State Bar of Wisconsin Return to wisbar.org Wisconsin Tax Appeals Commission


[WP]

STATE OF WISCONSIN

TAX APPEALS COMMISSION


BRENDA PHARO

and

MICHAEL A. PHARO

P. O. Box 129

Mt. Horeb, WI 53572-0129

Petitioners,

vs.

WISCONSIN DEPARTMENT OF REVENUE

P.O. Box 8907

Madison, WI 53708,

Respondent.

DOCKET NOS. 98-W-235 and 98-S-247

DOCKET NOS. 98-W-236-SC,
98-S-244, 98-S-245 and 98-W-246

DECISION AND ORDER


DON M. MILLIS, COMMISSIONER:

These matters came before the Commission for trial on February 29, 2000. Respondent has submitted a post-hearing brief; petitioners have not. Petitioners appeared pro se. Respondent appeared by Attorney Sheree Robertson.

Based upon the evidence received at trial, the submission of respondent, and the record in these matters, the Commission hereby finds, concludes, and orders as follows:

FINDINGS OF FACT

American Alarm & Telephone Corporation

1. During the years at issue, American Alarm & Telephone Corporation ("AATC") was in the business of selling and servicing telephone systems, and installing and monitoring alarm systems.(1)

2. AATC was incorporated in January 1992 by petitioner Brenda Pharo, then known by her maiden name of Brenda Farrey.(2) From incorporation until early 1995, Mrs. Pharo was president and treasurer of AATC.

3. Mrs. Pharo handled some of the accounting and payroll duties for AATC. Mrs. Pharo signed the application for AATC's sales and use tax seller's permit, and signed and filed some of AATC's monthly sales and use tax returns and the AATC 1992 year-end withholding tax return with respondent.

4. Mrs. Pharo was the only signatory on AATC's bank account with Monona State Bank from November 26, 1991 until December 9, 1994. During this period, Mrs. Pharo signed all checks drawn on this account, usually after determining that funds were available in this account.

5. During the period that Mrs. Pharo was president of AATC, AATC was delinquent in its withholding and sales/use tax obligations to

respondent. Notwithstanding the fact that AATC owed withholding and sales/use taxes to respondent, Mrs. Pharo authorized the use of corporate funds to pay AATC's other creditors.

6. Petitioner Michael A. Pharo was president and treasurer of AATC from early 1995 through the end of the periods under review.

7. At all times relevant to these matters, Mr. Pharo was in fact in charge of virtually all activities of AATC, including all day-to-day activities of AATC. Mr. Pharo routinely:

A. Received and handled inquires received by the receptionist;

B. Assigned duties and responsibilities to AATC employees;

C. Assigned service calls for AATC technicians;

D. Held himself out as owner of AATC and its "controller" even before becoming AATC's president;

E. Signed and filed withholding and sales/use tax returns on behalf of AATC;

F. Represented AATC in all dealings with respondent; and

G. Was compensated for his efforts on behalf of AATC.

8. Mr. Pharo was a signatory on AATC's checking account at Associated Bank beginning on December 8, 1994.

9. Prior to and during the period that Mr. Pharo was its president, AATC was delinquent in its withholding and sales/use tax obligations to respondent. Mr. Pharo had actual knowledge that AATC was delinquent in its withholding and sales/use tax obligations as early as 1993.

10. Notwithstanding the fact that AATC owed withholding and sales/use taxes to respondent, Mr. Pharo authorized the use of corporate funds to pay AATC's other creditors.

Assessments Against Brenda Pharo

11. Under the date of October 31, 1996, respondent issued a withholding tax assessment against Mrs. Pharo in the principal amount of $4,831.14, plus interest ($2,968.32) and penalties ($1,107.11). Respondent issued the assessment against Mrs. Pharo as a person responsible for the withholding tax liability of AATC. The periods involved in the assessment are 1992, 1993, and the first three quarters of 1994.

12. Mrs. Pharo filed a timely petition for redetermination with respondent. Respondent denied the petition for redetermination, and Mrs. Pharo filed a timely petition for review with the Commission. This petition for review was assigned Docket No. 98-W-235.

13. Under the date of November 14, 1996, respondent issued a sales and use tax assessment against Mrs. Pharo in the principal amount of $19,338.92, plus interest ($10,951.92) and penalties ($3,996). Respondent issued the assessment against Mrs. Pharo as an officer, employee or other person responsible for the sales and use tax liability of AATC. The period involved in the assessment runs from June 1992 to October 1994.

14. Mrs. Pharo filed a timely petition for redetermination with respondent. Respondent denied the petition for redetermination, and Mrs. Pharo filed a timely petition for review with the Commission. This petition for review was assigned Docket No. 98-S-247.

15. Subsequent to respondent's action on the petition for redetermination, respondent reduced the principal amount of the assessment in Docket No. 98-S-247 by $488.37 with respect to May of 1993.

Assessments Against Michael Pharo

16. Under the date of May 31, 1996, respondent issued a withholding tax assessment against Mr. Pharo in the principal amount of $5,249.07, plus interest ($2,776.14) and penalties ($1,185.16). Respondent issued the assessment against Mr. Pharo as an officer, employee or other person responsible for the withholding tax liability of AATC. The periods involved in the assessment are 1992, 1993, 1994, and the first three quarters of 1995.

17. Mr. Pharo filed a timely petition for redetermination with respondent. Respondent denied the petition for redetermination, and Mr. Pharo filed a timely petition for review with the Commission. This petition for review was assigned Docket No. 98-W-246.

18. Under the date of June 14, 1996, respondent issued a sales and use tax assessment against Mr. Pharo in the principal amount of $22,516.53, plus interest ($10,137.70) and penalties ($4,016). Respondent issued the assessment against Mr. Pharo as an officer, employee or other person responsible for the sales and use tax liability of AATC. The period involved in the assessment runs from May 1992 to October 1995.

19. Mr. Pharo filed a timely petition for redetermination with respondent. Respondent denied the petition for redetermination, and Mr. Pharo filed a timely petition for review with the Commission. This petition for review was assigned Docket No. 98-S-245.

20. Under the date of November 26, 1997, respondent issued a sales and use tax assessment against Mr. Pharo in the principal amount of $8,000 plus interest ($771) and penalties ($3,686). Respondent issued the assessment against Mr. Pharo as an officer, employee or other person responsible for the sales and use tax liability of AATC. The periods involved in the assessment include February 1994 to September 1995 and November 1995 to February 1997.

21. Mr. Pharo filed a timely petition for redetermination with respondent. The petition for redetermination was granted in part and denied in part. As a result of respondent's action on the petition for redetermination, the principal amount of the assessment against Mr. Pharo was reduced to $7,118.06 and the applicable period reduced to November 1995 to February 1997.

22. Mr. Pharo filed a timely petition for review with the Commission. This petition for review was assigned Docket No. 98-S-244.

23. Subsequent to respondent's action on the petition for redetermination, respondent reduced the principal amount of the assessment in Docket No. 98-S-244 to $2,060.06.

24. Under the date of May 28, 1997, respondent issued a withholding tax assessment against Mr. Pharo in the principal amount of $10,500, plus interest ($1,521.69) and penalties ($2,625). Respondent issued the assessment against Mr. Pharo as an officer, employee or other person responsible for the withholding tax liability of AATC. The period involved in the assessment is October 1995 to September 1996.

25. Mr. Pharo filed a timely petition for redetermination with respondent. The petition for redetermination was granted in part and denied in part. As a result of respondent's action on the petition for redetermination the principal amount of the assessment was reduced to $610.16.

26. Mr. Pharo filed a timely petition for review with the Commission. This petition for review was assigned Docket No. 98-W-236-SC.

APPLICABLE STATUTES

71.83 Penalties.

(1) CIVIL.

* * *

(b) Intent to defeat or evade.

* * *

2. 'Personal liability.' ... Any person required to withhold, account for or pay over any tax imposed by this chapter 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.... "Person", in this subdivision, includes an officer, employee or other responsible person of a corporation ... who, as such officer, employee ... or other responsible person, is under a duty to perform the act in respect to which the violation occurs.

77.60 Interest and penalties.

* * *

(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. ... 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, employee or other responsible person of a corporation ... who, as such officer, employee, ... or other responsible person, is under a duty to perform the act in respect to which the violation occurs.

CONCLUSIONS OF LAW

1. Brenda Pharo was a person responsible for the delinquent tax liabilities of AATC pursuant to sections 71.83(1)(b)2 and 77.60(9) of the Statutes because she had the authority and duty to direct the payment of AATC's withholding and sales/use tax liabilities and she intentionally breached this duty.

2. Michael Pharo was a person responsible for the delinquent tax liabilities of AATC pursuant to sections 71.83(1)(b)2 and 77.60(9) of the Statutes because he had the authority and duty to direct the payment of AATC's withholding and sales/use tax liabilities and he intentionally breached this duty.

OPINION

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).

Authority

The president of a corporation necessarily has the authority to direct payment of taxes. Gerth, at 15,589. Authority is even greater when the president of a corporation is the sole person with check-signing authority.

However, one need not be an officer, director or shareholder of a corporation to have authority to direct payment of taxes. Noard v. Dep't of Revenue, 1998 Wisc. Tax LEXIS 44 at 10-11 (WTAC 1998). Such a person may be held responsible for the tax liabilities of a corporation if that person played a significant role in the corporation's business affairs and met the three tests for responsible person liability. Id.

Mrs. Pharo

The period at issue with regard to Mrs. Pharo runs from 1992 to October 1994. During this entire period, Mrs. Pharo was president and treasurer of AATC, and she was the only person with authority to sign checks on AATC's checking account. There can be no doubt that Mrs. Pharo had the authority to direct the payment of AATC's taxes.

Mr. Pharo

Mr. Pharo clearly possessed authority to direct the payment of taxes as soon as he succeeded Mrs. Pharo as president and treasurer in early 1995. However, it is clear from the factual record that Mr. Pharo had de facto responsibility for control of most aspects of AATC's operation, including its financial affairs, from its inception. Mr. Pharo handled inquires, assigned staff responsibilities, and dealt with respondent. During the entire period under review, Mr. Pharo was in a position to direct the payment of AATC's tax liability.

Duty

The duty to direct the payment of taxes derives from the authority to direct the payment of taxes, combined with the knowledge that taxes are due and owing. Gerth, at p. 15,589. However, even lacking evidence of actual knowledge that taxes were due and owing, duty attaches to corporate officials who participate in decisions concerning disbursal of corporate funds. Pharo v. Dep't of Revenue, Wis. Tax Rep. (CCH) ¶ 202-968, 13,843 (WTAC 1988).

Mrs. Pharo

Mrs. Pharo testified that the first time she knew that AATC was not current on its withholding and sales/use tax obligations was when she received the personal assessments in October and November of 1996. Even were the Commission to accept this testimony as true,(3) Mrs. Pharo was president and treasurer of AATC until early 1995, and she had authority to sign checks on AATC's account. While many of the checks may have been prepared for her, with respect to certain payments she prepared the checks themselves. Based on this degree of involvement, the duty to direct payment attached to Mrs. Pharo during her tenure as president and treasurer.

Mr. Pharo

In the same way that duty attached to Mrs. Pharo by virtue of her positions and authority, the same can be said of Mr. Pharo with respect to the period after he succeeded Mrs. Pharo as president and treasurer of AATC and as signatory on AATC's checking account. It is clear, however, that Mr. Pharo had actual knowledge of AATC's tax delinquencies as early as 1993 when he was dealing with respondent's agents concerning these delinquencies. Once he became aware of the delinquencies, he had a duty to make sure that they were paid, even with respect to taxes that went delinquent before he was aware that they were due and owing. Keimig v. Dep't of Revenue, 1998 Wisc. Tax LEXIS 3 at 6-7 (WTAC 1998).

Breach

In order to show that a person with the duty to direct payment of taxes has intentionally breached that duty, respondent need only demonstrate that the person used corporate funds to pay creditors when taxes are due. Omegbu v. Dep't of Revenue, 1999 Wisc. Tax LEXIS 46 at 11-12 (WTAC 1999). Both petitioners directed payment to creditors and vendors of AATC when AATC had substantial tax obligations to respondent.

ORDER

1. Respondent's actions on the petitions for redetermination in Docket Nos. 98-W-235, 98-W-236-SC, 98-S-245, and 98-W-246 are affirmed.

2. Respondent's actions on the petitions for redetermination in Docket Nos. 98-S-244 and 98-S-247 are modified as provided in Findings 15 and 23 and, as modified, are affirmed.

Dated at Madison, Wisconsin, this 23rd day of March, 2001.

WISCONSIN TAX APPEALS COMMISSION

Mark E. Musolf, Chairperson

Don M. Millis, Commissioner

Thomas M. Boykoff, Commissioner

ATTACHMENT: "NOTICE OF APPEAL INFORMATION"

April 25, 2001 Appealed to Dane County Circuit Court(01CV1076)

1 Unless otherwise stated, all facts pertain to the various periods under review commencing in 1992 and continuing through February of 1997.

2 All references to Mrs. Pharo, even those relating to the periods prior to her marriage to Mr. Pharo, will be as "Mrs. Pharo."

3 While Mrs. Pharo's testimony to her lack of involvement in AATC was not credible, we need not rely on this because, as a matter of law, she had a duty to direct payment of AATC's tax obligations.