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LEE v. UNITED STATES

January 14, 1997

IVOR J. LEE II, Plaintiff,
v.
UNITED STATES OF AMERICA, Defendant/Third Party Plaintiff v. THOMAS HOCKRAN, and SULO MAYNARD LAHTI JR., Third Party Defendants



The opinion of the court was delivered by: COHILL

 This is an action filed by the plaintiff taxpayer, Ivor J. Lee, II, to recover a tax penalty assessed against him by the Internal Revenue Service ("IRS") of the United States of America, the defendant in the action. The government has impleaded Thomas Hockran and Sulo Maynard Lahti Jr. as third-party defendants.

 The government has filed a motion in limine to exclude certain evidence that the plaintiff and the third-party defendants (collectively, the "taxpayers") intend to introduce at trial.

 I. Background

 HLH Drilling, Inc., was incorporated under the laws of Pennsylvania in 1981. For all relevant time periods Lee, Hockran, and Lahti were shareholders of HLH. Each was an officer of the corporation and a member of its board of directors. In order to obtain operating funds HLH received a loan of $ 1 million and a working capital line of credit in the amount of $ 198,000 from First National Bank of Pennsylvania ("FNB"). The bank took a security interest in all of HLH's accounts receivables and acquired the right to set off against the corporation's various operating accounts at FNB to assure repayment of debts owed by HLH. Each of the taxpayers, along with their wives, personally guaranteed all monies lent and/or made available to HLH by FNB.

 In late 1985 and early 1986 HLH began to experience financial difficulties and began to fall behind on its debts to FNB. Accordingly, FNB required HLH to enter a "lockbox" arrangement. All of HLH's income, including accounts receivable, was directed to the lockbox. This money was applied to various HLH accounts to cover checks written by the taxpayers, and to interest and principal due the bank on the outstanding loan and line of credit. HLH could not issue checks from its operating accounts without the consent of FNB.

 In 1986, subsequent to the lockbox arrangement being put into effect, HLH's financial situation worsened. The situation was such that FNB would first satisfy HLH debts to FNB from the lockbox, and would then allow money to be used to cover HLH's operating expenses, one of which was HLH's federal employment taxes. Sometimes sufficient funds to satisfy these expenses did not exist. The taxpayers assert that the practical effect of the lockbox arrangement was that FNB became a preferred creditor over any other creditors, including the IRS.

 In accordance with the aforementioned facts, it is undisputed that payments were made to creditors other than the IRS notwithstanding HLH's tax obligation.

 II. Discussion

 (i)

 Employers are required to withhold from the wages of their employees' income and social security taxes, and to hold such taxes in trust for the United States. The government is required to credit employees for taxes withheld irrespective of whether or not they are paid by the employer. RIBS-R-US, 828 F.2d at 200. Accordingly, the Internal Revenue Code ("IRC") allows the IRS to assess a penalty for non-remittance of employment taxes against "an officer or employee of a corporation" who was "under a duty to" account for, collect, and/or pay of the taxes and who "willfully" failed to perform such duties. 26 U.S.C. §§ 6671 and 6672; In re RIBS-R-US, Inc., 828 F.2d 199, 200 (3d Cir. 1987).

 Pursuant to section 6672, the IRS imposed a 100% penalty against the taxpayers for unpaid trust fund taxes which were withheld from the wages of HLH employees, but not remitted to the IRS for the eleven tax periods beginning January 1, 1986, and ending September 30, 1988. The IRS determined that the taxpayers were "responsible persons," as they were all required to collect, truthfully account for, and pay over the employment (payroll or trust fund) taxes withheld from the wages of HLH. Additionally, the IRS determined that taxpayers had "willfully" failed to ensure that the taxes which had been withheld from the employees were remitted to the IRS.

 The taxpayers have paid the penalty and bring this action to recover the payment. At trial they intend to introduce evidence that because of the lockbox arrangement (a) FNB, and not the taxpayers, was the "responsible person" as defined by the statute and case law, and (b) that the taxpayers did not "willfully" omit to remit the taxes in question to the IRS. In short, they argue that it was FNB's fault that the taxes were not remitted ("bank defense"). The government has moved, in limine, to exclude any evidence relating to the bank defense from being introduced into evidence. It asserts that this has no basis in ...


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