STATE OF WISCONSIN
TAX APPEALS COMMISSION
11652 North River Road
Mequon, WI 53092,
WISCONSIN DEPARTMENT OF REVENUE
P.O. Box 8933
Madison, WI 53708-8933,
|DOCKET NOS. 97-W-293, 97-S-294, and 97-S-295
DECISION AND ORDER
DON M. MILLIS, COMMISSIONER:
This matter came before the Commission for trial on June 3, 1999, in Waukesha. The parties have submitted post-hearing briefs. Petitioner was represented by Zetley & Cohn, S.C., by Attorney Bela Roongta Eitel. Respondent was represented by Attorney Sheree Robertson.
Based on the evidence received at trial, the submissions of the parties, and the record in this matter, the Commission hereby finds, concludes, and orders as follows:
FINDINGS OF FACT
Ceille Industries, Inc.
1. During the periods under review the sole operation of Ceille Industries, Inc. ("Ceille Industries") was a restaurant called Country Gardens that was located on the south side of Milwaukee.
2. For many years, Country Gardens was a popular and successful restaurant. In the late 1980s, Country Gardens fell on hard times.
3. On July 3, 1989, Ceille Industries filed a Chapter 11 petition for bankruptcy in the Eastern District of Wisconsin.
4. In the spring of 1990, the Bankruptcy Court approved a plan of reorganization. Under the plan, Ceille Industries was to have a three-person board of directors consisting of:
A. Loretta Ceille, a principal in Ceille Industries, or her representative;
B. A representative of M&I First Bank of Cudahy, the secured creditor; and
C. A representative of the unsecured creditors.
5. Under the plan, the Board of Directors was authorized to operate the Country Gardens restaurant, to select officers of the corporation, and to select a new manager of Country Gardens.
6. The Board of Directors hired petitioner to manage Country Gardens as of July 15, 1990. Petitioner resigned as manager on July 15, 1992. Petitioner had check-signing authority on the business checking account of Ceille Industries during his tenure as manager. Petitioner held no other position or office associated with Ceille Industries and was not a shareholder of Ceille Industries.
7. On June 30, 1990--about two weeks before petitioner took his position of manager--Ceille Industries had outstanding tax obligations of more than $15,000 and a net cash balance of less than $132.
8. Within certain limitations, petitioner had the authority to run the day-to-day affairs of Country Gardens. Petitioner could hire, fire, and set the pay for employees other than department heads. Personnel divisions involving department heads had to be approved by the Board of Directors. Petitioner did not have the authority to close down the restaurant.
9. Petitioner had limited authority to direct payments to vendors and creditors of Ceille Industries. The Board of Directors authorized petitioner to pay those vendors who required payment in exchange for supplies. For example, some vendors required payment at the time of delivery or within a few days following delivery of supplies. However, decisions concerning payments to other vendors and creditors (including respondent) rested with the Board of Directors.
10. The Board of Directors charged petitioner with the task of operating the Country Gardens, even if that meant delaying the payment of taxes owed to respondent and payments to other creditors. The Board of Directors hoped that petitioner would be able to get Country Gardens on its feet so that all tax obligations could be paid. This did not occur during petitioner's tenure at Country Gardens.
11. At times, the Board of Directors ordered petitioner to pay other expenses (e.g., payments on the bank loan and remodeling expenses) while tax obligations went unpaid, and to pay taxes only when the restaurant's finances permitted.
12. During petitioner's tenure at Country Gardens many, but not all, of Ceille Industries' tax obligations were paid.
Five Ceals, Inc.
13. Five Ceals, Inc. ("Five Ceals"), is a corporation that was apparently organized for the purpose of holding a liquor license so that alcohol could be served at Country Gardens.
14. Prior to the adoption of the plan of reorganization, Edward Kordich owned all of the stock of Five Ceals. Mr. Kordich was an employee of Ceille Industries and operated the bar at Country Gardens. Under the plan of reorganization, all of the stock in Five Ceals was transferred to Ceille Industries.
15. Petitioner had little or no role in the operation of Five Ceals.
Docket No. 97-W-293--Ceille Industries
16. Under the date of April 30, 1996, respondent assessed petitioner as a person responsible for the withholding tax liability of Ceille Industries, Inc., for the period of June 16 through September 30, 1992.
17. Petitioner filed a timely petition for redetermination with respondent. Under the date of June 13, 1997, respondent denied the petition for redetermination.
Docket No. 97-S-294--Ceille Industries
18. Under the date of May 14, 1996, respondent assessed petitioner as a person responsible for the sales and use tax liability of Ceille Industries, Inc., for the period of August 1990 and November 1990 through September 1992.
19. Petitioner filed a timely petition for redetermination with respondent. Under the date of June 13, 1997, respondent denied the petition for redetermination.
Docket No. 97-S-295--Five Ceals
20. Under the date of April 29, 1996, respondent assessed petitioner as a person responsible for the sales and use tax liability of Five Ceals, Inc., for the period of May and June 1992.
21. Petitioner filed a timely petition for redetermination with respondent.
22. Under the date of June 13, 1997, respondent denied the petition for redetermination. In its action on the petition for redetermination, respondent determined petitioner's principal liability as $1,403.59, plus interest of $1,186.03.
23. Petitioner filed a timely petition for review with the Commission appealing respondent's actions on all three petitions for redetermination.
24. Subsequent to the filing of the petition for review, respondent adjusted the amounts assessed against petitioner in Docket Nos. 97-W-293 and 97-S-294. The table below shows the amounts of petitioner's liability asserted by respondent in these two dockets as of the date of respondent's action on the petitions for redetermination and as of the date of trial.
June 1997 June 1999
Docket No. 97-W-293
Tax 23,984.10 2,220.57
Interest 15,110.12 1,559.90
Penalty 5,750.00 555.14
Total 44,844.22 4,335.61
Docket No. 97-S-294
Tax 83,345.44 65,705.59
Interest 84,787.01 92,289.00
Penalty 4,793.17 16,626.40
Total 172,925.62 174,620.99
APPLICABLE WISCONSIN STATUTES
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(b) Intent to defeat or evade.
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2. 'Personal liability.' The penalties provided by this subdivision shall be paid upon notice and demand of the secretary of revenue or the secretary's designee and shall be assessed and collected in the same manner as income or franchise taxes, except that the time limits under s. 71.77 do not apply to the assessment of personal liability under this subdivision if the corporation, other form of business association, partnership, limited liability company or sole proprietorship with which the person is associated is assessed within the time period under s. 71.77. Any person required to withhold, account for or pay over any tax imposed by this chapter, whether exempt under s. 71.05(1) to (3), 71.26(1) or 71.45 or not, who intentionally fails to withhold such tax, or account for or pay over such tax, shall be liable to a penalty equal to the total amount of the tax, plus interest and penalties on that tax, that is not withheld, collected, accounted for or paid over. The personal liability of such person as provided in this subdivision shall survive the dissolution of the corporation or other form of business association. "Person", in this subdivision, includes an officer, employe or other responsible person of a corporation or other form of business association or a member, employe or other responsible person of a partnership, limited liability company or sole proprietorship who, as such officer, employe, member or other responsible person, is under a duty to perform the act in respect to which the violation occurs.
77.60 Interest and penalties.
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(9) Any person who is required to collect, account for or pay the amount of tax imposed under this subchapter and who wilfully fails to collect, account for or pay to the department shall be personally liable for such amounts, including interest and penalties thereon, if that person's principal is unable to pay such amounts to the department. The personal liability of such person as provided in this sub-section shall survive the dissolution of the corporation or other form of business association. Personal liability may be assessed by the department against such person under this subchapter for the making of sales tax determinations against retailers and shall be subject to the provisions for review of sales tax determinations against retailers, but the time for making such determinations shall not be limited by s. 77.59(3). "Person", in this subsection, includes an officer, employe or other responsible person of a corporation or other form of business association or a member, employe or other responsible person of a partnership, limited liability company or sole proprietorship who, as such officer, employe, member of other responsible person, is under a duty to perform the act in respect to which the violation occurs.
CONCLUSION OF LAW
Petitioner lacked the requisite authority to direct the payment of the taxes at issue for either Ceille Industries, Inc., or Five Ceals, Inc.
Generally, there are three elements of a personal liability assessment:
1. Whether the taxpayer had authority to direct payment of taxes;
2. If so, whether the taxpayer had a duty to direct payment of taxes; and
3. If so, whether the taxpayer intentionally breached this duty.
Gerth v. Dep't of Revenue, Wis. Tax Rep. (CCH) ¶ 203-367 at 15,588 (WTAC 1992). Once respondent presents clear and satisfactory evidence of each element, the person assessed bears the ultimate burden of proof that respondent's assessment is incorrect. Drilias v. Dep't of Revenue, Wis. Tax Rep. (CCH) ¶ 400-222, 30,739 (WTAC 1996).
This matter is resolved by the fact that respondent has not met its burden to show that petitioner had authority to pay the taxes at issue. Petitioner simply did not have the authority to direct the payment of taxes owed by Ceille Industries.
With regard to the tax obligations of Ceille Industries, respondent's primary witness (the only member of the Board of Directors to testify) acknowledged that petitioner was hired to operate the restaurant with the hope that at some point in the future the restaurant would be profitable, but that during petitioner's tenure there were never enough funds to pay all of the tax obligations while at the same time keeping the business afloat. After all, it was keeping the business afloat that was petitioner's prime directive.(1)
It is clear that the Board of Directors expected petitioner to rehabilitate the business first, pay taxes second. In fact, respondent's primary witness acknowledged that, in order to rehabilitate Country Gardens, the Board of Directors understood that tax obligations would have to be subordinated to other obligations that would have to be paid in order for the restaurant to operate. Moreover, at one point, the Board of Directors ordered petitioner to make a payment on the bank loan (a payment that was not necessary to keep the restaurant operating) even though tax obligations were unpaid.
With regard to Five Ceals, there is no evidence that petitioner was involved in the day-to-day operations of this corporation, except to the extent that obligations of Five Ceals were paid out of the Ceille Industries' checking account. Even if Five Ceals came under petitioner's authority as manager of Country Gardens, petitioner's control over financial decisions and authority to pay tax obligations was circumscribed as indicated above.
The record does not permit the Commission to conclude that petitioner had the authority to direct the payment of any of the taxes at issue.
Respondent's actions on the petitions for redetermination are reversed.
Dated at Madison, Wisconsin, this 16th day of June, 2000.
WISCONSIN TAX APPEALS COMMISSION
Mark E. Musolf, Chairperson
Don M. Millis, Commissioner
Thomas M. Boykoff, Commissioner
ATTACHMENT: "NOTICE OF APPEAL INFORMATION"
July 18, 2000 Appealed to Dane County Circuit Court (00CV1962)
1 Time after time on both direct and cross examination, respondent's primary witness explained that the goal of the Board of Directors and the charge to petitioner was to keep the business going and increase business. Tr. at 14, 16, 24, 38, 39, 43, and 44. The goal was not to wind down the business or pay tax obligations.