The opinion of the court was delivered by: Aspen, District Judge:
MEMORANDUM OPINION AND ORDER
This is a consolidation of separate tax refund suits brought by
Martin H. Roefer ("Roefer") and John H. Platt, Jr. ("Platt"). The
United States has filed counterclaims against both Roefer and
Platt for the payment of additional amounts. This case arises due
to the failure of Dot Engravers, Inc. ("Dot") to pay federal
employment taxes for calendar quarters ending September 30, 1975,
and December 31, 1975. At all relevant times, Platt was the
president and a 30 percent shareholder of Dot and Roefer was
chairman of the Dot board of directors and a 70 percent
shareholder. This matter is currently before the Court on
plaintiffs' motions for summary judgment with respect both to
their claims and the government's counterclaims.
The following facts are undisputed. Dot was an Illinois
corporation engaged in the graphics arts business. In 1972, Dot
borrowed large sums of money from Associates Capital, Inc.
("Associates"), an Indiana finance company. Associates required
extensive collateral for the loan, including all of Dot's
accounts receivable. As a consequence of this accounts receivable
and financing agreement, employees of Dot were in regular contact
with representatives of Associates to make sure that funds were
available to cover the checks written by Dot.
In mid-1974, Dot negotiated with Color Associates, ("Color"),
a Missouri graphics company, for the sale of its stock.
Representatives of Associates met with Aron Katzman ("Katzman"),
who was then vice-president of Color. Katzman told Associates
that Color was interested in purchasing Dot and that Color
desired Associates to continue the financing after the purchase.
Dot then entered into two contracts with Color, both dated
September 15, 1974. The first was a Loan and Security Agreement
wherein Color loaned Dot $50,000. One of the conditions of the
loan was that Dot enter into an exclusive management agreement
with a manager approved by Color, "pursuant to which the manager
will have complete control of and management responsibilities for
[Dot's] business, including complete control over [Dot's] bank
accounts, business records and responsibility for supervision of
[Dot's] sales and payment of salaries, commissions, and business
expenses." As additional consideration for the loan, Platt and
Roefer granted to Color an exclusive one-year option to purchase
all of their outstanding capital stock for the sum of $10,000.
The second contract entered into between Dot and Color and
dated September 15, 1974, was a Management Agreement. Under the
terms of that Agreement, Color was to serve as the "manager"
referred to in the Loan Agreement described above. As manager,
Color was "to operate Dot's business" for three years or until
the loan was repaid. Specifically, the Management Agreement
provided that Color was to "provide sole and exclusive
supervision of the operation of the business." In addition to a
myriad of other responsibilities delegated to Color under the
contract,*fn1 paragraph 3(e) of the
Management Agreement provided Color with sole responsibility for
payment of all wage taxes under the following provisions:
(e) Manager [Color] shall have exclusive
responsibility for issuing checks in payment for all
wages of Dot's employees, as well as the payment of
all federal and state withholding taxes attributable
to said wages. . . .
Furthermore, the Agreement stated that Color was to have "full
power and authority to do all things necessary or reasonably
proper in Manager's [Color's] sole judgment to bring about the
efficient operation of the business and its maintenance and
operation. . . ."
The Management Agreement further provided that Color was to
take exclusive possession of all Dot's bank accounts. Withdrawals
from these accounts to cover all operating expenses were to be
made by Color in its sole discretion.*fn2 The record indicates,
however, that Dot's bank accounts never were transferred to
Color. Color also was responsible for maintaining the books and
records of Dot pertaining to the operation of the business.*fn3
Thus, as of September 15, 1974, Dot contractually turned full
management responsibility over to Color. Color exercised its
responsibilities under the Management Agreement primarily through
Aron Katzman, although other representatives of Color also made
occasional visits to Dot. From September 15, 1975, until the end
of October, 1975, Katzman, on behalf of Color, basically directed
the affairs of Dot. For the first year of the arrangement,
Katzman spent several days per week in Dot's offices, though
during August, September and October, 1975, Katzman's appearances
in Dot's offices were somewhat curtailed. During this period, any
decisions made with respect to money had to be approved by
Katzman or Color. The only constraint that Katzman
faced as he directed Dot's business was provided by Associates,
not by Platt, Roefer, or any of the Dot employees.*fn4 Indeed,
from September 15, 1974, until the end of October, 1975, Platt
and Roefer rarely were consulted by Katzman with respect to
management of Dot, although Katzman frequently discussed
management of Dot with representatives of Associates. Associates
did not deal with Roefer or Platt or look to them to make any
decisions after the execution of the Management Agreement.
From the time Color assumed responsibility for managing Dot's
business, it required that Dot's corporate tax returns be
prepared by a firm of accountants which also serviced Color.
Although Dot's federal employment tax returns were prepared by
Dot's bookkeeper, Mary Andres, Katzman reviewed the returns.
Katzman did not discuss the returns with Platt or Roefer.
During the calendar quarter ending September 30, 1975, Dot
failed to pay its federal employment taxes. This decision was
made by Katzman after discussions with representatives of
Associates and the owners of Color. Katzman felt that he had no
alternative but to refrain from paying the taxes because he
believed that Associates would not have allowed him to put the
checks through to the government. Katzman did not consult with
Platt or Roefer about his decision regarding the non-payment of
When Color's one-year option to purchase the stock of Dot was
about to expire on September 15, 1975, Color requested and
received a one-month extension, which was extended once again
until October 25, 1975. Throughout this period, Platt and Roefer
believed that Color intended to exercise its option to purchase
Dot. Color, however, did not exercise its option.
In fact, when the last option period expired, Color abandoned
its interest in Dot. Although the Management Agreement
technically remained in full force, by the end of October, 1975,
Katzman stopped coming to Dot, and Color ceased its active role
in the management of Dot. With Color no longer involved in Dot's
management, Platt and Roefer, along with Mary Andres and David
Roefer performed the functions that Color had ...