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October 27, 1972

Harry W. BAILY

Troutman, District Judge.

The opinion of the court was delivered by: TROUTMAN

TROUTMAN, District Judge.

Plaintiff, taxpayer, filed this action, seeking a refund of $11,951.84 which was in plaintiff's bank account and levied upon by defendant for failure to pay the federal withholding taxes allegedly owed by the Lakewood Summer Playhouse in Tamaqua, Pennsylvania. The relevant facts are as follows: In 1965, plaintiff advanced to one Charles W. Hall, Jr. [Hall] $19,197.56 to help finance said theater, which went out of business in the same year. On January 3, 1966, an Employer's Quarterly Tax Return was filed for the third quarter of 1965, indicating a tax due in the amount of $9,033.05. Whereas no payment of the amount owed accompanied the form, the District Director of Internal Revenue assessed the above amount together with penalties and interest against Hall and plaintiff, jointly and severally, as partners in the playhouse. The assessments were made on January 20, 1966, pursuant to 26 U.S.C. §§ 3401-3403 and § 3102.

 On February 4, 1966, plaintiff sued Hall in assumpsit in the Court of Common Pleas of Schuylkill County, Pennsylvania, seeking recovery of the amount of money he allegedly loaned to Hall for the establishment of the playhouse. In his answer, Hall denied liability on the ground that he and plaintiff had entered into a partnership agreement regarding the playhouse. Following a trial on the merits, the jury returned a verdict in favor of defendant on April 17, 1968. On November 20, 1968, upon failure to obtain voluntary payment, the Internal Revenue Service issued a Notice of Levy on plaintiff's bank account in the amount of the tax assessed, penalty and interest. Thereafter, plaintiff filed a claim for refund, which was ultimately disallowed by the District Director on October 30, 1970. This suit followed, alleging that the collection was illegal on the ground plaintiff was neither a partner nor a responsible person with respect to the playhouse enterprise.

 Before the Court is defendant's motion for summary judgment on the ground of collateral estoppel. Ordinarily, the question whether plaintiff's degree of involvement in the playhouse enterprise constituted a partnership would give rise to genuine issues of material fact, thereby precluding summary judgment under Rule 56. Here, however, it is defendant's argument that the State court verdict conclusively determined that plaintiff was a partner in the enterprise and plaintiff is, therefore, collaterally estopped from relitigating the issue in this Court.

 It is apparently not disputed that if plaintiff was a partner in the playhouse, the tax was properly assessed and collected. Under the Internal Revenue Code of 1954, an employer is required to deduct withholding taxes from wages, 26 U.S.C. § 3402, and is liable for the payment of taxes required to be deducted and withheld. 26 U.S.C. § 3403. An employer is defined in 26 U.S.C. § 3401 (d) as "the person for whom an individual performs or performed any service, of whatever nature * * *". See also 26 C.F.R. § 301.3401 (d)-1. The term "person" when used in Title 26 is to be "construed to mean and include an individual, a trust, estate, partnership, association, company or corporation. 26 U.S.C. § 7701 (a) (1); 26 CFR § 301.7701-1. Under the facts of the instant case, the playhouse was an employer within the meaning of the Code, and, if it is determined that the playhouse was a partnership, the partners, jointly and severally, would be liable for the taxes due. Thus, the sole issue in the instant case is whether the playhouse was a sole proprietorship operated solely by Hall or whether it was a partnership involving both plaintiff and Hall.

 Moreover, plaintiff apparently does not dispute the fact that even if he were an inactive partner, merely financing the operation in return for a share of the partnership profits without actively managing the enterprise on a day-to-day basis, he would, nevertheless, be liable for tax obligations accrued. See Calvey v. United States, 448 F.2d 177, 180 (6th Cir. 1971); Filesi v. United States, 352 F.2d 339 (4th Cir. 1965); Young v. Riddell, 283 F.2d 909 (9th Cir. 1960). What is disputed, however, is the effect of the State court verdict on plaintiff's status for the purpose of federal tax liability.

 In the instant case, defendant, a nonparty to the State court action, is asserting the doctrine of collateral estoppel defensively to preclude the relitigation of the partnership issue. Defendant argues that plaintiff's status as a partner for the purpose of federal tax liability was conclusively determined by the Common Pleas verdict. Plaintiff, on the other hand, argues that the doctrine of collateral estoppel is inapplicable in this action on essentially three grounds: (1) the requirement that the issues in both actions be identical is lacking; (2) the requirement of mutuality is lacking; and (3) the issue of partnership in this case is governed by federal rather than state law.

 A. Identity of Issues

 In Comm'r v. Sunnen, 333 U.S. 591, 68 S. Ct. 715, 92 L. Ed. 898 (1948), the Supreme Court held that the principles of res judicata and collateral estoppel were applicable in federal tax litigation. In so doing, however, the Court confined the applicability of collateral estoppel to "situations where the matter raised in the second suit is identical in all respects with that decided in the first proceeding and where the controlling facts and applicable legal rules remain unchanged." 333 U.S. at 599-600, 68 S. Ct. at 720. The apparent rationale of the Court in so restricting these doctrines in tax matters was its concern that since each tax year gives rise to a new tax liability, the doctrine might be unfairly asserted in situations where the factual circumstances or the law has changed over successive years. The Court, however, continued, stating:

"Of course, where a question of fact essential to the judgment is actually litigated and determined in the first tax proceeding, the parties are bound by that determination, in a subsequent proceeding even though the cause of action is different." 333 U.S. at 601, 68 S. Ct. at 721.

 It is plaintiff's contention that "the matter raised in the second suit is not identical in all respects with that decided in the first proceeding."

 Plaintiff asserts that the first action was a State court assumpsit action to recover money loaned to Hall under an oral contract, while the second action is a tax action, to recover funds erroneously assessed and collected. We have no difficulty in discerning that there are two separate and distinct causes of action involved, thereby precluding the application of res judicata to bar the second suit. The issue decided in the State court action and the issue involved in this action are exactly the same -- whether plaintiff was a partner in the playhouse enterprise. Moreover, the period of time involved in both suits is identical, thereby complying with the time limitations established in Sunnen. In his State court action, plaintiff sought recovery of money loaned in 1965. In 1965, the playhouse went out of business. The commissioner assessed and collected for taxes owed in 1965, and it is this money which is now in dispute. Thus, since the issue and time period are identical in both actions, we conclude that Sunnen does not bar the application of collateral estoppel in this case.

 Plaintiff, however, further contends that the only issue in the State court case was whether he loaned money to Hall. He further argues that the fact that the jury found in favor of Hall merely indicates that he failed to meet his burden of proof. Even if the jury verdict constituted a finding of partnership, plaintiff continues, this determination was not "necessary and essential to the judgment", 1B Moore, Federal Practice, para. 0.443 [1] at p. 3901 (2d Ed.), and must be disregarded in this suit as surplusage. We find this argument without merit. Hall's answer to the State court complaint denied that he accepted plaintiff's advance as a loan, asserting that the advance was made pursuant to an oral partnership agreement, thereby placing the alleged partnership squarely in issue. The Court, in its charge, explicitly presented the partnership issue to the jury for its determination, stating:

"We are only concerned as to whether or not you believe from the testimony that there was a partnership. If there was a partnership between the plaintiff and the defendant, whether or not then the defendant would be entitled to a verdict in his favor. Now, if from the testimony, you are satisfied by the fair weight and preponderance of the evidence that the plaintiff, Doctor Baily, did, in fact, lend or advance money to this defendant with the understanding that he would be repaid that sum of money in full by the ...

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