Appeal from the United States District Court for the Northern District of Illinois, Eastern Division, No. 79 C 3167, Paul E. Plunkett, Judge.
Bauer, Chief Judge, and Cudahy and Ripple, Circuit Judges.
This appeal involves a claim by The Purdy Company of Illinois (the "taxpayer") against the United States and a counterclaim by the United States, regarding the alleged liability of the taxpayer under 26 U.S.C. § 6672(a)(1982), as a "responsible person" for the payment over to the government of federal employment taxes withheld from the wages of employees of Nick Pavletic Pontiac, Inc. ("Pontiac"). The district court entered judgment against the taxpayer for the amount of a penalty attributable to taxes owing for the third and fourth quarters of 1974 plus interest. The taxpayer appeals. Because we agree with the district court that the taxpayer was a responsible person who willfully avoided paying withholding taxes, and because in these circumstances the taxpayer was responsible for paying over certain after-acquired funds, we affirm the judgment.
Pontiac was an automobile dealership that operated in Chicago during the early 1970's. Pavletic was its chief executive officer and initially its sole shareholder. As a result of serious financial difficulties in the summer of 1974, Pavletic sought the taxpayer's assistance in August of that year. After some investigation, the taxpayer, through John Purdy, its president, purchased 49% of the stock of Pontiac for $20,000. In August 1974, Pavletic assigned to the taxpayer certain pension and profit sharing plan rebates. In September Pavletic agreed to deliver to the taxpayer the money due Pontiac from the yearly "2% holdback" by General Motors on sales of new General Motors cars to the dealership. The holdback check, which was based upon Pontiac's volume of purchases from General Motors throughout 1974, was delivered by General Motors to Pontiac on January 3, 1975, in the amount of $16,427.45. Also in September 1974, John Purdy arranged a $15,000 loan for Pavletic which the taxpayer fully guaranteed, apparently relying on the 2% holdback as security. In October 1974, the taxpayer lent Pontiac an additional $15,000 for use in its operations. Thus, from August through October 1974, the taxpayer, directly or indirectly, advanced a total of $50,000 to Pontiac, which enabled the dealership to continue in business.
On or about November 4, 1974, General Motors Acceptance Corp. withdrew its floor-plan financing for Pontiac, and the Standard Heritage Bank, of which John Purdy was a director and shareholder, undertook to finance Pontiac. As a part of this new floor-plan financing arrangement, the taxpayer agreed to guarantee Pontiac's indebtedness and was given the power and duty to co-sign all Pontiac checks and to review and approve all Pontiac expenditures. The taxpayer, through Mr. Boyle -- one of its employees and John Purdy's son-in-law -- exercised that power by co-signing all Pontiac checks and approving all Pontiac expenditures from and after approximately November 18, 1974.
From that date onward, Pontiac's bookkeeper prepared a "daily cash report" for Boyle's use, setting forth, with respect to the bank accounts then maintained by Pontiac, all amounts received and deposited in each account for the day, the amounts available to be disbursed, all proposed disbursements and the creditor that was to receive each disbursement. Boyle reviewed all reports, proposed disbursements and the related invoices; he disapproved payments to creditors that he determined were not legitimate.
After consulting with Pontiac's insurance agent, Boyle also required that steps be taken to insure against loss in the event of an attempt to steal Pontiac's inventory; every morning from the middle of November onward, Boyle visited Pontiac's premises in order to inspect its inventory and ensure that no cars had been sold "out of trust." In addition to his other responsibilities, Boyle analyzed Pontiac's financial statements for the periods running from January 1, 1974 through October 31, 1974, and January 1, 1974 through November 30, 1974. He investigated the current value of assets listed in these statements in connection with attempts to establish a price at which the dealership might be offered for sale.
In the middle of December 1974, an agent from the Internal Revenue Service (the "IRS") met with Boyle and advised him that Pontiac was delinquent in the payment of employment taxes. The agent requested Boyle not to sign any Pontiac checks in payment of wages unless he at the same time also signed checks payable to the IRS covering the amount of the employment taxes withheld from those wages. Boyle agreed to comply with this request and did, in fact, comply.
As noted, on January 3, 1975, Pontiac received the "2% holdback" check from General Motors. Pavletic advised Boyle that the check should be used to pay the delinquent employment taxes owing for the third and fourth quarters of 1974. Nevertheless, Pavletic turned the check over to Boyle, who applied $14,000 of it against the $15,000 loan that the taxpayer had made to Pontiac in October. Both Boyle and Purdy knew that Pontiac's employment taxes for the entire third quarter of 1974 and for a portion of the fourth quarter of 1974 had not been paid when the holdback check was applied against the $15,000 debt owed to the taxpayer. During the period from November 18, 1974 through December 26, 1974, checks drawn on Pontiac's "regular" bank account and signed by Boyle in payment of creditors, other than the IRS, totaled $56,879.53. During the period from December 27, 1974 through January 23, 1975 (the date Pontiac ceased operations) similar checks totaled $36,981.27.
Pursuant to section 6672(a) of the Internal Revenue Code of 1954 (26 U.S.C.),*fn1 the IRS assessed a penalty of $25,922.51 against the taxpayer for failure to account for and pay over federal employment taxes withheld from the wages of the employees of Pontiac for the last two quarters of 1974 and the first quarter of 1975. The taxpayer made a partial payment of $85.38 and filed a suit for refund; the government filed a counterclaim for the unpaid balance of the assessment ($25,837.13), plus interest and statutory additions provided by law. After a two-day bench trial, the district court entered judgment against the taxpayer for the amount of the penalty attributable to employment taxes owing for the last quarter of 1974 and the first quarter of 1975. After further proceedings, the taxpayer was relieved of liability for the first quarter of 1975, but was held liable for a portion of the taxes owing for the third quarter of 1974 as well as for the taxes owing for the fourth quarter of 1974.
The district court in its original oral decision concluded that the taxpayer had assumed control of Pontiac on or around November 18, 1974 and had thereby become a "responsible person" under section 6672. By obtaining the right (in fact, the duty) to co-sign all checks of Pontiac, approve or disapprove all the agency's expenditures, and oversee the operation of the company, as well as by achieving the status of a substantial stockholder and creditor, the taxpayer had become a "responsible person" for the payment of taxes during the fourth quarter of 1974. The court found that the taxpayer, through its employee, Mr. Boyle, knew of the government's claim for delinquent taxes and willfully chose to pay itself in lieu of the government. On the other hand, the district court found that the taxpayer's involvement with Pontiac in the third quarter of 1974 was as an investor and creditor and that this was not such a role as to make the taxpayer a "responsible person" during that period. The court in this first decision found the taxpayer liable for 1974 fourth quarter taxes (in addition to the subsequently released 1975 first quarter taxes). See Purdy Co. v. United States, No. 79-C-3167, Trial Transcript ("Tr.") at 2-11 (N.D. Ill. Sept. 23, 1983).
In a subsequent decision on the motions of the parties for reconsideration, the district court decided, inter alia, that the taxpayer was liable for third quarter withholding taxes in an amount of $12,320.59, representing three-fourths of the holdback check received from General Motors in January. Applying Slodov v. United States, 436 U.S. 238, 56 L. Ed. 2d 251, 98 S. Ct. 1778 (1978), the court held that because some three-fourths of the holdback check was generated by sales predating the taxpayer's ownership, the taxpayer was required to apply that three-fourths against the back taxes:
the check represents sales in 1974, for three-quarters of which time the Purdy Company was not a controlling person. Thus, three-quarters of the check does not reflect "sums received from sales in carrying on the business after [the date of ...