Wisconsin Tax Appeals Commission Docket No. 97-S-129

STATE OF WISCONSIN

TAX APPEALS COMMISSION

JOHN D. CEILLE and

CHARLENE CEILLE

8716 Westlake Dr.

Greendale, WI 53129,

Petitioners,

vs.

WISCONSIN DEPARTMENT OF REVENUE

P.O. Box 8933

Madison, WI 53708-8933,

Respondent.

Docket Nos. 97-S-129 and 97-S-130

DECISION AND ORDER

DON M. MILLIS, COMMISSIONER:

These matters came before the Commission for trial on January 14, 1999, in Waukesha. Petitioners were represented by Weiss Law Office, S.C, by Attorney Monte E. Weiss. Respondent was represented by Attorney Michael J. Buchanan. Both parties submitted post-hearing briefs.

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

1. At all times relevant to these matters, the sole business of Ceille Industries, Inc. ("Ceille Industries") was a restaurant called Country Gardens, located at 911 West Layton Avenue in Milwaukee. From 1968 until 1986, Ceille Industries was operated by various members of the family of petitioner John Ceille, including his mother and brothers.

2. In August of 1986, as the result of an agreement involving Mr. Ceille and other members of his family who had been involved in the operations of Ceille Industries, the corporation redeemed the shares of all other shareholders, leaving Mr. Ceille as the sole shareholder, president, and treasurer of Ceille Industries.

3. At the time Mr. Ceille became sole shareholder of the corporation, Ceille Industries borrowed $340,000 from the 1^st National Bank of Cudahy (the "Bank"). Mr. Ceille alone negotiated the loan and executed the formal loan documents on behalf of Ceille Industries.

4. From the time he became sole shareholder of Ceille Industries until the summer of 1988, Mr. Ceille alone managed Country Gardens restaurant on a day-to-day basis. Mr. Ceille's authority included signing all checks drawn on Ceille Industries' checking account.

5. During all times relevant to this matter, Mr. Ceille's wife, petitioner Charlene Ceille, was employed as a real estate broker. Prior to August of 1988, Mrs. Ceille had no active involvement in Ceille Industries. During at least a portion of the period under review, Mrs. Ceille was a member of the board of directors of Ceille Industries, as well as the corporation's vice-president and secretary.

6. During the last half of 1987 and the first half of 1988, Ceille Industries experienced financial difficulties. In September of 1987, Mr. Ceille, on behalf of the corporation, entered into an installment agreement with respondent for the payment of delinquent franchise and income taxes. Ceille Industries reported a sales tax liability of $6,442.82 for May of 1988, but failed to remit any funds to pay this liability.

7. In the spring of 1988, Mr. Ceille, on behalf of Ceille Industries, negotiated an additional loan of approximately $120,000 from the Bank, for the apparent purpose of keeping the corporation afloat.

8. While attending a family gathering in July of 1988 in southern Illinois, Mr. Ceille suffered a heart attack. Mr. Ceille was admitted to a small local hospital for monitoring and recuperation.

9. After approximately one week, Mr. Ceille's condition had stabilized, and he was transferred to a larger hospital in Champaign, Illinois. After 10-14 days, Mr. Ceille was transported to a Milwaukee hospital.

10. Shortly after being admitted to the Milwaukee hospital, doctors there performed an angioplasty on Mr. Ceille. During the course of the operation, the angioplasty balloon broke off and blocked blood flow in one of Mr. Ceille's blood vessels. The doctors immediately began an emergency open-heart surgery that lasted ten hours.

11. As a result of the blockage in blood flow, Mr. Ceille suffered permanent brain damage that affected, among other things, his memory.

12. In December of 1988, Mr. Ceille suffered another heart attack that led to a second open-heart surgery.

13. From the day of Mr. Ceille's initial heart attack, Mr. Ceille's involvement in the business of Ceille Industries ceased for all practical purposes. The extent of Mr. Ceille's subsequent involvement was a few visits to the restaurant and signing documents that had been prepared by others.

14. Shortly after Mr. Ceille suffered his initial heart attack, Mrs. Ceille called the bookkeeper at Country Gardens to let her know that Mr. Ceille would not be returning for several days. During the course of the conversation, Mrs. Ceille was advised in general terms of the financial problems experienced by Ceille Industries.

15. Mrs. Ceille had not been aware of these financial problems and did not believe she could deal with these problems because she intended to stay with Mr. Ceille during his recovery. Mrs. Ceille called an attorney who had represented Ceille Industries in the past and asked him to see what could be done to solve the problems.

16. In August of 1988, after it was apparent that Mr. Ceille would not thereafter be involved in the business affairs of Ceille Industries, Mrs. Ceille and her attorney met with representatives of the Bank. During this meeting, the Bank dictated on the following changes in the operation of Ceille Industries:

A. Mrs. Ceille would become a signatory on the checking account of Ceille Industries.

B. Periodically, the bookkeeper for Ceille Industries would prepare a list of vendors and amounts to be paid. The Bank would review the list and indicate which vendors could be paid and which could not.

C. The Bank would honor any check that was paid to an approved vendor in an approved amount. The Bank would not honor any check that was paid to an unapproved vendor or in excess of an approved amount.

D. All receipts of Ceille Industries would be deposited with the Bank.

1. During the meeting with the Bank, Mrs. Ceille signed a signature card for the checking account of Ceille Industries which had been presented to her by Bank officials.

2. At some point after the August 1988 meeting, one of the Bank's officers acted as or was named as treasurer of Ceille Industries.

3. The loan agreement negotiated and executed by Mr. Ceille on behalf of Ceille Industries authorized the Bank to dictate the operational changes that were imposed during the August 1988 meeting.

4. For the next several months, the operations of Ceille Industries adhered to the dictates of the Bank. Mrs. Ceille would typically stop by the restaurant on a weekly basis and sign those checks that had been prepared in accordance with the Bank's instruction.

5. The Bank authorized the payment of some but not all tax obligations of Ceille Industries. Sales tax returns were filed but no taxes paid for August of 1988 and for the first six months of 1989.

6. Mrs. Ceille and her attorney became concerned about the failure of the Bank to authorize payments to tax authorities. As a result, Mrs. Ceille prepared and remitted to respondent a number of checks for tax liabilities that were not approved by the Bank. The Bank did not honor these checks.

7. As a result, in an effort to regain control of the corporation, Mrs. Ceille caused the corporation to file a voluntary Chapter 11 petition for bankruptcy in July of 1989. Mr. Ceille executed certain documents in the course of filing this petition for bankruptcy.

8. Approximately one year after filing the petition for bankruptcy, the Bankruptcy Court approved a plan of reorganization filed by Mr. Ceille's mother which effectively terminated petitioners' involvement in and control over Ceille Industries.

9. Under the date of May 14, 1996, respondent issued assessments against each petitioner in the amount of $28,389.98 in sales taxes, plus $38,806.90 in interest and penalties. In each case, the liability arose from sales tax delinquencies of Ceille Industries for May and August of 1988 and January through June of 1989.

10. Both petitioners filed a petition for redetermination with respondent, which respondent denied. Petitioners then filed a timely petition for review with the Commission.

APPLICABLE WISCONSIN STATUTE

77.60 Interest and penalties.

* * *

(9) Any person who is required to make a payment of the amount of tax imposed under this subchapter and who wilfully fails to make such payment 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 subsection 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 or other responsible person, is under a duty to perform the act in respect to which the violation occurs.

CONCLUSIONS OF LAW

1. Petitioner John D. Ceille is liable for the sales and use tax obligations of Ceille Industries at issue because he had the authority and duty to direct the payment of the corporation's taxes, and he intentionally breached this duty.

2. Petitioner Charlene Ceille is not liable for the sales and use tax obligations of Ceille Industries at issue because she did not have the authority to direct the payment of the corporation's taxes.

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).

Burden of Proof

As will become obvious from the analysis below, the Commission concludes that respondent has carried its burden to present sufficient evidence on each of the elements with regard to each petitioner. We come to this conclusion based on our review of the quantity and quality of the evidence offered by respondent.

As Affected by Petitioners' Presentation of Evidence

Before going further, we must address two assertions made by respondent with respect to the burden of proof. Respondent argues that the very fact that petitioners presented evidence at the hearing indicates that respondent met its initial burden of proof. We reject this notion. The mere fact that petitioners presented evidence does not constitute an implied waiver by petitioners or implied conclusion by the Commission that respondent has met its burden. This is particularly so in this case where, by agreement of the parties, petitioners presented their case-in-chief first. Such agreement, which was actually sought by the presiding commissioner, avoids the awkward alternative: (1) respondent presents its initial case-in-chief to show some evidence on each element; (2) petitioner then presents a case-in-chief to carry the ultimate burden on each element; and, (3) finally, respondent presents a second case-in-chief to show that petitioner has not met the ultimate burden on the elements.

Even if the presentation of evidence was arranged so that respondent would first present evidence to meet its initial burden, the subsequent presentation by the person assessed could not be construed to mean that respondent met its burden. Were the person assessed to move for a dismissal based on the failure of respondent to meet its initial burden, the presiding commissioner would lack the authority to rule on such a motion, since dispositive motions must be considered by the full Commission. Therefore, we conclude that no inference with respect to respondent's burden can be drawn from a taxpayer's presentation of evidence or a taxpayer's failure to move to dismiss for respondent's failure to meet its burden.

As Affected by the Briefing Schedule

Respondent also argues that the fact petitioners had the opportunity to file both the first brief and the last brief indicates that petitioners bear the ultimate burden of proof. While the party with the ultimate burden typically has the opportunity to file an initial brief and the final brief, it would be a mistake to draw conclusions from the briefing schedule about the burden of proof or whether respondent has met its initial burden. As indicated above, the Commission will determine whether respondent met its initial burden of proof based upon our analysis of the evidence, not upon superficial indicators such as the briefing schedule.

Assessment Against Mr. Ceille

With regard to the period prior to his initial heart attack in July of 1988, there can be little doubt that Mr. Ceille met the elements of personal liability. He had authority because he was president and sole shareholder of Ceille Industries and ran the day-to-day affairs of the corporation.⁽¹⁾ He had a duty to pay the sales taxes because he was aware that they were due and, in some cases, delinquent. He intentionally violated this duty to pay by paying vendors other than respondent. See, Gerth, at 15,589; Gould v. Dep't of Revenue, Wis. Tax Rep. (CCH) ¶ 203--319, 15,405 (WTAC 1992).

The only issue with respect to Mr. Ceille is whether his diminished mental capacity resulting from his first heart attack changed any of the elements. We conclude Mr. Ceille did not do enough to extricate himself from the affairs of the corporation to avoid liability after he suffered his initial heart attack. Mr. Ceille remained as sole shareholder and president of the corporation. He signed various documents for the corporation, including the forms necessary to commence the bankruptcy proceeding. No guardianship or conservatorship was established with respect to Mr. Ceille's involvement in the corporation. Moreover, petitioners failed to offer any expert witness testimony that would help the Commission establish the precise nature of his disability and the extent of his abilities during 1988 and 1989.

We also cannot conclude that the control exercised by the Bank affected Mr. Ceille's liability. While the Bank may have taken considerable control over the affairs of the corporation, it was Mr. Ceille who agreed, on behalf of the corporation, to grant such power to the Bank. When Mr. Ceille negotiated and executed the loan agreements with the Bank, he agreed to let the Bank exercise control if Ceille Industries defaulted on the loan. He cannot at a later date claim immunity from liability based on the control that he voluntarily conveyed to the Bank. See, e.g., Kalb v. U.S., 74-2 USTC ¶ 9760 at 85,499 (2d Cir. 1974).

Because of the unique circumstances involving Mr. Ceille's mental capacity, this result may seem unusually harsh. Failing businesses, especially family businesses, often present difficult situations and difficult choices. With good reason, state and federal laws imposing personal liability on those involved in such failing businesses impose dire consequences for actions that might otherwise seem prudent. As harsh as the result in this case may appear, we cannot conclude that this result is impermissibly unfair.⁽²⁾

Assessment Against Mrs. Ceille

We conclude that Mrs. Ceille is not personally liable for sales and use tax obligations of Ceille Industries because she did not, in fact, have the authority to direct payment of taxes. The indicia of Mrs. Ceille's authority are her positions of vice-president and secretary of the corporation, her membership on the board of directors, and her authority to sign checks for the corporation.

While it may be that any person who is president and sole shareholder of a corporation inherently has authority to direct the payment of taxes, we cannot conclude the same holds for another corporate officer who has no active role in the affairs of the corporation. Thus, in order for Mrs. Ceille to have had authority to direct the payment of taxes, she must have had some active involvement in the business affairs of the corporation.

This brings us to Mrs. Ceille's authority to sign checks. On its face, this might appear to be sufficient to establish Mrs. Ceille's authority to direct the payment of taxes. However, such authority must be real, not illusory. In this case, Mrs. Ceille did not, in fact, have authority to cause the corporation to pay taxes. Only if the Bank concurred could Mrs. Ceille direct payment of taxes. In fact, in those instances in which she sought to pay tax liabilities not authorized by the Bank, the Bank refused to honor such checks.

Had Mrs. Ceille, like her husband, signed documents on behalf of Ceille Industries that ceded the authority to direct payment of taxes to the Bank, she would not prevail. Such an action on her part would be deemed a delegation of her authority to a third party. Otherwise responsible persons may not hide behind such delegations. In this case, Mrs. Ceille did not make such a delegation and, in fact, was never involved in the affairs of the corporation until the onset of her husband's health problems. By the time she became involved, it was clear that the Bank, not Mrs. Ceille, was calling the shots.

Respondent argues that, rather than go along with the Bank's terms in August of 1988, petitioners could have closed down the business. Respondent cites Lee v. U.S., 97-1 USTC ¶ 50,334 (W.D. Pa. 1997), for the proposition that in situations such as this, closing down the business, while a harsh alternative, may be the only way to avoid personal liability for the corporation's unpaid taxes. Id. at 87,736. While Mr. Ceille, as the corporation's sole shareholder and president, had the authority to shut down the business of the corporation, Mrs. Ceille did not have that authority. Therefore, this option was not available to Mrs. Ceille.

Application of Prior Payments

At the close of the trial, petitioners raised the possibility that respondent had not properly applied payments of sales and use taxes made by Ceille Industries after the plan of reorganization was adopted and petitioners were removed from the operation of the corporation. The presiding commissioner afforded petitioners the opportunity to submit documentary evidence to support their contention.

Petitioners took the Commission up on this offer and submitted portions of the Bankruptcy Court's records that showed payments of sales and use taxes by Ceille Industries. After reviewing these documents, we find no evidence that amounts paid were improperly applied by respondent.

ORDER

Respondent's action on the petition for redetermination with respect to John D. Ceille is affirmed.

Respondent's action on the petition for redetermination with respect to Charlene Ceille is reversed.

Dated at Madison, Wisconsin, this 28th day of February, 2000.

WISCONSIN TAX APPEALS COMMISSION

Mark E. Musolf, Chairperson

Don M. Millis, Commissioner

(Dissents in part)

Thomas M. Boykoff, Commissioner

ATTACHMENT: "NOTICE OF APPEAL INFORMATION"

DISSENTING OPINION

I dissent from Conclusion of Law #1. I would conclude that petitioner John D. Ceille is not liable for the sales and use tax obligations of Ceille Industries at issue because, after Mrs. Ceille's August 1988 meeting with the Bank, Mr. Ceille did not have the authority to direct payment of the corporation's taxes.

The majority states that its conclusion that Mr. Ceille had tax paying authority "may seem unusually harsh" (p. 11). This is a gross understatement.

Two factors cannot be ignored. First, during Mr. Ceille's initial heart operation, he incurred permanent brain damage that affected his memory. (Finding of Fact ("FF") 11). This resulted in "diminished mental capacity" (majority's opinion, p. 10). He no longer had the ability to perform his duties (and authorities) as corporate president.

Second, the procedures in authorizing check issuance (FF 16) would have hamstrung Mr. Ceille from exercising his one-time authority to issue checks for tax obligations. The Bank's check-signing policies amounted to a usurpation of Mr. Ceille's check issuing and signing authority. This is evidenced by Mrs. Ceille's attempting to unilaterally pay state sales taxes and the Bank's vetoing those efforts by failing to honor her checks. Mr. Ceille, with diminished mental capacity, would not likely have fared any better. To conclude that Mr. Ceille had the authority, that he intentionally did not pay the taxes, and, therefore, he is personally liable for them ignores the reality of the situation.

Mr. Ceille borrowed $340,000 from the Bank in August of 1986 (FF 3) and another $120,000 in the spring of 1988 (FF 7). The record does not reflect that the check-signing procedures dictated by the Bank in August 1988 (FF 16) were specified in any loan documents. Therefore, the Bank's authoritarian assumption of check-signing powers, and its use of those powers, are not analogous to a corporate president's delegation of check writing and signing authority to another person (ex., bookkeeper) in the corporation, as the majority states.

This case, indeed, presents "unique circumstances" (majority opinion, p. 11). Its conclusion should recognize this situation's reality and demonstrate unique understanding.

Respectfully submitted,

Thomas M. Boykoff, Commissioner

ATTACHMENT: "NOTICE OF APPEAL INFORMATION"

March 23, 2000 Appealed to Milwaukee County Circuit Court (00CV002328)

March 24, 2000 Appealed to Dane County Circuit Court (00CV0787)

¹ Holding the position of corporation president is ordinarily sufficient evidence to show that a person has the authority to direct payment of the corporation's taxes. See, Gerth, at 15,589.

² Fairness limitations on tax statutes are discussed in Helvering v. City Bank Farmers Trust Co., 296 U.S. 85, 90, 80 L. Ed. 62, 56 S.Ct. 70 (1935) ("if the means are unnecessary or inappropriate to the proposed end, are unreasonably harsh or oppressive, when viewed in the light of the expected benefit the guarantee of due process is infringed").