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United States v. McMullen

decided: May 30, 1975.


Fairchild, Chief Judge, Swygert and Tone, Circuit Judges.

Author: Swygert

SWYGERT, Circuit Judge.

Defendant-appellant Robert G. McMullen was convicted by a jury for failure to comply with the employment tax accounting procedures prescribed by section 7512 of the Internal Revenue Code, 26 U.S.C. § 7512.*fn1 The defendant's failure related to the RETS Electronic Schools of Indiana, Inc. located in Indianapolis and engaged in the teaching of electronics. The taxes covered by the information filed against the defendant related to withheld federal income taxes and Social Security taxes which RETS had deducted from wages paid to its employees.

The evidence showed that RETS in 1972 was not paying its withholding taxes quarterly as required by law and was delinquent. The Internal Revenue Service over a period of months attempted unsuccessfully to contact the defendant. These efforts included a certified warning letter to McMullen dated January 23, 1973 which was returned undelivered. Finally a hand delivered warning letter and a form (outlining the procedures for depositing the employment taxes) were given the defendant on February 15, 1973.

Thereafter McMullen entered into negotiations with the Service to pay the delinquent taxes in weekly installments; however, these negotiations fell through because of the defendant's failure to cooperate. Finally on April 30, 1973 the official notice provided in subsection 7512(b) was hand delivered to the defendant. McMullen received the notice, but refused to sign the required forms claiming he was not an officer of the corporation. On May 16, 1975 the Service again contacted the defendant about his continuing tax failures. On that occasion the defendant admitted that no separate bank account had been established as required by law. Prosecution followed.

The evidence showed that RETS had an accrued employment and Social Security tax liability of some $11,000 and that McMullen, since he ran the business, was the person responsible for the failure to comply with the statutory requirements. The evidence showed that McMullen had in the past been a listed officer of RETS and had at all relevant times been the person in apparent control of the financial and tax affairs of the business. He had conducted all communications between the Internal Revenue Service and RETS concerning delinquent payroll taxes, and had never suggested that any other officer or employee of the corporation be included in these communications. McMullen was one of three authorized signatories for RETS payroll checks, and was the person whose signature appeared on nearly all tax returns of that company. The evidence further indicated that McMullen did the hiring for RETS, set the salaries for its employees, conducted staff meetings, and appointed corporate officers. Frank A. Tesky, who was selected by McMullen to fill the office of president of RETS, testified that he had absolutely no idea why McMullen made him president and that he had no duties as president other than to sign papers when asked to do so by McMullen, and to sign payroll checks when McMullen was unavailable to do so himself.


The defendant's most substantial argument is that the Government failed to prove the essential elements of an offense under section 7512(b) and the enforcement provision, section 7215. His argument has three facets: first, that there was no showing of proper notice as required by section 7512(a)(2); second, that he was never shown to be a "person" within the contemplation of these statutes; and third, that there was insufficient evidence showing that he failed to open a section 7512(b) bank account.

The first of these arguments focuses on the last sentence of section 7512(a), and seeks to construe this sentence as descriptive of the exclusive means of serving notice under the statute when a corporation is involved. An examination of the full text and organization of section 7512(a) belies this construction. The essence of the section 7512(a) notice provision is that the "person who is required to collect, [truthfully] account for, and pay over" be afforded individual service, delivered in hand. This specific requirement is set off from the remainder of the text of section 7512(a) and represents the basic notice requirement for that section. The sentence defendant refers to receives no such emphasis, and it is difficult to believe that it could have been intended to fully supercede the individual notice requirement, since it undercuts that requirement by allowing service in-hand to any one corporate officer to suffice as notice to all other officers and employees of that corporation. Far from invalidating notice delivered directly to the "person responsible," this sentence merely authorizes a form of "substitute service" in the case of formal business and legal entities. Since the defendant received statutory notice by direct, in-hand delivery, this element of the offense was properly established.

In a related argument, the defendant says that in the present factual context sections 7512(b) and 7215 do not apply to individuals, but only to corporations. Support for this contention is purportedly found in the definition of "American employer" at 26 U.S.C. § 3121(h)(5). The short answer to this contention is that the term "employer" is not at issue in this case. The defendant is charged with being a "person who is required to collect, [truthfully] account for, and pay over" employment taxes. The question is not whether McMullen rather than the RETS company was the employer, or even whether RETS was ever shown to be a formal corporation at all; the decisive question is whether McMullen had such a relation to the employing entity as would give him control over its financial affairs. Cf. Adams v. United States, 504 F.2d 73, 75 (7th Cir. 1974); Haffa v. United States, 516 F.2d 931 (7th Cir. 1975). If he had such control, the law charges him with a duty to collect, truthfully account for, and pay over the withholding taxes of the employer entity. There is no question that McMullen had such control over the financial and other affairs of RETS and this element of the charge was therefore also established.

Finally, the defendant contends that the Government never showed a failure to establish a separate withholding tax bank account as required by section 7512(b). He says that the existence of three general accounts in his name precludes liability without proof that none of these accounts had the purpose of serving as such separate account. In quoting the statute and in analyzing the proofs, however, the defendant does not include any reference to the most critical sentence in section 7512(b) on this point:

Any such account shall be designated as a special fund in trust for the United States, payable to the United States by such person as trustee.

The Government's proof showed that none of the three accounts referred to by McMullen was a designated trust account as required by the statute. In the absence of any contrary showing, the jury could ...

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