United States v. Security Pacific Business Credit, Inc.

In 1983, Mystic Tape, Inc. (Mystic) defaulted on a loan from Security Pacific Business Credit, Inc. (Security) (defendant). As a result, Security assumed control over Mystic’s finances. Over a six-week period, Security loaned Mystic approximately $500,000 so that Mystic could pay its employees. However, Security prohibited Mystic from using the loan to pay federal withholding taxes for the employees despite knowing that Mystic could not otherwise pay the taxes. In 1987, the Internal Revenue Service (IRS) assessed a penalty against Security of $241,488.70 pursuant to Internal Revenue Code (code) § 6672, which imposed liability for unpaid withholding taxes on employers and relevant executives who willfully failed to perform their duty to collect, account for, and pay taxes to the IRS (responsible persons). This amount represented the withholding taxes that Mystic did not pay at Security’s instruction, but it did not include interest, about which § 6672 was silent. The IRS also imposed a penalty against Security of $123,009.50 pursuant to code § 3505(b), which imposed liability for up to 25 percent of a loan on a lender that loaned money to an employer for the payment of wages with knowledge that the employer would not pay withholding taxes on those wages. This amount represented preassessment interest, as limited by § 3505’s cap, on the $241,488.70 in unpaid taxes. (Unlike § 6672, § 3305 expressly permitted the IRS to obtain interest.) The United States sued Security for payment of the penalties. At trial, the district court found Security liable for both penalties. Security appealed, arguing that it could not be held liable under both §§ 6672 and 3305(b) because such dual liability negated § 3305’s 25 percent cap. Specifically, Security noted that the relevant loan was for approximately $500,000 yet the total judgment against it was for almost $400,000. Accordingly, Security contended that the United States should be limited to the § 6672 penalty because § 6672’s silence regarding interest reflected Congress’s desire to shield responsible persons from being liable for interest.