Appeal from the United States District Court for the Middle District of Pennsylvania.
Before: SEITZ, WEIS, and ROSENN, Circuit Judges.
The United States appeals from an order of the district court granting summary judgment in favor of the defendant, Jersey Shore State Bank ("Jersey Shore" or "the Bank"). This court has jurisdiction over the appeal by virtue of 28 U.S.C. § 1291 (1982).
The United States brought this action alleging that Jersey Shore was personally liable under I.R.C. § 3505(a) and (b) (1982) for the unpaid federal withholding tax liabilities of Pennmount Industries, Inc. ("Pennmount"). The complaint alleged that from the fourth quarter of 1977 through the first quarter of 1980, Jersey Shore (i) paid wages directly to Pennmount employees and (ii) supplied funds to Pennmount for the specific purpose of paying wages with actual notice and knowledge that Pennmount did not intend to, or would not be able to, make timely payments or deposits of the federal taxes required to be deducted and withheld. The complaint also alleged that the Bank's liability under section 3505(a) totals $76,547.57 plus interest, and that its liability under section 3505(b) totals $72,069.00 plus interest.
In its answer, Jersey Shore admitted making commercial loans to Pennmount, but denied any liability under section 3505. The Bank also alleged that the complaint failed to state a claim upon which relief could be granted, because the United States did not provide it with timely notice of assessments against Pennmount, which it asserted were required by I.R.C. § 6303(a) (1982).
The United States moved for partial summary judgment with respect to the first count of its complaint, which involved Jersey Shore's liability under section 3505(a). At the same time, the Bank moved for summary judgment on both counts of the government's complaint, arguing that the government's failure to give it notice of the assessments against Pennmount pursuant to section 6303(a) precluded the United States from bringing suit. In its reply, the United States admitted that Jersey Shore had not been given notice pursuant to section 6303(a), but argued that it was not required to give the Bank such notice and, alternatively, that even assuming that such notice was required, the failure to give it did not bar the United States from bringing suit to collect the Bank's liability under section 3505.*fn1
Relying upon the Seventh Circuit's opinion in United States v. Associates Commercial Corp., 721 F.2d 1094 (7th Cir. 1983), the district court held that where a lender is liable under section 3505 for another's withholding taxes, the government is required by section 6303(a) to give notice of the assessment against the employer to the lender within sixty days of the assessment. It concluded that the government's failure to give timely notice to Jersey Shore of the assessments against Pennmount barred the United States from bringing suit. This appeal followed.
Prior to 1966, only "employers" were liable for income, social security, and railroad retirement taxes required to be withheld and deducted from employee wages--despite the many situations in which persons other than employers directly or indirectly paid the wages. Problems arose when these third parties paid the employees only "net" wages, neglecting to pay to the government the withholding taxes due. When this occurred, the government was often unable to collect the taxes required to be deducted and withheld, despite the fact that it was required to credit the employees' accounts for them. Recourse against the employer was often fruitless, because it was frequently without any financial resources. And the government could not proceed against the third parties who paid the net wages, because they were not "employers" under the Code and, therefore, were not liable for the taxes. S. Rep. No. 1708, 89th Cong., 2d Sess. 21-22, reprinted in 1966 U.S. Code Cong. & Ad. News 3722, 3742-43 [hereinafter cited as S. Rep. No. 1708]; H.R. Rep. No. 1884, 89th Cong., 2d Sess. 20 (1966) [hereinafter cited as H.R. Rep. No. 1884].
This practice, commonly known as "net payroll financing," was apparently quite prevalent in the construction industry. See generally United States v. Algernon Blair, Inc., 441 F.2d 1379 (5th Cir. 1971). In an attempt to keep work moving along smoothly, prime contractors would provide their financially troubled subcontractors with the funds necessary to meet their payrolls, see id. at 1381, or would help them arrange the necessary credit through a third-party lender, see United States v. Coconut Grove Bank, 545 F.2d 502, 505 (5th Cir. 1977). However, anxious to limit their exposure on such transactions, the prime contractor or third-party lender typically provided the subcontractor funds only to the extent of its net payroll, thus making the government an unwilling "co-lender" of such loans to the extent of the withholding taxes due.
To stem this loss of revenue, Congress enacted section 3505. See Coconut Grove Bank, 545 F.2d at 505; Algernon Blair, Inc., 441 F.2d at 1381. It imposes liability on lenders, sureties, and other third parties in two specific situations. First, section 3505(a) provides, in pertinent part, that:
if a lender, surety, or other person, who is not an employer with respect to an employee . . . pays wages directly to such employee . . . 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) required to be deducted and withheld [emphasis added].
Similarly, section 3505(b) provides, in pertinent part, that:
[i]f a lender, surety, or other person supplies funds to . . . an employer for the specific purpose of paying wages of the employees of such employer, with actual notice or knowledge . . . that such employer does not intend to or will not be able to make timely payment or deposit of the amounts of tax required . . . to be deducted and withheld by such employer . . . 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 [emphasis added].
In short, Congress thought it fair to impose liability on third parties like Jersey Shore in these two situations, because they sit in essentially the same position vis-a-vis control over payroll funds and access to information as the employer itself. See S. Rep. No. 1708, at 22 (observing that given the amount of information available to such third parties and the burden of proof upon the government, there is "no reason for distinguishing between the portion of the total wages which is owed and should be paid to employees . . . and the portion of the wages which is owed and should be paid to the Government"); H.R. Rep. No. 1884, at 20 (id.).
With this background, we turn to the issue posed by the present appeal; Whether the government's failure to provide Jersey Shore with notice of the assessments against Pennmount pursuant to I.R.C. § 6303(a) (1982) bars its suit to collect the Bank's liability under I.R.C. § 3505 (1982).
"When interpreting a statute, the starting point is of course the language of the statute itself. If the language is clear and unambiguous, and there is no 'clearly expressed legislative intention to the contrary, that language must ordinarily be regarded as conclusive." National Freight v. Larson, 760 F.2d 499, 503 (3d Cir.) (citation omitted), cert. denied, 474 U.S. 902, 106 S. Ct. 228, 88 L. Ed. 2d 227 (1985), quoting Consumer Prod. Safety Comm'n v. GTE Sylvania, 447 U.S. 102, 108, 64 L. Ed. 2d 766, 100 S. Ct. 2051 (1980).
Section 6303(a), the notice provision presently at issue, is found in Subtitle F of the Internal Code, which governs procedure under and administration of the internal revenue ...