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October 11, 1963


The opinion of the court was delivered by: DUSEN

This is a civil action to obtain judgment for an unpaid penalty from the defendant, a corporate officer, for wilfully failing to pay over withholding taxes of the Philadelphia Brewery Company (hereinafter referred to as 'Company') for the second quarter of 1948 (ending 7/31/48) in the amount of $ 6,538.70, plus interest from 8/31/54. The action is predicated on §§ 2707(a) and 2707(d) *fn1" of the Internal Revenue Code of 1939. 26 U.S.C.A. § 2707(a) and (d). These penalty sub-sections apply to social security and withholding taxes by virtue of §§ 1430 and 1627 of the Internal Revenue Code of 1939, 26U.S.C.A. §§ 1430 and 1627. *fn2"

This case presents two questions:

 (1) Was the defendant a 'person' under a duty to collect and pay the taxes within the purview of § 2707(d); and

 (2) If he was, did he wilfully fail to collect and pay over the withholding taxes imposed against the Company on wages paid its employees within the meaning of § 2707(a)?

 The Company, organized in 1928, had weathered prohibition, depression, peace and war until the end of 1946, when a jurisdictional strike inflicted a severe set-back from which the brewery never recovered. Rutledge Slattery, the Company's president, one of five directors, a substantial shareholder, a co-trustee of the voting trust which controlled the Company, and creditor of the Company, was authorized by the Board, in the spring of 1947, to borrow funds to keep the company going. Banks refused his requests for capital funds, so he personally loaned money to the Company and also made loans to the Company from his uncle's testamentary trust, *fn3" of which he was trustee. For the time being, the Company continued in business.

 By October 1947, the Company's position had not materially improved. The defendant left his law practice to more actively participate in the affairs of the brewery. Defendant started by learning the different operations of the business: purchasing, manufacturing, brewing, bottling, selling, shipping and promoting the beer. He also studied the Company's serious cost problems. The defendant's goal was to keep the brewery in business by streamlining its operation and then to sell it as a going business. To achieve these ends, he made changes in the Company's management and performed the duties of several positions himself. Even efficiency experts were called in for their advice.

 Still the affairs of the Company did not improve. The $ 3,832.31 earned surplus which the Company had on 1/1/48 steadily declined, and by 10/18/48 there was a deficit of $ 205,204.16.

 While defendant had spent all his time improving the management of the Company, reducing costs and trying to find a buyer for it, he had not inquired into or changed either the treasurer's or the payroll department. Mr. Harry Burger, the former treasurer *fn4" of the company, had the responsibility of preparing and filing the Company's quarterly tax returns. Burger, who was familiar with the financial condition of the Company, and its creditors decided which creditors were to be paid, since defendant did not know those who had to be paid and those who could be forestalled.

 Defendant does not know exactly when he first learned of the deficiency. He testified that it was possibly in August or September of 1948, but at the latest October 8, 1948, *fn5" when Mr. Burger informed him that the taxes had not been paid, that no return had been filed, and that there were not sufficient funds to pay the taxes. Defendant instructed Burger to file the return even though they could not enclose the payment with it. Neither party knows the date when this return was filed.

 Usually two or three weeks after the close of each month's business, Mr. Burger's department would give defendant an informal balance sheet. In 1948, until the bankruptcy audit, these were the only statements of the company's financial position. At the trial, only one of these balance sheets was introduced (P-7, the statement of 9/30/48), which showed the Company's cash on hand and in banks to be $ 2975.96. By October 18, 1948, these figures had increased to $ 5,144.85.

 On October 8, 1948, defendant met with representatives of the Internal Revenue Service to discuss the delinquency. The Service wanted the tax, the interest, and a 15% Penalty paid by the end of the week.

 From the time of this meeting with the Internal Revenue Service until the Petition in Bankruptcy, defendant paid only those expenses arising in the normal course of business. *fn6" Defendant did not receive a salary during this period, nor did he collect any of the loans he had made to the Company.

 On October 18, 1948, the Company filed a Petition for Reorganization under Chapter X of the Bankruptcy Act. This attempted reorganization failed and in June 1950, the plant and its equipment were sold in bankruptcy.

 Conceding the first question, that the defendant was the officer or person under a duty to collect and pay over taxes, *fn7" there is no proof of his wilful failure to pay. The word 'wilfully' in this civil penalty statute does not involve a moral wrong, but does include 'a conscious act or omission'. *fn8" Many cases have defined 'wilfully' as: 'acts knowingly and intentionally'; *fn9" 'without reasonable cause, capricious'; *fn10" "consciously', 'intentional', and 'deliberately', 'voluntarily, as distinguished from accidental'.' *fn11" Cases ...

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