Westover, Collector of Internal Revenue v. William Simpson Const. Co. et al, 209 F.2d 908 (9th Cir. 1954)

This is an appeal by the Collector from a judgment directing the refund of income withholding taxes on wages and kindred taxes on employers, exacted of appellees as prime contractors after default in payment thereof by their subcontractor.

The facts, in part stipulated, are not materially in dispute, although the inferences the parties draw from them are at variance. In April of 1944 appellees, who will generally be referred to as Simpson-Kier, jointly contracted with the Navy Department for certain construction work at Seal Beach, California. As required by the Miller Act, Simpson-Kier furnished a payment bond to the United States for the protection of persons supplying labor or materials for the job. In furtherance of the enterprise they entered into various subcontracts one of which was with United Concrete Form Products Company. United, in order to finance the subcontract, negotiated a loan from the Aetna Bank in Chicago, as security for which the latter required that the subcontract be assigned to it and that amounts becoming due thereunder be paid through the bank.

In August 1944 United notified Simpson-Kier that Aetna would not make further advances, and it requested Simpson-Kier to advance United sufficient funds to complete the work, stating that an analysis of the job indicated a probable loss to United of about $40,000. At that time more than half the work under the subcontract had been completed, and there was a balance owing United under it of approximately $149,000. A meeting was held between representatives of United and Simpson-Kier to discuss the matter and to arrange procedures. Under the terms of the subcontract Simpson-Kier had the option, among others, of advancing to United sufficient funds to complete the subcontract and to deduct the same from the amount to be paid United. The latter was at that time negotiating a similar subcontract at Port Chicago at prices which were thought by its president to indicate a substantial profit. United also had contracts then in progress at various other military installations from which it expected to receive additional funds; and from these several sources it anticipated that money would flow enabling it to satisfy all its obligations. Simpson-Kier agreed to advance United sufficient funds in payment of labor claims to meet the net "take-home" pay of United's employees. It was agreed that the subcontract was to continue in full force and that the money advanced would represent only amounts actually earned by the subcontractor at the time advanced, and that the advances would be made only for the purpose of paying lienable claims. The work being done was of an emergency nature and it was deemed of importance that it be not disrupted. United assured the prime contractor that with these advances it would be able to take care of its obligations, its payroll taxes, and its material suppliers.

United opened a "payroll trust account" at its bank, and the advances made by Simpson-Kier were deposited in this account. Checks on the account could be signed only by a Mr. Weber, project manager for United, or by a Mr. Noble, personnel manager for Simpson-Kier. Noble was authorized to sign checks because Weber was out in the field a great deal of the time, and United's president had specifically requested that Noble be permitted to sign checks as a matter of convenience to United. No representative of Simpson-Kier had or exercised any supervision over or any authority to hire or fire any employee of United. Simpson-Kier, in lieu of the semimonthly progress payments provided in the contract, undertook to and did accelerate payment by making weekly advances to United of the amounts required to meet its net weekly payroll. At the time of each such advance United had performed enough work to have earned it. Simpson-Kier was reassured by United that the latter would have ample funds from other sources to pay all taxes to become due with respect to such payrolls. The obligation to pay all taxes with respect to employees of United rested expressly upon the latter under the terms of the subcontract.

During the period from the making of this arrangement until the end of October 1944, when the work under the subcontract was completed, Simpson-Kier advanced United, through the latter's payroll trust account, the amounts necessary to take care of the net take-home pay of United's employees. United duly filed with the Internal Revenue people returns for the period, including the income withholding and other payroll taxes with respect to its employees, but did not pay the amounts becoming due thereon. Having failed to collect the taxes from United, the Collector looked to Simpson-Kier, who thereafter paid them under protest and brought this suit for refund.

The taxes involved are of three types: Income withholding taxes,¹  Federal Insurance Contributions,²  and Federal Unemployment Taxes.³  We turn briefly to those of the second and third variety. As a condition precedent to liability for either of them there must have subsisted during the period in question an employment relationship between Simpson-Kier and United's employees as defined in the statutes. The definitions are set out in the margin.⁴  It is evident that the requisite relationship did not obtain, and the trial court was right in so holding.

In respect of obligations of the first type — the income withholding tax — the statutory definition of the term "employer" is not materially different from the ordinary concept of such relationship. However, certain exceptions are incorporated to take care of special cases, one of which exceptions needs to be noticed in considering the government's argument pertaining to this particular tax. The definition, found in § 1621(d) of the Code,⁵  so far as here pertinent is as follows: "(d) Employer. The term `employer' means the person for whom an individual performs or performed any service, of whatever nature, as the employee of such person, except that — (1) if the person for whom the individual performs or performed the services does not have control of the payment of the wages for such services, the term `employer' * * * means the person having control of the payment of such wages; * * *." [Emphasis supplied.]

The government contends that the arrangement between the parties for completion of the work left Simpson-Kier in control of the payment of wages, hence Simpson-Kier must under the exception be considered the employer. We do not agree. To render the exception applicable two things must be shown: (1) that United had no control over the payment of the wages, and (b) that Simpson-Kier had. Obviously the requirement was not met. Whatever measure of control Simpson-Kier might have had it was not exclusive, but was shared with United. United made up the payroll, the wages were paid from United's checking account and a United employee had and exercised the power to sign the paychecks. Indeed, it is doubtful whether Simpson-Kier had any control over the wage payments. While it supplied the money, it did so only in fulfillment of the agreement, and United had earned the money by the time it was deposited in the special account. The legislative history of § 1621(d) makes it clear that something more than the mere supplying of the money for the payroll is essential.⁶  However, since it is manifest that Simpson-Kier did not have the measure of control of the wage payments required by the statutory exception, it is unnecessary to determine that it had no control at all.

The government advances other arguments respecting all three types of tax. One of these is that the supplemental agreement amounted to a third party beneficiary contract, the United States being the third party beneficiary. We shall not undertake to discuss the theory beyond saying that it has no basis in the facts of the case. The supplemental agreement had the exclusive purpose of enabling United to pay the take-home wages of its employees. Simpson-Kier undertook only to accelerate payments to United under the contract. It assumed no obligations either to the employees of United or to the government.

A final argument has to do with the payment bond supplied by Simpson-Kier under the requirements of the Miller Act, 40 U.S.C.A. § 270a et seq.⁷  The purpose of this bond was to protect laborers and materialmen. It was not intended, as counsel for the Collector argue, to assure payment to the government of withholding or payroll taxes. Cf. United States Fidelity & Guaranty Co. v. United States, 10 Cir., 201 F.2d 118. To hold that it is usable as a weapon in the collection of taxes would be an arbitrary perversion of the legislative purpose.

Affirmed.