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Who is liable?

Federal taxes are collected from those who are "liable" for the various taxes imposed in the Internal Revenue Code. For example, 26 U.S.C. § 7601 commands that the Secretary of the Treasury "canvass" the various internal revenue districts to located those "liable" to pay any internal revenue tax:

Section 7601. Canvass of districts for taxable persons and objects.

(a) General rule.
The Secretary shall, to the extent he deems it practicable, cause officers or employees of the Treasury Department to proceed, from time to time, through each internal revenue district and inquire after and concerning all persons therein who may be liable to pay any internal revenue tax, and all persons owning or having the care and management of any objects with respect to which any tax is imposed.

After taxes are assessed against a taxpayer so liable therefor, the Secretary must give notice and demand for payment thereof to persons "liable" for the tax:
Section 6303. Notice and demand for tax.

(a) General rule.
Where it is not otherwise provided by this title, the Secretary shall, as soon as practicable, and within 60 days, after the making of an assessment of a tax pursuant to section 6203, give notice to each person liable for the unpaid tax, stating the amount and demanding payment thereof. Such notice shall be left at the dwelling or usual place of business of such person, or shall be sent by mail to such person's last known address.

Tax liens authorized via 26 U.S.C. § 6321 are filed against persons "liable" for the tax:
Section 6321. Lien for taxes.

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

And the Secretary is authorized to collect taxes from those identified as "liable" for taxes:
Section 6331. Levy and distraint.

(a) Authority of Secretary.
If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary to collect such tax (and such further sum as shall be sufficient to cover the expenses of the levy) by levy upon all property and rights to property (except such property as is exempt under section 6334) belonging to such person or on which there is a lien provided in this chapter for the payment of such tax. Levy may be made upon the accrued salary or wages of any officer, employee, or elected official, of the United States, the District of Columbia, or any agency or instrumentality of the United States or the District of Columbia, by serving a notice of levy on the employer (as defined in section 3401(d)) of such officer, employee, or elected official. If the Secretary makes a finding that the collection of such tax is in jeopardy, notice and demand for immediate payment of such tax may be made by the Secretary and, upon failure or refusal to pay such tax, collection thereof by levy shall be lawful without regard to the 10-day period provided in this section.

The Internal Revenue Code imposes in subtitle C several different types of employments taxes, and only one party is "liable" therefor: the employer. The FICA tax is imposed in § 3101, and only the employer is "liable":
Section 3102. Deduction of tax from wages.
(a) Requirement.
The tax imposed by section 3101 shall be collected by the employer of the taxpayer, by deducting the amount of the tax from the wages as and when paid. * * *
(b) Indemnification of employer.
Every employer required so to deduct the tax shall be liable for the payment of such tax, and shall be indemnified against the claims and demands of any person for the amount of any such payment made by such employer.

The Railroad Retirement Tax is imposed via § 3201, and it is the employer who is liable therefor:
Section 3202. Deduction of tax from compensation.

(a) Requirement.
The taxes imposed by section 3201 shall be collected by the employer of the taxpayer by deducting the amount of the taxes from the compensation of the employee as and when paid. * * *
(b) Indemnification of employer
Every employer required under subsection (a) to deduct the tax shall be liable for the payment of such tax and shall not be liable to any person for the amount of any such payment.

The employment tax imposed via § 3402 that provides for wage withholding makes the employer "liable" for it:
Section 3403. Liability for tax.

The employer shall be liable for the payment of the tax required to be deducted and withheld under this chapter, and shall not be liable to any person for the amount of any such payment.

And those who provide pensions, etc, are considered employers who are "liable" for the deferred wage/income payments they make:
Section 3405. Special rules for pensions, annuities, and certain other deferred income.
* * *
(d) Liability for withholding.
(1) In general
Except as provided in paragraph (2), the payor of a designated distribution (as defined in subsection (e)(1)) shall withhold, and be liable for, payment of the tax required to be withheld under this section.

And in certain circumstances, certain third parties are "liable" for employment taxes:
Section 3505. Liability of third parties paying or providing for wages.

(a) Direct payment by third parties
For purposes of sections 3102, 3202, 3402, and 3403, if a lender, surety, or other person, who is not an employer under such sections with respect to an employee or group of employees, pays wages directly to such an employee or group of employees, employed by one or more employers, or to an agent on behalf of such employee or employees, 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 from such wages by such employer.
(b) Personal liability where funds are supplied
If a lender, surety, or other person supplies funds to or for the account of an employer for the specific purpose of paying wages of the employees of such employer, with actual notice or knowledge (within the meaning of section 6323(i)(1)) that such employer does not intend to or will not be able to make timely payment or deposit of the amounts of tax required by this subtitle to be deducted and withheld by such employer from such wages, 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 with respect to such wages.

Clearly, being made "liable" for a tax via an express provision of the Internal Revenue Code is very important.

Subtitles D and E of the Internal Revenue Code impose various excise taxes, and excellent examples appear in these titles of sections of the Code that impose taxes and make specific parties "liable" therefor. For instance, the tax on tires is imposed via § 4071:
Section 4071. Imposition of tax.

(a) Imposition and rate of tax.
There is hereby imposed on tires of the type used on highway vehicles, if wholly or in part made of rubber, sold by the manufacturer, producer, or importer a tax at the following rates:

Those "liable" for this tax are identified in the same section as follows:
(b) Special rule for manufacturers who sell at retail.
Under regulations prescribed by the Secretary, if the manufacturer, producer, or importer of any tire delivers such tire to a retail store or retail outlet of such manufacturer, producer, or importer, he shall be liable for tax under subsection (a) in respect of such tire in the same manner as if it had been sold at the time it was delivered to such retail store or outlet. This subsection shall not apply to an article in respect to which tax has been imposed by subsection (a).

The section imposing the gambling tax also identifies who is "liable" for such tax:
Section 4401. Imposition of tax.

(a) Wagers.
(1) State authorized wagers.
There shall be imposed on any wager authorized under the law of the State in which accepted an excise tax equal to 0.25 percent of the amount of such wager.
****
(c) Persons liable for tax.
Each person who is engaged in the business of accepting wagers shall be liable for and shall pay the tax under this subchapter on all wagers placed with him. Each person who conducts any wagering pool or lottery shall be liable for and shall pay the tax under this subchapter on all wagers placed in such pool or lottery. Any person required to register under section 4412 who receives wagers for or on behalf of another person without having registered under section 4412 the name and place of residence of such other person shall be liable for and shall pay the tax under this subchapter on all such wagers received by him.

Directly connected to this tax on wagers is a tax on those receiving the wagers as an occupation tax:
Section 4411. Imposition of tax.

(a) In general.
There shall be imposed a special tax of $500 per year to be paid by each person who is liable for the tax imposed under section 4401 or who is engaged in receiving wagers for or on behalf of any person so liable.
(b) Authorized persons.
Subsection (a) shall be applied by substituting "$50" for "$500" in the case of -
(1) any person whose liability for tax under section 4401 is determined only under paragraph (1) of section 4401(a), and
(2) any person who is engaged in receiving wagers only for or on behalf of persons described in paragraph (1).

The section imposing a tax on crude oil also specifies who is "liable" for that tax:
Section 4611. Imposition of tax.

(a) General Rule.
There is hereby imposed a tax at the rate specified in subsection (c) on -
(1) crude oil received at a United States refinery, and
(2) petroleum products entered into the United States for consumption, use, or warehousing.
*****
(d) Persons liable for tax.
(1) Crude oil received at refinery
The tax imposed by subsection (a)(1) shall be paid by the operator of the United States refinery.
(2) Imported petroleum product
The tax imposed by subsection (a)(2) shall be paid by the person entering the product for consumption, use, or warehousing.
(3) Tax on certain uses or exports
The tax imposed by subsection (b) shall be paid by the person using or exporting the crude oil, as the case may be.

A tax is imposed on distilled spirits in § 5001:
Section 5001. Imposition, rate, and attachment of tax.

(a) Rate of tax.
(1) General.
There is hereby imposed on all distilled spirits produced in or imported into the United States a tax at the rate of $13.50 on each proof gallon and a proportionate tax at the like rate on all fractional parts of a proof gallon.

Those who are "liable" for this tax are identified in § 5005:
Section 5005. Persons liable for tax.
(a) General.
The distiller or importer of distilled spirits shall be liable for the taxes imposed thereon by section 5001(a)(1).

The tax on wines makes certain parties "liable":
Section 5043. Collection of taxes on wines.

(a) Persons liable for payment.
The taxes on wine provided for in this subpart shall be paid -
(1) Bonded wine cellars.
In the case of wines removed from any bonded wine cellar, by the proprietor of such bonded wine cellar; except that -
(A) in the case of any transfer of wine in bond as authorized under the provisions of section 5362(b), the liability for payment of the tax shall become the liability of the transferee from the time of removal of the wine from the transferor's premises, and the transferor shall thereupon be relieved of such liability; and
(B) in the case of any wine withdrawn by a person other than such proprietor without payment of tax as authorized under the provisions of section 5362(c), the liability for payment of the tax shall become the liability of such person from the time of the removal of the wine from the bonded wine cellar, and such proprietor shall thereupon be relieved of such liability.
(2) Foreign wine.
In the case of foreign wines which are not transferred to a bonded wine cellar free of tax under section 5364, by the importer thereof.
(3) Other wines.
Immediately, in the case of any wine produced, imported, received, removed, or possessed otherwise than as authorized by law, by any person producing, importing, receiving, removing, or possessing such wine; and all such persons shall be jointly and severally liable for such tax with each other as well as with any proprietor, transferee, or importer who may be liable for the tax under this subsection.
(b) Payment of tax.
The taxes on wines shall be paid in accordance with section 5061.

Specific parties are made liable for the beer tax:
Section 5418. Beer imported in bulk.

Beer imported or brought into the United States in bulk containers may, under such regulations as the Secretary may prescribe, be withdrawn from customs custody and transferred in such bulk containers to the premises of a brewery without payment of the internal revenue tax imposed on such beer. The proprietor of a brewery to which such beer is transferred shall become liable for the tax on the beer withdrawn from customs custody under this section upon release of the beer from customs custody, and the importer, or the person bringing such beer into the United States, shall thereupon be relieved of the liability for such tax.

The tobacco tax also makes a specific party liable for it:
Section 5703. Liability for tax and method of payment.

(a) Liability for tax.
(1) Original liability.
The manufacturer or importer of tobacco products and cigarette papers and tubes shall be liable for the taxes imposed thereon by section 5701.

Pursuant to the commands of the federal Privacy Act, the IRS is required to give a notice (contained in the Privacy Act Notice or Notice 609) of the various laws that require persons to supply information to it. The IRS Privacy Act Notice states: "Our legal right to ask for information is Internal Revenue Code sections 6001, 6011 and 6012(a), and their regulations. They say you must file a return or statement with us for any tax you are LIABLE for." To determine whether one must file a federal income tax return, one thus only needs to study these 3 sections of the Code.
The first section states as follows:

Section 6001. Notice or regulations requiring records, statements, and special returns.

Every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Whenever in the judgment of the Secretary it is necessary, he may require any person, by notice served upon such person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not such person is liable for tax under this title.

The second section provides as follows:
Section 6011. General requirement of return, statement, or list.

(a) General rule.
When required by regulations prescribed by the Secretary any person made liable for any tax imposed by this title, or with respect to the collection thereof, shall make a return or statement according to the forms and regulations prescribed by the Secretary. Every person required to make a return or statement shall include therein the information required by such forms or regulations.

Thus, the "general requirement" for making a tax return is that, first, one must be liable for a tax. But WHO is LIABLE for the federal income tax? The federal income tax is found in subtitle A of the Internal Revenue Code and consists of sections 1 through 1563. You may download a 2002 version of the entire Internal Revenue Code here ( item 6 on this page, size: 1.34 Gigs).  Once downloaded, please search the Code (particularly the first 1563 sections) to determine who is "liable" for the federal income tax. The only section of the Internal Revenue Code that makes anyone "liable" for the federal income tax is as follows:
Section 1461. Liability for withheld tax.

Every person required to deduct and withhold any tax under this chapter is hereby made liable for such tax and is hereby indemnified against the claims and demands of any person for the amount of any payments made in accordance with the provisions of this chapter.

This party is the withholding agent for nonresident aliens and foreign corporations; see § 1441 and § 1442.  Withholding agents may be individuals, corporations, estates, trusts, political organizations, homeowners associations, etc. These are the parties who are required to make federal income tax returns pursuant to § 6012:
Section 6012. Persons required to make returns of income.

(a) General rule.
Returns with respect to income taxes under subtitle A shall be made by the following:
(1)(A) Every individual having for the taxable year gross income which equals or exceeds the exemption amount, except that a return shall not be required of an individual -
(i) who is not married (determined by applying section 7703), is not a surviving spouse (as defined in section 2(a)), is not a head of a household (as defined in section 2(b)), and for the taxable year has gross income of less than the sum of the exemption amount plus the basic standard deduction applicable to such an individual,
(ii) who is a head of a household (as so defined) and for the taxable year has gross income of less than the sum of the exemption amount plus the basic standard deduction applicable to such an individual,
(iii) who is a surviving spouse (as so defined) and for the taxable year has gross income of less than the sum of the exemption amount plus the basic standard deduction applicable to such an individual, or
(iv) who is entitled to make a joint return and whose gross income, when combined with the gross income of his spouse, is, for the taxable year, less than the sum of twice the exemption amount plus the basic standard deduction applicable to a joint return, but only if such individual and his spouse, at the close of the taxable year, had the same household as their home.
* * *
(2) Every corporation subject to taxation under subtitle A;
(3) Every estate the gross income of which for the taxable year is $600 or more;
(4) Every trust having for the taxable year any taxable income, or having gross income of $600 or over, regardless of the amount of taxable income;
(5) Every estate or trust of which any beneficiary is a nonresident alien;
(6) Every political organization (within the meaning of section 527(e)(1)), and every fund treated under section 527(g) as if it constituted a political organization, which has political organization taxable income (within the meaning of section 527(c)(1)) for the taxable year; and
(7) Every homeowners association (within the meaning of section 528(c)(1)) which has homeowners association taxable income (within the meaning of section 528(d)) for the taxable year.
(8) Every individual who receives payments during the calendar year in which the taxable year begins under section 3507 (relating to advance payment of earned income credit).
(9) Every estate of an individual under chapter 7 or 11 of title 11 of the United States Code (relating to bankruptcy) the gross income of which for the taxable year is not less than the sum of the exemption amount plus the basic standard deduction under section 63(c)(2)(D).
except that subject to such conditions, limitations, and exceptions and under such regulations as may be prescribed by the Secretary, nonresident alien individuals subject to the tax imposed by section 871 and foreign corporations subject to the tax imposed by section 881 may be exempted from the requirement of making returns under this section.
(b) Returns made by fiduciaries and receivers. 
* * *
 
*****************
Relevant Cases
 
Drake v. United States, 355 F.Supp. 710 (E.D. Mo. 1973)

William Irvin DRAKE,
Plaintiff,

v.

UNITED STATES of America,
Defendant and Third-Party Plaintiff,

v.

Jack W. KLEIN et al.,
Third-Party Defendants.

January 10, 1973.


Michael J. Ebeling, St. Louis, Mo., for plaintiff and Third Party Defendant.

Daniel Bartlett, Jr., U.S. Atty., David W. Harlan, Asst. U.S. Atty., St. Louis, Mo., for the United States.

MEMORANDUM OPINION AND ORDER

WEBSTER, District Judge.

Plaintiff William Irvin Drake instituted this action to recover amounts paid on account of taxes assessed by defendant United States of America. Jurisdiction is based upon 28 U.S.C. § 1340 and 1346.

On August 14, 1970, plaintiff was timely assessed the sum of $98,116.45 respecting plaintiff's wagering activities during the period October, 1965 through and including February, 1967. Plaintiff paid the sum of $19.00 against this total liability. On December 4, 1970, plaintiff was timely assessed the sum of $189,879.66 respecting plaintiff's income tax liability for the years 1965, 1966 and 1967. Plaintiff has paid the sum of $3.00 respecting these assessments. Plaintiff denies liability under the assessments and seeks to recover the $22.00 paid in protest. Defendant has counter-claimed for the $98,107.90 alleged to remain unpaid on account of the unsatisfied assessments.

Defendant, as third-party plaintiff, demands judgment against third-party defendants Jack W. Klein, Jacqueline C. Klein and Samuel O. Swofford, severally, on account of taxes assessed against their wagering activities, and entirely unpaid.

I

Defendant asserts, as a defense to Count II of the complaint, plaintiff's failure to pay his income tax assessment in full before seeking refund of the $3.00 paid in protest. Defendant's position is well taken. In tax disputes, the taxpayer has the option of resisting a proposed deficiency assessment in the United States Tax Court or of paying the full amount of the assessment and seeking refund in the United States District Court. Sec. 6214 I.R.C.; Sec. 7422 I.R.C. A taxpayer may not seek relief in the District Court until he can allege that he has made a proper claim for refund which has been rejected and that the amount assessed has previously been paid. Sec. 7422 I.R.C. A court does not have jurisdiction over a refund suit where the taxpayer has not paid the entire amount of the assessment. Flora v. United States, 362 U.S. 145, 80 S.Ct. 630, 4 L.Ed.2d 623 (1960). It therefore appears that this court is without jurisdiction to entertain plaintiff's claim for refund of income taxes under Count II, and Count II is hereby dismissed.

II

The assessments against Drake, Mr. and Mrs. Klein and Swofford are based upon §§ 4401 and 4411 of the Internal Revenue Code of 1954 (Title 26, U.S.C. §§ 4401 and 4411). Section 4401 imposes an excise tax on "wagers, as defined in § 4421, * * * equal to 10 per cent of the amount thereof." Section 4411 requires all persons liable for the tax under § 4401 to pay a special stamp tax of $50.00 per year, with registration with the Internal Revenue Service further required by § 4412. Section 4421 defines the term "wager" to include "any wager with respect to a sports event or a contest placed with a person engaged in the business of accepting such wagers."

Section 4401(c) designates the persons liable for the tax as follows:

"(c) [as amended by Sec. 151(a), Excise Tax Technical Changes Act of 1958, P.L. 85-859, 72 Stat. 1275] Persons Liable for Tax. — Each person who is engaged in the business of accepting wagers shall be liable for and shall pay the tax under this subchapter on all wagers placed with him. Each person who conducts any wagering pool or lottery shall be liable for and shall pay the tax under this  subchapter on all wagers placed in such pool or lottery. Any person required to register under section 4412 who receives wagers for or on behalf of another person without having registered under  section 4412 the name and place of residence of such other person shall be liable for and shall pay the tax under this subchapter on all such wagers received by him."

Sections 44.4403-1 and 44.6001-1 of the Wagering Tax Regulations require, in part, daily records of the following:

(1) The gross amount of all wagers accepted;

(2) The gross amount of each class or type of wager accepted on each separate event, contest, or other wagering medium;

(3) The gross amount of wagers accepted directly;  accepted by agents; accepted as laid-off wagers;

(4) Detailed information with respect to laid-off wagers; and

(5) The gross amount of tax collected from or charged to bettors as a separate item.

Where persons liable for the tax imposed by Section 4401, fail to maintain records as required in Sections 44.4403-1 and 44.6001-1(b) of the Wagering Tax Regulations, the government is justified in estimating the volume and extent of their wagering operations. Hodoh v. United States, 153 F. Supp. 822 (N.D.Ohio, 1957); O'Neill v. United States, 198 F. Supp. 367 (E.D.N.Y., 1961); Pinder v. United States, 330 F.2d 119 (C.A.5, 1964). The burden of proof is on the person so assessed not only to show that the amount of the assessment was wrong, but to produce convincing evidence from which a proper determination of the amount of tax due may be ascertained. Pinder v. United States, supra; Hodges v. United States, 223 F.2d 140 (C.A.5, 1955); Hamilton v. United States, 429 F.2d 427 (C.A.2, 1970).

Neither plaintiff nor any of the third-party defendants registered under the provisions of § 4412, nor did any of them maintain the detailed records required by §§ 44.4403-1 and 44.6001-1 of the Wagering Tax Regulations. They contend that they were not "persons liable for [the] tax" within the meaning of § 4401(c).

The case was tried to the court. Drake testified that during the period covered by the assessments he was working for Swofford as a runner, and that Swofford was operating a "numbers" lottery. The "numbers" lottery is a gambling operation, particularly popular among members of the black communities of St. Louis and St. Louis County. The operator is generally known as a policy company. In a customary operation, managers in the local communities, acting as entrepreneurs, distribute lottery sheets and other paraphernalia supplied by the policy company through writers. The writers and managers work on a percentage of the take. The cost to the bettor is usually small ($1.00 or less per bet). Briefly summarized, the manager collects the winnings on the last lottery and prepares a record of results on "hit" sheets and "take" sheets. Because of a certain mutual distrust, the policy company exchanges the "drawings" or list of winning numbers from the next lottery at the same time it receives the material from the previous lottery from the manager. This is frequently accomplished on neutral ground between two slowly passing automobiles and is known in the industry as a "cut-loose".

Swofford corroborated Drake's testimony and admitted his operation of the wagering business. The court finds from the preponderance of the credible evidence that Drake was paid approximately $100.00 per week when he worked; that his function was to carry out the "cut-loose" in the City of St. Louis for the policy company; that he accepted no wagers and had nothing to do with the keeping of accounts or records. He had no control over the operation and paid the taxes under protest. In 1967, Drake was arrested and thereafter indicted by the Grand Jury. He pleaded guilty to one count of engaging in the business of accepting wagers as bookmakers without paying the occupational tax imposed by 26 U.S.C. § 4411, in violation of 26 U.S.C. § 7203. Swofford also pleaded guilty to accepting wagers and evading taxes due thereon in violation of 26 U.S.C. § 7201 before Judge Regan, U.S.A. v. Swofford, et al. E.D.Mo. No. 67 Cr. 102(3) (1967).

Mr. and Mrs. Klein each testified with respect to their relationship to Swofford. In late 1966, Swofford asked Klein if he could use his garage. Klein had an idea of what was going on, and this was later confirmed. Klein testified that he had no financial or proprietary interest in the operation or any control over the draw. He testified that he was not engaged in a gambling business. Mrs. Klein acknowledged that she occasionally helped Swofford run adding machine tapes on some of the packages which were later delivered to Drake. Occasionally Mr. Klein counted some money for Swofford. He testified that these activities took place on an average of three times per week. Both Mr. and Mrs. Klein pleaded guilty with Drake to the charge of engaging in the business of accepting wagers as bookmakers without paying the occupational tax imposed by 26 U.S.C. § 4411, in violation of 26 U.S.C. § 7203.

Mrs. Klein admitted that on one occasion she went to Swofford's trailer and that she frequently saw Drake at a bar which they both frequented. Both Mr. and Mrs. Klein denied receiving any compensation from Swofford, and he testified to like effect. Swofford testified that he showed his appreciation for the hospitality extended by the Kleins by taking them out to dinner from time to time and by providing other forms of entertainment for them. The frequently played cards and drank before Swofford went to work. Swofford testified that he had known Jack Klein for thirty years or more. His purpose in using the garage was to work on his forms without having to return to his trailer, which was located some distance away in Jefferson County. Swofford testified that his modus operandi was substantially as follows: he would leave his home between 9:30 and 10:30 a.m. and go to the trailer, where he would print result drawings until 12:00. He usually printed his winning drawings two days in advance in case he should be incapacitated by his drinking. These sheets, printed in advance, made him very vulnerable to his customers, and he took extra precautions not to have them found. After printing the sheets, he would deliver the city drawings to Drake at one of the bars. Drake made the "cut-loose" in the city. Swofford generally made the "cut-loose" himself in the county. After that, Swofford would go to the Kleins' garage and work an average of two hours. At the Kleins he added up the top sheets or prepared for the next drawing, cutting numbers, doing paper work, etc. He testified that Drake did not know about the trailer. Swofford customarily provided morning and afternoon drawings. At the end of the day, he would review the take sheets in his home behind locked doors, making corrections. Swofford testified that Drake had access to the drawings prior to the "cut-loose" but that if anything went wrong that would be his last time. He paid his managers once a week and further testified that the manager was a free agent who could move elsewhere with his clientele.

Special Agent Richard W. Carr of the Internal Revenue Service testified that he had placed Swofford under surveillance in the Fall of 1966, and his testimony with respect to Swofford's comings and goings was consistent with the testimony of other witnesses. He testified that he seized various wagering apparatus at Swofford's trailer.

A somewhat lengthy recitation of the modus operandi of the "numbers" lottery business has been made in order to place the respective parties in their proper roles and to determine whether, under the applicable statutes, any or all of them are liable for the assessments made by the government.

A.

Third-party defendant Swofford. Swofford has acknowledged his participation, and there can be no doubt but that he was a person liable for wagering taxes imposed by § 4401 and § 4411. He ran the business. He failed to register. He failed to keep records, and he failed to pay the wagering taxes. On August 14, 1970, defendant was assessed by the Commissioner of Internal Revenue or his duly authorized agent for the taxable period October 14, 1965 to June 30, 1967 in the amount of $132.72 pursuant to § 4411.

Pursuant to § 4401, the Commissioner timely assessed Swofford for the taxable period October 14, 1965 — February 28, 1967 the sum of $98,070.45. Third-party defendant Swofford has failed to prove that the assessment was wrong and has failed to produce convincing evidence from which a proper determination of the amount of tax due may be ascertained. Judgment will therefore be entered in favor of third-party plaintiff and against third-party defendant Swofford in the amount of $98,203.17.

B.

Third-party defendants Jack W. Klein and Jacqueline C. Klein. These parties have each been assessed for the taxable period October 14, 1965 to June 30, 1967 the sum of $132.62 pursuant to § 4411 and for the period October 14, 1965 to February 28, 1967 and have each been assessed $97,982.15 pursuant to § 4401 for a total of $98,114.77 each party. The question presented for determination is whether either Jack W. Klein or Jacqueline C. Klein are persons liable within the meaning of § 4401(c). The government contends that by furnishing vital auditing functions and a place of operation the Kleins made themselves liable under this section. The key words of the section are: "Each person who is engaged in the business of accepting wagers" and "each person who conducts any wagering pool or lottery * * *" (Emphasis supplied). A mere pick-up man or other employee who has no proprietary interest in the operation and who receives no wagers for his own account is not engaged in the business nor does he conduct a wagering pool or lottery, and is not liable for the tax. United States v. Calamaro, 354 U.S. 351, 77 S.Ct. 1138, 1 L.Ed.2d 1394 (1957); Ingram v. United States, 259 F.2d 886 (5th Cir. 1958), affirmed in part, reversed in part on other grounds 360 U.S. 672, 79 S.Ct. 1314, 3 L.Ed.2d 96; United States v. Bowen, 411 F.2d 923 (5th Cir. 1969).

The government contends that the guilty pleas by Swofford, Mr. and Mrs. Klein and Drake before Judge Regan are admissions against interest which establish that they were personally liable under § 4401(c). The court has considered such pleas for what they are worth, and has accorded them very little weight. At the time of plea, no questions were asked or answers given touching upon the factual basis for the plea.[fn1] The parties testified that they were advised to plead guilty by their attorney and that each of them only knew that they did not have a wagering stamp. The plea, under these circumstances, standing alone, is no evidence that any of the three had any wagers placed with them or conducted a wagering pool or lottery within the meaning of § 4401(c).

While the court does not condone the actions of the Kleins in knowingly permitting Swofford to perform certain functions of an illegal lottery in their home and in assisting him in various minor ways, the court concludes from the preponderance of the credible evidence that the Kleins were not persons liable for tax within the meaning of § 4401(c). There was no evidence of participation in the proceeds of the business or that either of the Kleins had any control or management functions. They received no compensation except such largesse as their friend Swofford saw fit to bestow from time to time in terms of entertainment outside the home. One may find the relationship between the three bizarre, but the court does not find the testimony to be so improbable as to be beyond belief. There was no evidence to the contrary. Accordingly, judgment will be entered in favor of third-party defendants Jack W. Klein and Jacqueline C. Klein and against third-party plaintiff on the third-party complaint.

C.

William Irvin Drake. Defendant claims that Drake played an indispensable role which enabled Swofford to extend his business in the city while handling the county business himself. The government stresses the trust imposed in Drake by giving him access to advance materials. For reasons previously set forth in relation to Mr. and Mrs. Klein, the court concludes that this relationship was not such as to make Drake a person liable for the tax within the meaning of § 4401(c). He was a paid runner, nothing more. He was not conducting a lottery business, but was a mere employee having no interest or participation in the proceeds of the business. Accordingly, the court concludes that plaintiff Drake is entitled to recover amounts paid by him under protest against the assessment for wagering taxes. Judgment will be entered in favor of plaintiff and against defendant in the sum of $19.00. Judgment on the counterclaim will be entered in favor of plaintiff and against defendant. Each party will bear his own costs.

This Memorandum Opinion constitutes the court's findings of fact and conclusions of law.

So ordered.

[fn1] The criminal case pre-dated McCarthy v. United States, 394 U.S. 459, 89 S.Ct. 1166, 22 L.Ed.2d 418 (1969).

See also Fine v. United States, 206 F.Supp. 520 (Colo. 1962).

Peymon Mottahedeh
President - Freedom Law School
(813) 444-4800 | www.livefreenow.org

Last Updated on Thursday, 07 April 2016 12:44

 
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