Robert A. Cole v. Commissioner of Revenue (January 31, 2000)

 

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD



ROBERT A. COLE				v.	COMMISSIONER OF REVENUE

Docket No. F235571				Promulgated:
							January 31, 2000
	

	This is an appeal under the formal procedure pursuant to G.L. c. 62C, § 39, from the refusal of the Appellee, Commissioner of Revenue, to abate sales tax on meals assessed against the Appellant under G.L. c. 64H, § 16, as a responsible person liable under G.L. c. 62C, § 31A, for the period beginning July 1990 and extending through June 1994.
	Commissioner Scharaffa heard the appeal and was joined in the decision for the Appellant by Chairman Gurge and Commissioners Lomans, Burns and Gorton. 
	These findings of fact and report are promulgated at the request of the Appellee, pursuant to G.L. c. 58A, § 13 and 831 CMR 1.32.

	Robert A. Cole, Esq., pro se.

Mary C. Brown, Esq., for the Appellee.

FINDINGS OF FACT AND REPORT
Based on the testimony, agreed statement of facts, and exhibits entered into evidence at the hearing of this appeal, as well as reasonable inferences drawn therefrom, the Appellate Tax Board ("Board") made the following findings of fact.
The Appellant, Robert A. Cole, was the trustee of Center Trust 3 ("Trust"). Pamela G. Cole ("Appellant's wife") was the Trust's beneficiary.  Sometime in July 1989, the Appellant, as trustee, purchased real estate at 2 Grafton Street in Shrewsbury, Massachusetts.  On November 30, 1989, the Appellant, as Trustee, entered into a lease with an individual, Spiro P. Koulisis ("Koulisis"), for use of the basement premises at 2 Grafton Street as a bar and restaurant known as "Lantern Room II."   The agreed rental was $4000 per month.  The lease specified that the lessee would procure and maintain all licenses, but that the lessor would use his best efforts to obtain a liquor license by October 1, 1989, and would name Koulisis as manager on the liquor license application.  Koulisis purchased from the Appellant, as well, the existing restaurant equipment that was on the premises. 
Mass. Centre Crossing, Inc. ("Mass. Centre Crossing"), a Massachusetts corporation, was organized on or about April 11, 1990, with the Appellant's wife named as president, treasurer and director.  On April 24, 1990, the Trust conveyed the 2 Grafton Street property to Mass. Centre Crossing.
 	Spiker Corporation ("Spiker") was incorporated in Massachusetts on April 25, 1990, for the purpose of conducting a restaurant business.  Its articles of organization named Koulisis as president and co-director, with Hal Doherty named as treasurer.  Doherty, as a 25% stockholder, was the sole investor in Spiker, providing funds of approximately $150,000.   Spiker was issued a federal tax identification number and a TA-1 meals tax registration number. Sometime in July 1990, Spiker began operating Lantern Room II in the basement of 2 Grafton Street.   
During the period at issue, Koulisis, on Spiker's behalf, managed all operations of Lantern Room II.  He hired and fired employees, ordered and purchased all meals and alcoholic beverages, kept financial records of operations, paid bills, and decided which creditors to pay.  Koulisis, as president and subsequently treasurer of Spiker, signed and filed all sales tax returns and all checks for amounts due.  Spiker continued its operations of Lantern Room II until sometime in May 1994.  
During the period at issue, the Appellant was not named in Spiker's articles of organization as a corporate officer, director or shareholder.  He never, in fact, served as Spiker's officer, director, shareholder or employee.  He had no familial relationship with anyone within Spiker.  He never provided financial support to Spiker.  He never held an insurance policy for Spiker's operations, nor did he lend money to Spiker or any of its officers, stockholders or directors.  He had no involvement in, knowledge of, or control of the day-to-day operations or management of Lantern Room II.  He had no involvement in hiring or firing Lantern Room II employees, or in its employment policies.  He also held no signatory powers on Spiker's checking or operating accounts, had no involvement with Spiker's financial records, made no decisions as to what bills or creditors to pay, never signed Spiker's sales tax returns, and never made any meals tax payments on Spiker's behalf.  Appellant had no authority to act, in any capacity, in the day-to-day operations of Lantern Room II or Spiker.  During the period at issue, the Appellant's sole connection to Spiker was as lessor.
During the period at issue, the identity of the licensee under the liquor license used by Spiker in operating Lantern Room II was in question.  On November 2, 1989, the local licensing board of the Town of Shrewsbury ("Local Board") granted and issued a liquor license, due to expire on December 31, 1989, to "Lantern Room II - Pamela G. Cole - Manager."  On December 31, 1989, the Local Board renewed the license for calendar year 1990, and issued it, again, to the same licensee.   The license, when renewed by the Local Board for calendar year 1991, was issued to "D & M Associates, Inc. Lantern Room II - Robert A. Cole, Manager." On April 23, 1991, the Alcoholic Beverages Control Commission ("ABCC") denied an application to transfer the license to Mass. Centre Crossing.  When renewed for calendar year 1992 and 1993, the Local Board, however, issued it to "Mass. Centre Crossing d/b/a Lantern Room II - Spiro Koulisis, Manager."  There was no evidence presented that indicated that a license transfer had, at any time, been approved by the ABCC.  Spiker paid the annual fees for the renewal of the liquor license.   Pursuant to a decision by the ABCC regarding a January 29, 1996 application to transfer the license, the ABCC found that Appellant was the holder of the original license and that the license had not been effectively transferred during the period at issue.
During the period beginning July 31, 1990 and extending through September 30, 1992, Spiker failed to pay $64,474.72 in Massachusetts sales tax that it collected from its customers, as required by G.L. c. 64H, § 16, to the Appellee Commissioner of Revenue ("Commissioner".)  On February 28, 1993, the Commissioner issued to Spiker, a Notice of Intention to Assess ("NIA") sales tax on meals, in the amount of $65,474.74, for the period beginning July 31, 1990 through September 30, 1992.  Spiker subsequently filed for Chapter 11 protection in U.S. Bankruptcy Court.  On May 6, 1994, Spiker converted to Chapter 7 protection, and ceased doing business.  After the president of Spiker, Koulisis, was determined to be a responsible person by the Commissioner, Koulisis petitioned for Chapter 13 protection in U.S. Bankruptcy Court.  In both bankruptcy filings for Spiker, as well as in Koulisis' Chapter 13 petition, the sales tax was listed as a liability.  Following his own bankruptcy and that of Spiker, Koulisis terminated his tenancy at 2 Grafton Street.  
On December 15, 1994, the Commissioner issued a Notice of Proposed Determination of Personal Liability and Deemed Assessment to Appellant's wife.  Appellant's wife was designated personally responsible for Spiker's unpaid meals tax liability.  The Commissioner's Proposed Determination, however, was rescinded following a hearing of January 9, 1995, thus releasing Appellant's wife as responsible person for Spiker.
The Commissioner issued a Notice of Proposed Determination of Personal Liability and Deemed Assessment dated August 16, 1995, to the Appellant, designating him as a responsible person for Spiker's unpaid sales and withholding taxes.  Following a conference held on October 24, 1995, the Commissioner issued a Notice of Determination of Personal Liability and Deemed Assessment, dated October 25, 1995.  The Commissioner held the Appellant to be a responsible person for Spiker for unpaid meals and withholding taxes, and therefore liable for $182,539.48 in meals and withholding taxes, including interest and penalties, for various periods from July 1990 through June 1994. 
Appellant timely filed an Application for Abatement on December 28, 1995.  The Appellant's application was partially denied by a Notice of Abatement Denial dated May 31, 1996.  By that notice, the Commissioner abated the withholding taxes assessed but refused to abate sales tax in the amount of $65,474.72.  On June 18, 1996, the Appellant timely appealed the Commissioner's abatement denial of the sales tax to this Board.  On the basis of the foregoing, the Board found this appeal to be in conformity with the requirements of G.L. c. 62C, §§ 37 and 39, and therefore that it had jurisdiction to hear and decide this matter.
On the basis of the evidence presented, and to the extent that it is a Finding of Fact, the Board found that the Appellant: had no involvement with Spiker's incorporation; was never an officer, director, or employee of Spiker; was not an authorized signatory on Spiker's checking accounts and had no check-signing authority; did not issue checks to Spiker's vendors; never prepared Spiker's tax returns; could not and did not exercise any control over Spiker's financial matters; and never had authority, control or involvement over the day-to-day operations of Spiker's restaurant, Lantern Room II. The Board, therefore, ruled that the Appellant was not personally or individually responsible for Spiker's sales tax obligation.  Accordingly, the Board granted an abatement of $65,474.72. 
OPINION
In the present appeal, Spiker Corporation incurred sales tax on meals, together with related interest and penalties, totaling $65,474.72, which it failed to pay.  The amount of the assessment is not in dispute.  Spiker's corporate failure resulted in the imposition by the Commissioner of personal liability upon the Appellant, pursuant to G.L. c. 62C, § 31A.  The question presented in this appeal is whether the Appellant was personally and individually responsible for the payment of Spiker's sales taxes, along with the related interest and penalties.   
The sales tax imposed under G.L. c. 64H is a tax that a vendor doing business in the Commonwealth collects from those to whom taxable sales are made and then remits to the Commonwealth.  Brown v. Commissioner of Revenue, 17 Mass. App. Tax Bd. Rep. 26, 28 (Docket No. 193553, October 6, 1994), aff'd, 424 Mass. 42 (1997).  It is commonly referred to as a "trustee tax."  Every vendor doing business in the Commonwealth who makes sales subject to the sales tax is obligated to collect the tax from its purchasers and pay it over to the Commonwealth.  G.L. c. 64H, §§ 2 and 3.  

Further, G.L. c. 64H, § 16 provides, in pertinent part:
Every person who fails to pay to the commissioner any sums required by this chapter shall be personally and individually liable therefor to the commonwealth.  The term "person," as used in this section, includes an officer or employee of a corporation . . . who as such officer [or] employee . . . is under a duty to pay over the taxes imposed by this chapter.  [Emphasis added.] 

The Massachusetts responsible person statute, G.L. c. 62C, § 31A, was designed to cut through the shield of organizational form and impose liability upon those actually responsible for a corporation's failure to pay over "trustee taxes."  Once the corporation has failed to pay a "trustee tax," the liability under G.L. c. 62C, § 31A is separately assessed against, and is collectible by the Commissioner from the responsible person.   G.L. c. 62C, § 31A provides that:

If a person fails to pay to the commissioner any required tax of a corporation or partnership and such person is personally and individually liable therefor to the commonwealth under…chapter sixty-two B . . . [or] sixty-four H . . . the commissioner shall so notify that person in writing at any time during the period of time that such assessment against the corporation or partnership remains in existence and unpaid . . . . After the expiration of thirty days from the date of such notification, such person shall be personally and individually liable for the tax [emphasis added].

A "person" is personally and individually liable for a corporation's sales tax liability if he or she is "an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee or member is under a duty to pay over" the corporation's sales taxes.  G.L. c. 64H, § 16.
	In ruling on the question of who may be under a duty to pay over the taxes imposed under the sales tax statute, the Massachusetts Supreme Judicial Court has stated that the answer depends on "whether there is an obligation to remit taxes arising from a person's circumstances." Commissioner of Revenue v. Brown, 424 Mass. 42, 44 (1997). 
In Brown, the Court found that, absent express authority pursuant to the terms of the individual's employment, no formula readily identifies circumstances which give rise to that individual's obligation to remit taxes on behalf of a corporation.  Id. at 44.   Furthermore, the Court, in upholding the Board's decision, agreed with the Board that consideration of federal cases is appropriate because there is a "close parallel between the State and Federal statutes concerning the duty to pay 
over."  Id. at 44.  Accordingly, the Court and this Board looked to federal case law in determining that "the issue of a duty to pay over turns on whether the facts demonstrate that the person assessed had the authority to have the taxes paid." Id. (emphasis added), citing United States v. Rem, 38 F.3d 634, 642 (2d Cir. 1994); Purcell v. United States, 1 F.3d 932, 937 (9th Cir. 1993); Barnett v. IRS, 988 F.2d 1449, 1454-1455 (5th Cir.) cert. denied, 510 U.S. 990 (1993); O'Connor v. United States, 956 F.2d 49, 50-51 (4th Cir. 1991).
	Federal courts, in their consideration of the meaning of "responsible person," "have explicitly given the word 'responsible' a broad interpretation." Caterino v. United States, 794 F.2d 1, 5 (1st Cir. 1986); see also Thomsen v. United States, 887 F.2d 12, 16 (1st Cir. 1989.)  "[A] responsible person is anyone with the power and responsibility within the corporate structure for seeing that the withheld taxes are remitted." Monday v. United States, 421 F.2d 1210, 1218 (7th Cir. 1970); see also Slodov v. U.S., 436 U.S. 238 (1978).
	Factors drawn from federal case law which have guided the Board in making responsible person determinations include:
(1) the contents of the corporate by-laws; (2) the authority of the individual to sign checks; (3) the identity of the individuals who signed the tax returns; (4) the payment of other creditors, besides the taxing authority; (5) the identity of the officers, directors, and principal stockholders of the corporation; (6) the identity of the individual who hires and fires employees; and, most importantly, (7) the identity of the individual with significant control over the corporation's financial affairs.

Mandell v. Commissioner of Revenue, 16 Mass. App. Tax Bd. Rep. 59, 64 (Docket No. 170601, March 18, 1994).  (Board held that, notwithstanding taxpayer's lack of status as an officer, director or shareholder of the corporation, his "various contributions to the corporation and many duties which he assumed" satisfied the responsible person criteria.)
	The factor most probative of such a duty is "significant control over disbursement of the company's funds." See Gadoury v. United States, 77 F. 3d. 460 (1st Cir. 1996), 1996 U.S. App. LEXIS 32345, at *3.  Exclusive control over the relevant operations of the corporation is not required, provided that the taxpayer's control is significant.  Gephart v. United States, 818 F.2d 469, 473 (6th Cir. 1987); Caterino v. United States, 794 F.2d 1, 5 (1st Cir. 1986).  See also, United States v. Kim, 111 F.3d 1351, 1362 (7th Cir. 1997) (quoting Thomas v. United States, 41 F.3d 1109, 1114 (7th Cir. 1994) ("all that is required is that the individual 'could have impeded the flow of business to the extent necessary to prevent the corporation from squandering the taxes it withheld.'") Generally, such a person is one "with ultimate authority to direct payment of creditors."  Barret v. United States, 580 F.2d 449, 452 (1978). "No single factor is dispositive in evaluating whether [an] individual had significant control; that determination must be made in light of the 'totality of the circumstances.'"  United States v. Rem, 38 F.3d at 642, citing Fiataruolo v. United States, 8 F.3d 930, 939 (2d Cir. 1993.)
	A corporate officer will not generally be found to be a responsible person if he has no managerial duties or control over funds. In Brown, 424 Mass. at 42, the Court concluded that the appellant was not a responsible person even though he was the treasurer, a director, had check- signing authority and owned 23 percent of the corporation's stock.  The Court's decision was based on the fact that Brown was not the general manager, had no authority over the personnel, did not sign checks or participate in the day-to-day operation of the company, and had no decision- making authority over the disbursement of funds.  Brown, 424 Mass. at 43-45.  In the present appeal, as in Brown, the Board found that the Appellant did not have managerial responsibilities over the day-to-day business of the corporation, did not participate in its financial affairs, and had no control over the corporation's funds.  In fact, since the Appellant was not an officer, director, or shareholder of the corporation and did not have check-signing authority, his case for avoiding individual liability is even stronger than the taxpayer in Brown.
	Similarly, the Board found in Caradimos v. Commissioner of Revenue, 1997 Mass. A.T.B. Adv. Sh. 589 (Docket No. 205088, June 10, 1997), that a taxpayer was not a responsible person where, although he held the title of treasurer, was a significant stockholder and had check- signing authority for the general account, he never exercised his check-signing authority, he did not participate in the financial affairs of the business, he had no responsibilities of day-to-day management, and he offered only occasional advice regarding menu items.  See also Shields v. Commissioner of Revenue, 1997 Mass. A.T.B. Adv. Sh. 374 (Docket No. 192121, May 8, 1997); Manor v. Commissioner, 1997 ATB Adv. Sh. 390 (Docket No. 215984, May 8, 1997).
	In the present appeal, the Appellant was not an officer, director or employee of the corporation and never served in any decision-making capacity within the corporation.  He had no authority to disburse funds or to sign checks, no control over personnel, and no involvement over the day-to-day operations of the business.  The Appellant did not issue checks to the corporation's vendors and did not prepare the corporation's tax returns.  He exercised no control over the corporation's financial matters, had no involvement in the corporation's financial record keeping and had no involvement in decisions concerning what bills to pay.  He also provided no financial support to the corporation.  Compare Mandell, supra (Board found that although appellant was not an officer of the corporation, he was still responsible for the corporation's unpaid sales tax liability because he handled the corporate finances, wrote virtually all the checks, paid the corporation's bills, had discretion over which bills were paid and was aware of the company's sales tax liability).  Mandell, 16 App. Tax Bd. Rep. at 64.
The Commissioner argues that "the duty to pay over" Spiker's meals taxes must fall upon the Appellant because he was the holder of the liquor license used in Spiker's operations of Lantern Room II.   The Commissioner argues, pursuant to 830 CMR 64H.6.5(13), that by permitting Spiker to use his liquor license, the Appellant clothed the corporation with authority to act on his behalf.  This regulation specifies: 
[if] a liquor license holder operates an establishment where meals are served, the holder of the liquor license is generally presumed to be the vendor of the meals, whether the meals are served by the holder of the liquor license or by a lessee or concessionaire of the liquor license holder.  As vendor of the meals, the license holder is responsible for collecting and paying over the sales tax on the meals.  [Emphasis added.]

Pursuant to this regulation, holding the liquor license, rather than automatically conferring responsibility and liability for meals taxes, only raises the presumption of vendor status; as vendor of the meals, responsibility and liability for meals tax follow.  Therefore, this Appellant could rebut the presumption so as to be found not responsible for the sales taxes at issue.
	Although the ABCC determined that the Appellant was the holder of the liquor license during the applicable period, that determination is not dispositive of the issue of whether the Appellant had the requisite control as a responsible person for purposes of G.L. c. 62C, § 31A.  As discussed above, Spiker, through its president, Koulisis, operated and managed all aspects of the restaurant where the license was used, including the sale of alcoholic beverages.   The Board has found that the Appellant never acted as vendor to sell meals or alcoholic beverages.   The Appellant has presented sufficient evidence to overcome any presumption of vendor status arising under 830 CMR 64H.6.5(13).
Based on the foregoing, the Board ruled that the Appellant met his burden of proving that he did not have the duty and authority to have the unpaid sales tax remitted to the Commissioner.  Staples v. Commissioner of Corp. & Tax, 305 Mass. 20, 26 (1940) (person who claims to be aggrieved by the refusal of the Commissioner to abate a tax in whole or in part has the burden of establishing the right to an abatement).

Accordingly, the Board found that the Appellant was not a person responsible for the outstanding sales tax and issued a decision for the Appellant in the present appeal.
	
				APPELLATE TAX BOARD


					By:													Abigail A. Burns, Chairman


A true copy,

Attest:_________________________
		Clerk of the Board

 While the Appellant was pursuing his tax abatement remedy with the Commissioner and this Board, he also sought the protection of the U.S. Bankruptcy Court.  The following highlights relevant portions of the Bankruptcy Court proceedings: On June 14, 1996, the Appellant filed a Chapter 7 Petition in U.S. Bankruptcy Court.  On February 4, 1997, the Appellant filed a motion with the U.S. Bankruptcy Court to transfer the pending Appellate Tax Board proceeding to the U.S. Bankruptcy Court for a determination of tax liability which the Court denied. On April 4, 1997, the Court granted the parties' joint motion for relief from the automatic stay under 11 U.S.C §362(d) and to allow the Appellate Tax Board case to proceed.  

 Taxes for which the Commissioner may determine that the person responsible is individually and personally liable include any interest and penalties imposed for those taxes. Berenson v. Commissioner of Revenue, 14 Mass. A.T.B. Rep. 59 (Docket No. 180504), March 11, 1992).

 There is one marked difference between the Federal responsible person statute and the state statutes applicable to this appeal.  The Federal statute requires that the failure to pay over be willful, whereas the State statute has no such requirement. "There is a close parallel between the State and Federal statutes concerning the duty to pay over, but only the Federal statute requires that the failure to pay over be willful." Brown, 424 Mass. at 44 (1997).
The quoted language is taken from the regulation in effect during the periods in issue.  It was later amended on December 27, 1996 to read: "The liquor license holder is a vendor of all alcoholic beverages sold at the licensed premises, and is jointly and severally responsible with any other person selling such beverages on the premises for the collection and payment of the tax imposed by M.G.L. c 64H."  830 CMR §64H.6.5(13)(a)(1).  The amended language was not in effect for any part of the periods at issue and therefore the Board offers no opinion on the effect of the amended regulation.

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ATB 2000-39