Third-party liability for withholding taxes under Sec. 3505.

Employers faced with financial difficulties may try to cut corners to maintain positive cash flow. It is not unusual for financially troubled employers to attempt to improve their cash position by failing to remit withholding taxes or to delay remittance until their finances improve. Alternatively, an employer may attempt to secure payroll financing from a third-party lender. The third party may be a bank, general contractor supplying a subcontractor, manufacturer financing a supplier, a wholesaler financing a manufacturer or a surety.

However, even if a third party provides payroll financing, it is still possible that the employer will not remit payroll taxes. The overall effect of failing to remit payroll taxes is that the employer is illegally borrowing these funds. It is also possible that the third-party lender may directly finance the payroll but fail to remit withholding taxes.

Congress's first attempt to deal with this problem was to enact Sec. 6672, which imposes a 100% penalty on certain "responsible persons" who willfully fail to pay over employee FICA and income taxes and thus become liable for 100% of the tax due. Nevertheless, a common practice of payroll lending before 1966 was for a third party to engage in net payroll financing. The lender would advance an employer enough to meet only the net payroll; withholding taxes were not advanced. At the time, only the employer could be be held liable for payroll taxes. Thus, no action could be taken against the lender for payroll taxes. Attempting to collect from the employer could be fruitless because it was likely to be without financing resources. To prevent net payroll financing Congress enacted Sec. 3505 in 1966.(1)

Sec. 3505 addresses direct payment of employee wages by third parties and indirect payments in the form of loans to the employer. The section applies only to liability for payment of the employee portion (FICA and income tax) of the payroll tax. Liability is not imposed for the employer portion.(2)

Sec. 3505(a) provides that if a lender, surety or other person who is not the employer directly pays an employee or group of employees employed by one or more employers, the third party will be liable "in a sum equal to the taxes (together with interest)" for amounts required to be deducted from wages. Liability is also imposed on the lender if the wages are paid to the employee's agent.

Sec. 3505(b) is more narrow in scope. It provides that when a lender, surety or other person supplies funds to or for the account of the employer for the specific purpose of paying employee wages, the third party will be liable "in a sum equal to the taxes (together with interest)" for amounts required to be deducted from wages. However, the third party must have actual notice or knowledge (within the meaning of Sec. 6323(i)(1) that the employer does not intend to withhold on the wages. Also, the liability of the third party is limited to 25% of the amount supplied to or for the employer's account.

Example 1: Lender L advances $100,000 to an employer for the specific purpose of paying only net wages. L knows that the employer will not be able to deduct and withhold the employment taxes. Withholding taxes not remitted amount to $26,000. The lender liability is limited to $25,0000 plus interest.(3)

L will be liable for up to 25% on only those wages supplied to an employer, not for unsupplied wages.

Example 2: Lender L loans employer E $15,000 for the specific purpose of paying $20,000 in net wages to E's employees. L knows that E will not be able to deduct and withhold the employment taxes. The total withholding liability is $4,500. The limitation is $3,750 ($15,000 X 0.25). However, E is liable for only $3,375 ($4,500 X ($15,000 / $20,000), plus interest.(4)

Sec. 3505(a) is a strict liability statute. It will be imposed regardless of whether the third party directly paying wages is aware of the withholding requirement or is financially able to withhold.(5) Thus, most of the litigation involving the statute concerns Sec. 3505(b).

This article will discuss the application of Sec. 3505(b); analyze the case law in this area, which tends to side with the IRS; and offer planning points on how to avoid the Sec. 3505 liability.

Working Capital Loans

Sec. 3505(b) does not apply to an ordinary working capital loan even if the party supplying the funds knows that part of the funds will be used for wage payments in the ordinary course of business. Under Regs. Sec. 31.3505-1 (b)(3), an ordinary working capital loan is a loan "made to enable the borrower to meet current obligations as they arise." The funds supplier is not required to determine the specific use of an ordinary working capital loan or the employer's ability to withhold the necessary employee taxes. However, Sec. 3505(b) will apply if the funds provider has actual notice or knowledge within the meaning of Sec. 6323(i)(1) at the time of the loan that the funds, or a portion of the funds, are to be used specifically to pay net wages. An agreement that states that funds are being provided as a working capital loan will not allow the lender to escape liability if it has actual notice or knowledge that withholding taxes will not be paid.

In Fidelity Bank, N.A.,(6) the lender granted a $1 million revolving credit line to CDI, a construction company. The money was used for construction and working capital. CDI experienced financial difficulties and had to shut down its operation in 1973. Shortly thereafter it was able to resume its operation and Fidelity agreed to provide additional funds even when CDI was overdrawn on its credit line. Fidelity asked CDI to close its payroll account at another bank and have all payroll checks paid through its general account with Fidelity. The word "payroll" was prominently displayed on the checks, which were initialed and approved by a bank officer.

CDI continued to have financial difficulties and Fidelity foreclosed on its assets. Fidelity also refused to honor unprocessed checks. Fidelity asserted that it was not liable under Sec. 3505(b) because its line of credit constituted an ordinary working capital loan. The court rejected this characterization because payroll checks were approved and initialed by a bank officer: "Although the overdrafts were secured by the agreements relating to the general credit line, the bank, through [its officer] knew it was supplying funds specifically for wages."(7) The court noted that when CDI closed its payroll account with another bank, Fidelity "had to know that without loans from it CDI would unable to pay taxes due."

In Intercontinental Industries, Inc.(8) (INI), a parent company was financing the operations of its subsidiary, Prebuilt, through a general account kept by Prebuilt at its bank. Prebuilt also received funds from sources not connected with INI. Prebuilt experienced financial difficulties and went bankrupt. During the period of financial difficulty Prebuilt failed to pay withholding taxes. INI not only knew of this decision but made it a condition of further financing.

INI argued that it was not liable under Sec. 3505(b) because the government failed to show that it gave specific amounts to Prebuilt for the specific purpose of paying wages. INI also argued that Prebuilt was receiving funds from other sources and all funds were going into a general account. The court stated that even if the loans from INI were ordinary working capital loan, INI would still be liable because it "had actual knowledge at the time the funds were advanced that a portion of the funds would be used for the specific purpose of paying net wages."(9) The court rejected INI's characterization of the loans as ordinary working capital loans because INI was told how the funds would be used and exercised significant control over the funds.

The court also rejected INI's contention that liability attaches under Sec. 3505(b) only if the lender "explicitly specifies the exact amount being advanced for net wages .... The statute provides only that funds must be supplied for the specific purpose of paying wages. It does not provide that funds must be supplied only for the purpose of paying wages ... nor does it provide that any or all the amounts supplied must be specifically designated for |the payment of wages'."(10) (Emphasis supplied by the court.) However, since Prebuilt was obtaining funds from other sources, the court held INI liable only for amounts it supplied for wages. Presumably, other lenders whose funds were used for wages met the ordinary working capital exception and were not liable under Sec. 3505(b).

The fact that a lender is performing payroll services and calculations for a client will not preclude it from coming within the ordinary working capital exception. In Merchants National Bank of Mobile (MNB),(11) the lender had been making loans to a client for a number of years. MNB and the client entered into a payroll data processing contract in which MNB agreed to provide an automated payroll service. The client supplied MNB data on 700 employees. The data included information on hours worked, wages, tax and nontax deductions. During 1977 MNB advanced the client sufficient funds to meet its ordinary obligations. The loans were made either directly to the client's general account or by honoring overdrafts on the client's account. Unknown to MNB, the client stopped paying payroll taxes during the third quarter of 1977.

The court refused to hold MNB liable under either Sec. 3505(a) of (b). Sec. 3505(a) was not applicable because a "direct" payment does not occur when a lender honors payroll checks drawn on a bank. For Sec. 3505(a) to apply, the government must show that MNB had (1) the ability to control the funds and (2) the legal authority to exercise control over them.(12) However, MNB had no ability or legal authority to control the funds. Sec. 3505(b) was inapplicable because the loans were not for the specific purpose of paying wages, but were ordinary working capital loans and MNB had no notice or knowledge that the client would not pay its payroll taxes.(13)

Application of Sec. 3505(b)

The government has discretion as to who it may pursue for payroll taxes when a third-party fund provider is involved. In In re Brandt-Airflex Corp.,(14) the employer asserted that the government was required to pursue the third party that had provided the funds. The Second Circuit stated that the statute was enacted for the government's benefit in order to facilitate withholding tax collection and that the government could exercise its discretion as to who it pursued for payroll taxes. The government can pursue the third party "either before or after attempting to collect from the employer."

An agent cannot be held liable for failure to withhold. The regulations offer the example of a construction company that used a bank's automated payroll service to prepare and distribute payroll checks to its employees. In its capacity as a disbursing agent, the bank is not liable. However, it may incur liability if it supplies funds for wage payments.(15) In First National Bank of Circle,(16) the third party claimed that it fell within the agent exception because it "merely arranged for funds" to go to the employer. However, the court held that Sec. 3505(b) "is not limited to persons supplying their own funds." The bank had honored employer overdrafts in anticipation of prompt repayment and this could put it within the liability envisaged in the statute.

For Sec. 3505(b) to apply, the third party must have actual notice or knowledge within the meaning of Sec. 6323(i)(1) that the employer does not intend or will not make a timely deposit of the payroll taxes. Sec 6323(i)(1) imposes due diligence on the third party. Due diligence is exercised when a party "maintains reasonable routines for communicating significant information to the person conducting the transaction and there is reasonable compliance with the routines." Thus, a third party cannot turn its back on information that would put it on notice of an employer's failure to withhold. The burden of proof is on the government to prove actual notice or knowledge.(17)

The due diligence requirement does not necessarily impose a duty of inquiry. In Coconut Grove Bank,(18) the lender received from the employer a list of its unpaid obligations. The list did not include employment taxes that the employer had failed to remit. The bank made no attempt to learn whether the employer intended or was able to pay employment taxes. The lower court instructed the jury that the bank would "be deemed to have notice or knowledge" if its routines and procedures were not sufficient to establish that the employer was making timely payroll deposits because this would show a lack of due diligence. On appeal, the Fifth Circuit rejected due diligence as imposing "an affirmative duty upon a lender to investigate outside its organization to determine a borrower's ability to pay employment taxes."(19) At the same time, however, the court did not reject the government's characterization that due diligence includes a requirement to "|investigate a situation where the information in the bank's possession would lead a reasonable person to suspect that employment taxes would not or could not be paid'."(20) Rather, it held that there must be sufficient facts in the bank's possession to lead it to inquire.

In Metro Construction Co., Inc.,(21) the third party was held not to have exercised due diligence. Metro advanced funds to a subcontractor with the knowledge that it did not have a sufficient amount to meet its payroll. The court noted that the subcontractor was requesting funds for net payroll only and Metro knew the amount of the gross payroll. The court stated that these "very suspicious circumstances" should have led to "minimal investigation" by Metro, which would have brought to its attention the subcontractor's nonpayment of payroll taxes.(22)

The determination as to whether a third-party fund supplier had actual notice or knowledge is a question of fact to be determined by the court. Most of the cases tried under Sec. 3505(b) have held the third party to have the requisite notice or knowledge. Contractors supplying funds to subcontractors have been held liable under Sec. 3505(b), in most instances, because they knew the subcontractors were not withholding payroll taxes.(23) When the contractor paid wages directly to the subcontractor's employees it was held liable under Sec. 3505(a) even though it was found to have no knowledge that would make it liable under Sec. 3505(b).(24)

A third party that has the authority to cosign checks may also be held liable. In Swindell-Dressler,(25) the third party, Swindell, made a large payment intended to cover payroll and other items for the employer to a bank. The employer passed a resolution that all checks had to be cosigned by an agent of Swindell. Swindell's agent refused to cosign checks for withholding on the grounds that the employer should generate internal cash from accounts receivable to cover these taxes. However, Swindell was held liable for only those payroll checks issued after enactment of a policy that required a cosigner on the signature card.

Sec. 3505(b) also applies to bank overdrafts. In Park Cities Bank & Trust Co.,(26) an employer maintained separate payroll and general accounts at the bank. Deposits from the general account were made into the payroll account. Sometimes, the deposits resulted in overdrafts in the general account that the bank honored. Payments of the overdrafts coupled with payroll loans was sufficient to show the bank's knowledge for purposes of Sec. 3505(b). The following factors will be considered by the court in determining whether an overdraft results in a liability.(27)

* The agreements and understandings between the parties for honoring overdrafts.

* The frequency, amount and duration of the overdrafts.

* The purposes for which overdraft funds are used.

* Procedures for overdraft approval by bank officials.

* Transactions between the third-party bank and other participating banks with respect to overdrafts.

* The documentary record relating to the overdrafts.

A third party that is aware of its liability under Sec. 3505 should file a Form 4219, Statement of Liability of Lendor, Surety, or Other Person for Withholding Taxes, in duplicate for each calendar quarter for which liability is incurred. Sec. 3505(c) provides that amounts paid by the third party are credited toward the employer's liability.

Notice and Time Limitations

The regulations state that the government may collect the liability imposed by Sec. 3505 "by appropriate civil proceeding commenced within 6 years after assessment of the tax against the employer."(28) In Harvis Construction Co., Inc.,(29) the IRS did not bring a collection suit against the lender for 6 1/2 years after it had assessed the employer. The Service argued that the six-year limitation period should be suspended because the employer had filed for bankruptcy during that time. Sec. 6503(i) (now Sec. 6503(h) provides for suspending the assessment and collection periods of Secs. 6501 and 6502 for cases under Chapter 11 for the period of the bankruptcy.(30) The court rejected this argument by noting that the regulation in question makes no reference to the suspension provision of Sec. 6503 and refused to create a suspension simply because the Treasury inadvertently failed to include it in the Sec. 3505 regulations.

The Service can have as long as nine years to collect the tax from the third-party fund provider: three years to assess the tax against the employer under Sec. 6501(a) and six years following assessment to collect from the lender under the regulations. In Dixieline Financial, Inc.,(31) it was argued that the government had to separately assess the lender within three years of the date the employer filed its return to hold the lender liable. The Ninth Circuit rejected this argument. The court held that the Service is required to assess the tax, not the taxpayer. When the employer was assessed, "the amount of the only sum in question was ascertained and was entered." There was only one amount involved and it was assessed against the employer. The court stated that Sec. 3505(b) does not impose a tax on the third-party fund provider. Rather, the section imposes a liability "in a sum equal to the taxes" due from the employer. Since assessment had already been made against the employer, "[f]urther independent assessment would accomplish nothing."

An issue that has caused uncertainty among several circuit courts was whether third-party fund providers were entitled to notice of an assessment. Sec. 6303(a) provides that within 60 days of assessment a notice must be given "to each person liable for the unpaid tax, stating the amount and demanding payment thereof."

The issue was finally resolved by the Supreme Court in Jersey Shore State Bank.(32) The Court noted that the relationship between Secs. 3505 and 6303(a) was not clear because Sec. 3505 does not declare that a lender is liable for the unpaid tax. Instead, the section imposes liability on the lender for all or part of a "sum equal to the taxes."

The Court sought to demonstrate a lack of connection between Secs. 3505 and 6303(a) by noting that the latter section requires a notice stating the amount assessed and demanding payment. Such a notice might have little meaning for a third party because the assessment against the employer could include the employer's share of unpaid social security taxes "for which the lender is not liable."

The Court stated that the chances are slim that a notice would be accurate for lenders liable under Sec. 3505(b) because of the 25% limit. "Accordingly, if sent to a lender, the notice required under [Sec.] 6303(a) is likely to demand payment of an amount different from that for which the lender is liable. We find it improbable that Congress intended such a result."(33) The Court also stated that employers have a greater need for an assessment notice because they are subject to summary collection procedures after the unpaid employment taxes are assessed. However, the "legislative history of [Sec.] 3505 makes clear that the Government may forcibly collect against a lender only by filing a civil suit."(34)

The essence of the Jersey Shore State Bank decision is that Sec. 3505 does not impose the tax on the lender, but a separate liability for the tax. Some support for this view can be found in Regs. Sec. 31.3505-1(d)(1). Note that when the regulation mentions the lender it speaks of a liability but when it mentions the employer it speaks of the "tax."

Calculating the 25% Limitation

As noted earlier, Sec. 3505(b) limits the liability of a third party providing funds to the employer to 25% of the amounts used for wages. An issue that has arisen is whether interest paid on these amounts should be included as part of the 25% or separated from the liability. The Service has argued that the interest should be figured separately even if this would bring the total collection over 25%. Understandably, third parties have argued that interest should be included as part of the 25%. Thus, interest payments when added to the tax would be capped at 25% and any interest that would bring the total over 25% would be lost.

The Service argued in litigation that the examples in Regs. Sec. 31.3505-1(b)(2), which state "plus interest" in addition to the liability, envisage interest as a separate item apart from the tax. However, Sec. 3505(b) states that the third party is liable "in a sum equal to the taxes (together with interest)." Read literally, the statute suggests that total liability cannot exceed 25%. The legislative history of Sec. 3505(b) supports this view by using and later defining the "together with interest" language:

The liability imposed upon the payor of wages is limited to the taxes which are required to be deducted and withheld from the wages of the employees plus interest from the date the employer's return with respect to such wages is due. In any event, such liability shall not exceed 25 percent of the amounts advanced to the employer for the specific purpose of paying wages of the employer's employees.(35) (Emphasis added.)

This language strongly suggests that total liability plus interest cannot exceed 25%.

In Metro Construction,(36) the Ninth Circuit apparently did not want to overturn the examples in the regulations. Therefore, it ruled that prejudgment interest (amounts due between the due dates for filing the employer's payroll tax return and the conclusion of court action) would be included under the 25% cap while postjudgment interest (amounts accruing after the conclusion of court action) could be added to the 25%. Two other circuits have followed the Ninth.

Interaction of Secs. 3505 and 6672

When a case involves both the Sec. 6672 penalty and the Sec. 3505 liability, the question arises as to whether both sections can be imposed. The Service has argued for application of both penalties in order to recover one. However, it does not usually argue that both penalties should be applied simultaneously. In Fidelity Bank, which involved both sections, the Tenth Circuit noted: "We do not understand the government to argue it is entitled to recover twice for [the] unpaid taxes - once under sections 3505(b) and 6672."(38) In Commonwealth National Bank of Dallas,(39) the Fifth Circuit stated that the government's position was that if it prevailed under Sec. 6672 there would be no need to review the judgment against Commonwealth by the lower court for the Sec. 3505(b) liability. Consequently, when the Fifth Circuit upheld the Sec. 6672 penalty it vacated the lower court's holding that Commonwealth was liable under Sec. 3505(b).

In Security Pacific Business Credit, Inc., (40) the Seventh Circuit had to decide whether interest could be imposed under Sec. 3505(b) for up to the 25% cap on loans for net wages when the penalty under Sec. 6672 was also imposed. Security Pacific argued that imposition of the Sec. 6672 penalty automatically negated the 25% liability of Sec. 3505(b).

The Seventh Circuit noted that the Service's policy is "to collect the tax due only once, thereby treating the section 6672 |penalty' as a tax." The court noted that the Service has refused "to take the penalty route because it fears that if it treated section 6672 as a real penalty rather than merely as a device for collecting unpaid taxes the courts would impose too heavy a burden of proof on it."(41) (Emphasis supplied by the court.)

The court then sought to distinguish the tax from interest. The government was collecting the tax under Sec. 6672 and interest (not taxes) under Sec. 3505(b). "The government obtains no windfall, for it merely collects the tax plus interest .... So long as the government doesn't collect more than it is owed, it can hardly be accused of seeking windfalls."(42) Application of the Security Pacific holding can be illustrated by the following example.

Example 3: B, a savings and loan bank, supplies X Corporation with funds for the specific purpose of paying $100,000 in wages. X fails to pay $30,000 of withholding taxes and interest of $15,000 accrues under Sec. 3505. B is held liable as a responsible person under Sec. 6672 and as a third-party lender with notice and knowledge under Sec. 3505(b). B will be liable for $45,000. It will not be liable for $25,000 (25% of $100,000) under Sec. 3505(b) because $30,000 is collected under Sec. 6672. Therefore, Sec. 3505(b) is applied to the interest. If the prejudgment interest was $30,000, only $25,000 of it could be collected.

The Security Pacific court, in dicta, noted that if the Sec. 6672 penalty and Sec. 3505(b) liability were imposed on two different taxpayers(43) the result would be the same as in Example 3 because the tax would be collected only once. This issue has never been before any court, but it is consistent with the overall rationale that the same tax cannot be collected twice.

Nevertheless, the issue as to whether prejudgment interest can be collected under Sec. 3505(b) on top of the Sec. 6672 penalty remains an open one in circuits other than the Seventh. As was noted earlier, three circuit courts have held that prejudgment interest comes under the 25% cap and the language of the statute supports this view.(44) Courts will have to grapple with the question of whether Sec. 3505(b) suggests that the tax and prejudgment interest are part of the same liability when it states that a person shall be liable for "a sum equal to the taxes (together with interest)...." Thus, it is reasonable to conclude that the tax and interest should not be separated. If this view is correct, the Seventh Circuit may have been in error by allowing prejudgment interest to be collected under Sec. 3505(b) when the Sec. 6672 penalty is imposed.. Courts should consider that Regs. Sec. 31.3505-1(d)(1) speaks of the liability imposed by Sec. 3505 on the lender, not the tax. Thus, because both the tax and interest are parts of the same liability they should not be divided.

Planning to Avoid Sec. 3505

The possibility of having a Sec. 6672 penalty imposed on a third-party lender is sufficient incentive to plan for avoiding the Sec. 3505 liability. When withholding taxes are paid neither statute will be imposed on the taxpayer. Thus, the following steps should be taken.

1. Third parties that pay employees directly should file a Form 4219 and pay the withholding taxes.

2. When loans are being made to an employer for payroll tax purposes, the lender should consider filing a Form 4219 and paying the withholding taxes directly. These amounts can be added to the loan balance.

3. The third party could make an agreement with the employer that the latter will pay withholding taxes in a timely manner.

4. Loan documents could provide for trust deposits that will be paid to the IRS.

5. In the case of a working capital loan in which the third party does not intend to monitor how the employer disburses funds, loans should be made at times other than when the employer issues its payroll.

6. Employer payroll disbursements should be monitored regularly.

7. Borrower checks for payroll tax deposits should be honored.

Conclusion

There has been an unmistakable trend in the case law to hold that the third-party lender has had the requisite notice and knowledge for liability under Sec. 3505(b). Such a trend can be expected to continue.

Moreover, the courts have been very generous towards the Service in the area of notice and assessments, allowing the Service the longest possible time to assess the tax. The Supreme Court's decision in Jersey State Shore Bank, holding that notice of assessment need not be given to a third-party lender within the 60-day period, an issue that had vexed the courts for years, was a major victory for the Service. Thus, the courts are likely to allow the Service the benefit of the doubt in timing matters for notice, assessment and collection.

Although the Seventh Circuit in Security Pacific held that both Secs. 3505(b) and 6672 could be applied to the third-party lender, this issue is far from settled. A fair reading of the statute and regulations suggests that the Seventh Circuit may have been in error.(45) Further litigation will be needed to resolve this issue.

(1) H. Rep. No. 1884, 89th Cong., 2d Sess. (1966) (hereinafter, the "House Report"), 1966-2 CB 828. (2) Rev. Proc. 78-13, 1978-1 CB 591, Section 4.02. (3) Adapted from Regs. Sec. 31.3505-1(b)(2), Example (1). For the controversy on interest calculation see the discussion at notes 36 and 37. (4) Regs. Sec. 31.3505-1(b)(2), Example (2). (5) Fred A. Arnold, Inc., 573 F2d 605 (9th Cir. 1978)(41 AFTR2d 78-1351, 78-1 USTC [paragraph] 9834); Kennedy Construction Co. of NSB, Inc., 572 F2d 492 (5th Cir. 1978)(41 AFTR2d 78-1354, 78-1 USTC [paragraph] 9423). (6) Fidelity Bank, N.A., 616 F2d 1181 (10th Cir. 1980)(45 AFTR2d 80-970, 80-1 USTC [paragraph] 9275). (7) Id., at 80-1 USTC 83,562. (8) Intercontinental Industries, Inc., 635 F2d 1215 (6th Cir. 1980)(47 AFTR2d 81-594, 81-1 USTC [paragraph] 9129). (9) Id., at 81-1 USTC 86,116. (10) Id., at 81-1 USTC 86,116. See also Park Cities Bank & Trust Co., 481 F2d 738 (5th Cir. 1973)(32 AFTR2d 73-5203, 73-2 USTC [paragraph] 9503). (11) Merchants National Bank of Mobile, S.D. Ala., 1988 (63 AFTR2d 89-433, 88-2 USTC [paragraph] 9587). (12) Fred A. Arnold, Inc., note 5, cited in MNB, id., at 88-2 USTC 85,841. (13) MNB, id., at 88-2 USTC 85,842-85,843. See Regs. Sec. 31.3505-1(c)(2) Example (2). The court noted that MNB fit the exception illustrated in this example. (14) In re Brandt-Airflex Corp., 843 F2d 90 (2d Cir. 1988)(63 AFTR2d 89-748, 88-1 USTC [paragraph] 9258). (15) Regs. Sec. 31.3505-1(c)(2), Example (2). (16) First National Bank of Circle, 652 F2d 882 (9th Cir. 1981)(48 AFTR2d 81-5750, 81-2 USTC [paragraph] 9615, rev'g and rem'g DC Mont., 1979 (44 AFTR2d 79-5860, 79-2 USTC [paragraph] 9637). (17) House Report, note 1, 1966-2 CB 829. (18) Coconut Grove Bank, 545 F2d 502 (5th Cir. 1977)(39 AFTR2d 77-686, 77-1 USTC [paragraph] 9147), rev'g and rem'g S.D. Fla., 1975 (35 AFTR2d 75-733). (19) Id., 5th Cir., at 77-1 USTC 86,204. (20) Id., 5th Cir., at 77-1 USTC 86,204. The duty of inquiry to show lack of knowledge has been more vigorously interpreted in non-Sec. 3505 cases. See Zimmerman, "Innocent Spouse Relief," 24 The Tax Adviser 253 (Apr. 1993), at 254. (21) Metro Construction Co., Inc., 439 F Supp 308 (C.D. Cal. 1977) (40 AFTR2d 77-5760, 77-2 USTC [paragraph] 9582), rev'd and rem'd on other issues, 602 F2d 879 (9th Cir. 1979)(44 AFTR2d 79-5518, 79-2 USTC [paragraph] 9530). See also Est. of Pope Lott Swan, 441 F2d 1082 (5th Cir. 1971)(27 AFTR2d 71-1080, 71-1 USTC [paragraph] 9279), a non-Sec. 3505 case. (22) Metro Construction, id., DC, at 77-2 USTC 87,955. (23) Whilmar General Contractors, Inc., N.D. Tex., 1970 (25 AFTR2d 70-1306, 70-1 USTC [paragraph] 9428); Algernon Blair, Inc., 441 F2d 1379 (5th Cir. 1971)(27 AFTR2d 71-1302, 71-1 USTC [paragraph] 9383); Clayton-Kent Builders, Inc., 378 F Supp 1109 (M.D. La. 1974)(34 AFTR2d 74-5766, 74-2 USTC [paragraph] 9631), aff'd, 5th Cir., 1975, in an unpublished opinion; The Hannan Co., 639 F2d 284 (5th Cir. 1981)(47 AFTR2d 81-1023, 81-1 USTC [paragraph] 9625); Burchfield & Thomas, Inc., E.D. Ky., 1986 (58 AFTR2d 86-5681, 86-2 USTC [paragraph] 9652); Terry P. Smith, Inc., N.D. Ohio, 1975 (36 AFTR2d 75-5739, 75-2 USTC [paragraph] 9710). (24) Kennedy Construction Co. of NSB, Inc., note 5. See also Marvin G. Derr, 498 F Supp 337 (W.D. Wisc. 1980)(46 AFTR2d 80-5632, 80-2 USTC [paragraph] 9597). (25) Swindell-Dressler Co., W.D. Penn., 1979 (44 AFTR2d 79-5724, 79-2 USTC [paragraph] 9583). See also First American Bank and Trust Co., W.D. Okla., 1979 (43 AFTR2d 79-739, 79-1 USTC [paragraph] 9205). (26) Park Cities Bank & Trust Co., note 10. See also North Side Deposit Bank, 569 F Supp 948 (W.D. Penn. 1983)(53 AFTR2d 83-5493, 83-2 USTC [paragraph] 9503). (27) First National Bank of Circle, note 16, at 81-2 USTC 88,055. (28) Regs. Sec. 31.3505-1(d)(1). (29) Harvis Construction Co., Inc., 857 F2d 1360 (9th Cir. 1988)(62 AFTR2d 88-5683, 88-2 USTC [paragraph] 9524). (30) The assessment period is extended an additional 60 days and the collection period an additional six months. (31) Dixieline Financial, Inc., 594 F2d 1311 (9th Cir. 1979)(43 AFTR2d 79-1107, 79-1 USTC [paragraph]9330). See also Swindell-Dressler Co., note 25; The First National Bank of Carbondale, 499 F Supp 51 (M.D. Penn. 1980)(46 AFTR2d 80-5011, 80-1 USTC [paragraph] 9459). (32) Jersey Shore State Bank, 107 Sup. Ct. 782 (1987)(59 AFTR2d 87-413, 87-1 USTC [paragraph] 9131). (33) Id., at 87-1 USTC 87,114. (34) Id. (35) House Report, note 1, 1966-2 CB 862. (36) Metro Construction, note 21. The 25% liability is calculated for each separate payroll tax return due during the year. (37) Intercontinental Industries, Inc., note 8; The Hannan Co., note 23. (38) Fidelity Bank, note 6, at 80-1 USTC 83,563. The court noted that if the Sec. 3505(b) 25% limitation would not cover the entire sum claimed by the government, a retrial on Sec. 6672 might be necessary. (39) Commonwealth National Bank of Dallas, 665 F2d 743 (5th Cir. 1982)(49 AFTR2d 82-647, 82-1 USTC [paragraph] 9149). (40) Security Pacific Business Credit, Inc., 956 F2d 703 (7th Cir. 1992)(69 AFTR2d 92-757, 92-1 USTC [paragraph] 50,125. See also Joseph J. Vaccarella, 735 F Supp 1421 (S.D. Ind. 1990)(66 AFTR2d 90-5872, 90-1 USTC [paragraph] 50,305). (41)Security Pacific, id., at 92-1 USTC 83,494. (42) Id., at 92-1 USTC 83,495. (43) The Tenth Circuit has noted that more control is needed by a lender to be held responsible under Sec. 6672 than to be liable under Sec. 3505(b). Fidelity Bank, note 6, at 80-1 USTC 83,563. (44) See notes 36 and 37. (45) See the discussion following note 43.