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UNITED STATES v. ASSOCIATES COMMERCIAL CORP.

September 30, 1982

UNITED STATES OF AMERICA, PLAINTIFF,
v.
ASSOCIATES COMMERCIAL CORPORATION, FORMERLY KNOWN AS ASSOCIATES CAPITAL, INC., DEFENDANT.



The opinion of the court was delivered by: Will, District Judge.

MEMORANDUM OPINION

I. BACKGROUND FACTS

In 1972, defendant, Associates Capital Corporation (hereinafter "Associates"), first began advancing money to Dot Engravers, Inc. (hereinafter "Dot") pursuant to a continuing accounts receivable financing agreement. Under that arrangement Associates advanced Dot cash equal to a fixed percentage of the face amount of Dot's accounts receivables, taking in return such receivables as collateral.

Having encountered severe financial difficulty by mid-1974, Dot, on September 14, 1974, entered into two contracts with Color Associates (hereinafter "Color"), a company which, like Dot, was engaged in the graphic arts business. Under these contracts Color took over complete control of the management of Dot and also loaned Dot $50,000. Pursuant to the management agreement Color basically directed the affairs of Dot until the end of October 1974, when, despite the fact that the management agreement technically remained in force, Color ceased its active role in the management of Dot.

Following Color's departure, Dot's former management resumed managing the operations of Dot. Associates subsequently stopped advancing the funds to Dot, which ceased operations and filed a voluntary petition in bankruptcy under Title 11 of the United States Code on December 19, 1975. An adjudication of bankruptcy was made by the Court on March 13, 1976.

On December 22, 1975, the United States made an assessment against Dot for its failure to pay over withheld federal income taxes and Federal Insurance Contribution Act taxes for the third quarter of 1975 (July 1, 1975 to September 30, 1975). On March 15, 1976, the United States made a further assessment against Dot for its failure to pay over to the United States such taxes for the fourth quarter of 1975 (October 1, 1975 to December 31, 1975). Dot was properly given, in a timely manner by the Internal Revenue Service, formal notice and demand for payment of such taxes.

On March 8, 1982, the United States first commenced action against Associates with regard to the still outstanding balance due (plus interest) which Dot failed to pay the government, alleging liability against Associates pursuant to § 3505(b) of the Internal Revenue Code of 1954, as amended. The United States brought the instant action against the defendant, alleging that the defendant advanced funds to Dot during this period with the knowledge that Dot would not pay the employment taxes.

The defendant has now filed a motion to dismiss this action for the reasons that the defendant was given no formal notice with respect to this liability and that the statute of limitations has allegedly expired on the liability relating to the third quarter of 1975. The United States opposes this motion.

II. NOTICE UNDER SECTION 6303

Defendant's first contention is that the government's failure to provide it with notice under section 6303(a) of the Internal Revenue Code and the applicable regulations of the assessment made against Dot on December 22, 1975 covering Dot's failure to pay withheld federal income taxes and F.I.C.A. taxes for the third and fourth quarters of 1975 precludes this action to recover the tax imposed by section 3505(b). Sections 3505(b) and 6303(a) provide:

  "SEC. 3505. LIABILITY OF THIRD PARTIES PAYING OR
    PROVIDING FOR WAGES.
    (b) Personal Liability Where Funds Are Supplied.
  — If a lender, surety, or other person supplies
  funds to or for the account of an employer for the
  specific purpose of paying wages of the employees
  of such employer, with actual notice or knowledge
  (within the meaning of section 6323(i)(1)) that
  such employer does not intend to or will not be
  able to make timely payment or deposit of the
  amounts of tax required by this subtitle to be
  deducted and withheld by such employer from such
  wages, such lender, surety, or other person shall
  be liable in his own person and estate to the
  United States in a sum equal to the taxes (together
  with interest) which are not paid over to the
  United States by such employer with respect to such
  wages. However, the liability of such lender,
  surety, or other person shall be limited to an
  amount equal to 25 percent of the amount so
  supplied to or for the account of such employer for
  such purpose.
    (c) Effect of payment. — Any amounts paid to the
  United States pursuant to this section shall be
  credited against ...

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