that the government’s contention that a genuine issue of material fact exists with respect to whether Lakeshore actually controlled the affairs of Skobis is not supported by the record. Accordingly, ap-pellee urges this court to affirm the judgment of the district court granting its motion for summary judgment.

The sole issue presented for our consideration and determination in this appeal, therefore, is whether the district court erred in concluding that there is no issue of triable fact as to whether Lakeshore Commercial Finance Corporation, a lender, is a “person” who is required and who willfully failed to collect, account for, and pay over the withholding taxes of its debtor within the meaning of § 6672 of the Internal Revenue Code of 1954.

The “person” who is responsible for the payment of corporate taxes within the meaning of § 6672 is that individual who has the final word as to what bills should or should not be paid, and when. Turner v. United States, 423 F.2d 448, 449 (9th Cir. 1970). In this context, the word “final” means significant rather than exclusive control over the disbursal of funds. Dudley v. United States, 428 F.2d 1196, 1201 (9th Cir. 1970). Moreover, although the liability for failure to collect, account for, and pay over withheld taxes usually attaches to those high corporate officials who have the power and responsibility within the corporate structure for seeing that taxes withheld from various sources are remitted to the government, Monday v. United States, 421 F.2d 1210, 1214 (7th Cir. 1970), the party subject to the penalty for the corporation’s failure to pay the taxes due is not always or necessarily an official of the delinquent corporation. McCarty v. United States, 437 F.2d 961, 967, 194 Ct.Cl. 43 (1971). The fact of the matter is that the responsibility for nonpayment of the tax includes all those so connected with the *76business as to be responsible for the performance of the act in respect of which the violation occurs. Dudley, supra, 428 F.2d at 1201. Indeed, § 6672 is broad enough to reach an entity which assumes the function of determining whether or not the employer will pay over taxes withheld from its employees. Pacific National Insurance v. United States, 422 F.2d 26, 30 (9th Cir. 1970). It is generally accepted, therefore, that employment is not the test of liability under § 6672. Dunham v. United States, 301 F.Supp. 700, 702 (D.Conn.1969); Regan & Company v. United States, 290 F.Supp. 470, 481 (E.D.N.Y.1968).

In the instant case, appellee places heavy reliance on the case of United States v. Hill, 368 F.2d 617 (5th Cir. 1966), to support its argument of non-liability under § 6672. The appellant argues that this reliance is misplaced and, in any event, asserts that Hill should be interpreted narrowly in light of the later eases dealing with § 6672. In Hill the court held that a bank which loaned funds to a defaulting corporation was not an “employer” subject to the penalty for the non-payment of employee income and F.I.C.A. taxes under § 6672 where the bank did not manage the internal affairs of the corporation, where it was under no duty to file corporate income tax returns, and where it withheld no taxes from the corporation’s employees. Appellee maintains that since the facts of the instant case are clearly in line with those in Hill, the same disposition should result here regarding the question of Lakeshore’s liability for Skobis’ unpaid withholding taxes. The court below was in accord with this viewpoint.

This court is of the opinion, however, in accordance with appellant’s position, that Hill is not dispositive of the present ease. There are two significant reasons for our opinion. In the first place, we are able to distinguish Hill on the issue of the degree of control that the lender in that case had over the debtor corporation and the extent to which Lakeshore could arguably control the financial affairs of Skobis in the instant case. In Hill the court expressly found that the lending institution had no power at all regarding the management and regulation of the debtor corporation’s internal affairs. In the present case, however, the affidavit of William Adams, a former officer of Skobis, indicates that: (1) Lakeshore possessed “final authority” over the application of the earnings of Skobis; (2) this authority was exercised “on a day-to-day basis”; and (3) Lakeshore, at one point, actually “determined to discontinue” the payment of withholding taxes to the government on behalf of Skobis. Because the essential allegations in this affidavit are contested by the Appel affidavit, this court perceives that the issue of whether Lakeshore had control over the disbursal of Skobis’ funds, if any, is not as clearly defined as it was in Hill. Therefore, because this crucial issue is obfuscated in the present case, we deem that Hill is not applicable.

Secondly, in regard to Hill, we note that its rationale has become somewhat eroded as of late in that it has been challenged in other well-reasoned opinions of other courts. Dunham, supra, 301 F.Supp. at 703. Although on the facts before it, the court in Hill appeared to have sufficient reason to justify its finding that the lending institution there was not subject to the penalty under § 6672, we note that the more recent trend seems to favor an expanding view of “persons” liable or responsible for the nonpayment of withholding taxes. In Pacific National, supra, 422 F.2d at 30-31, for example, the court, in finding the surety liable under § 6672, stated that the liability imposed by that section is not restricted to the officers or employees of corporations and members or employees of partnerships. Rather, the court said that there is a “calculated indefiniteness” with respect to the scope of “persons” who may incur liability for the failure to pay over withheld taxes in order that liability might be imposed on those actually responsible for the em*77ployer’s failure to pay over the tax. In White v. United States, 372 F.2d 513, 516, 178 Ct.Cl. 765 (1967), the court articulated this concept in the following manner:

In reaching a determination with respect to the person or persons upon whom to impose responsibility and liability for the failure to pay taxes, the courts tend to disregard the mechanical functions of the various corporate officers and instead emphasize where the ultimate authority for the decision not to pay the tax lies.

Based on the evidence in the instant case, and in particular the conflicting affidavits, we hold that it is not completely clear where that “ultimate authority” to pay the tax is vested and therefore where the ultimate liability for the failure to pay the tax lies. Indeed, Lakeshore, by virtue of its business affiliation with Skobis, may come within the scope of “persons” liable as an entity which had significant control over the disbursal of Skobis’ funds during the period in question. Then again, it may not. In any event, and in keeping with the more recent trend in assessing § 6672 liability, we adhere to our position and decline to give Hill controlling effect in light of the evidence in the case before us.

Finally, and most importantly, we find it interesting to note that summary judgment has been deemed inappropriate in cases where, as here, questions arise concerning whether a lending institution has assumed such control over its debt- or’s business as to become a liable “person” and whether the particular institution has acted willfully in preferring other creditors over the government within the meaning of § 6672, since such questions present material and substantial issues of fact. Dunham, supra, 301 F.Supp. at 702. Since the conflicting affidavits in the present case involve such issues, we now hold that summary judgment was precluded in the court below.

In summary, then, we do not intend in this opinion to in any way indicate whether or not Lakeshore is, in fact, a “person” who is liable under § 6672 for the failure of Skobis to pay over the taxes withheld from its employees during the second and third quarters of 1970. Rather, we merely hold, based on the evidence, that the district court was in error when it determined, in effect, that the instant situation presented no substantial factual issues for trial. On the contrary, the opposing affidavits of William Adams and Lawrence Appel do, in our opinion, present triable issues of fact regarding Lakeshore’s possible liability under § 6672.

Accordingly, the judgment of the district court granting summary judgment in favor of Lakeshore Commercial Finance Corporation is hereby reversed, and the cause is remanded for trial.