Richard J. Genaitis v. Commissioner of Revenue (September 27, 2006)

COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD





RICHARD J. GENAITIS			v.		COMMISSIONER OF REVENUE

Docket No. C272330					Promulgated:
								September 27, 2006
				

	This is an appeal under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 62C, § 39, from the refusal of the appellee, Commissioner of Revenue ("Commissioner"), to abate sales taxes assessed against the taxpayer under G.L. c. 62C, § 31A, as a responsible person liable under G.L. c. 64H, § 16, for the monthly periods beginning December 1, 1999 and extending through November 30, 2000.
	Commissioner Scharaffa heard the appeal and was joined in the decision for the appellee by former Chairman Foley and Commissioners Gorton and Rose.  Chairman Hammond took no part in the deliberations or decision in this appeal.
	These findings of fact and report are made pursuant to a request by the appellant under G.L. c. 58A, § 13, and 831 CMR 1.32.

	Leonard M. Singer, Esq. for the appellant.
	John J. Connors, Jr., Esq. for the appellee.


FINDINGS OF FACT AND REPORT

Based on testimony, an agreed statement of facts, and exhibits entered into evidence at the hearing of this appeal, the Appellate Tax Board ("Board") made the following findings of fact.  
At all times relevant to this appeal, RISCmanagement, Inc. ("RISC" or "the company") was a Massachusetts corporation with its principal place of business at 300 Second Avenue, Waltham, Massachusetts.  RISC was in the business of "designing, manufacturing, commercializing and selling integration and information technology management software tools and services and hardware platforms related thereto."  Sales and Use Tax Returns for the monthly periods December 1999 through November 2000 ("periods at issue") were filed, taxes were reported due, and taxes were paid, as follows: 						

Tax Period	
Due Date	
Date Filed	Tax Reported
on Return	Tax Paid with Return	
December  1999	January 20, 2000	September 13, 2000	$23,251.64	$0.00	
January   2000	February 20, 2000	September 13, 2000	$ 9,975.85	$0.00	
February  2000	March 20, 2000	September 13, 2000	$19,868.96	$0.00	
March     2000	April 20, 2000	September 13, 2000	$ 5,894.44	$0.00	
April     2000	May 20, 2000	September 13, 2000	$23,213.75	$0.00	
May       2000	June 20, 2000	September 13, 2000	$28,522.28	$0.00	
June      2000	July 20, 2000	September 13, 2000	$14,161.23	$0.00	
July      2000	August 20, 2000	October 20, 2000	$ 6,779.67	$0.00	
August    2000	September 20, 2000	October 20, 2000	$45,640.43	$0.00	
September 2000	October 20, 2000	November 2, 2000	$14,703.08	$0.00	
October   2000	November 20, 2000	December 4, 2000	$ 2,171.68	$2,171.68	
November  2000	December 20, 2000	January 9, 2001	$ 5,095.66	$5,095.66	

On April 18, 2001, the Commissioner of Revenue ("Commissioner") sent to Richard J. Genaitis ("Mr. Genaitis") a Notice of Proposed Determination of Personal Liability and Deemed Assessment ("Proposed Determination") for RISC's sales taxes for the periods at issue.  On November 25, 2002, Mr. Genaitis and his attorney met with representatives of the Massachusetts Department of Revenue ("DOR") to discuss the Proposed Determination.  Ultimately, the Commissioner determined that Mr. Genaitis was responsible for payment of RISC's unpaid sales taxes for the periods at issue and, on March 4, 2003, the Commissioner sent to Mr. Genaitis a Notice of Determination of Personal Liability and Deemed Assessment for the unpaid taxes.
On May 2, 2003, Mr. Genaitis timely filed an Application for Abatement with the Commissioner.  Subsequently, on October 16, 2003, Mr. Genaitis and his attorney conferred with a representative of the DOR regarding Mr. Genaitis' abatement application challenging the Commissioner's determination that Mr. Genaitis was a person responsible for RISC's unpaid sales taxes and related penalties and interest.  On March 18, 2004, the Commissioner denied Mr. Genaitis' abatement application and, on April 29, 2004, Mr. Genaitis timely filed an appeal with the Board.  Based on these findings of fact, the Board found that it had jurisdiction over this appeal.
On April 22, 1999, Mr. Genaitis agreed to loan $1.5 million to RISC.  The investment was comprised of a $500,000 convertible debenture issued by RISC and a $1,000,000 term loan to RISC.  In return for his investment, Mr. Genaitis received promises to pay from RISC which were evidenced by a series of documents ("loan documents").  Pursuant to the loan documents, RISC was to pay interest monthly commencing May 22, 1999 for the convertible debenture and August 22, 1999 for the term loan.  
Mr. Genaitis was also given the right to appoint three individuals to the new six-member board of directors and to name the president from among the three new appointees.  Mr. Genaitis selected John Whyte ("Mr. Whyte"), who was then president of RISC, to retain his position and also appointed him to the board.  Mr. Genaitis also appointed himself and John Caianello ("Mr. Caianello"), a long-time business associate, to the board.  In addition to having appointed fifty-percent of the board, in the event of a voting tie, Mr. Genaitis was authorized to appoint the individual responsible for casting the deciding vote.  Further, under the terms of a Voting Trust Agreement which gave Mr. Genaitis voting power with respect to one hundred percent of the common stock, Mr. Genaitis was given the right to take full and sole control of RISC, at such time as he saw fit, including the authority to hire and fire employees. 
Mr. Genaitis testified that at the time of his investment in RISC, he thought the company was very strong and profitable, with $20 million in annual sales and, therefore, a good investment.  However, the purchase agreement for the convertible debenture and the term loan, both signed by Mr. Genaitis, paint a different financial picture.  Both documents referenced the fact that RISC had undertaken a "Plan of Recovery," the purpose of which was to "return the Company to profitability," suggesting that RISC's financial condition was in fact weak at the time of Mr. Genaitis' investment.  
Despite this, Mr. Genaitis testified that he first learned of RISC's financial problems in December 1999, through a conversation with Stanley Miller ("Mr. Miller"), a financial and accounting consultant to RISC.  According to Mr. Genaitis, at their meeting, Mr. Miller told him that RISC was having problems receiving shipments from vendors due to failure to pay bills, and, therefore, needed additional funding.  Upon hearing this, Mr. Genaitis testified that he traveled to Massachusetts to review the company's financial records and to meet with the accounting personnel.  Mr. Genaitis agreed to loan to RISC an additional $600,000 and, immediately thereafter, commissioned his personal accountant, Jay Shulman, to review RISC's financial records.  From the information reviewed, Mr. Shulman concluded that RISC would not recognize a profit for the fiscal year ended October 31, 1999, but that it would most likely incur a net loss.  
Mr. Genaitis claimed that it was not until February 28, 2000, at the board of directors meeting, that he formally invoked his powers pursuant to the loan documents and took complete control of the company's finances.  He further asserted that at that time, he instituted a cash distribution plan whereby all cash and check payments had to be reviewed and approved by Mr. Caianello.  Mr. Genaitis claimed that he did not write any checks or send any bills and that it was solely Mr. Caianello's responsibility to oversee all functions of the accounting department.  He acknowledged, however, that during this time he had discussions with Mr. Caianello and also people in the accounting department, relative to the company's finances.  When asked if Mr. Caianello was operating under his direction, Mr. Genaitis responded "certainly I probably had some influence with him."  He indicated that "if he [Mr. Caianello] asked me a question I would give him an answer" but "most of the time, they made the decisions."
Sometime in September or October 2000, Mr. Genaitis resigned from RISC's board of directors.  On November 20, 2000, RISC filed Chapter 11 bankruptcy.  According to the statement of financial affairs filed in connection with the bankruptcy, within one year immediately preceding the filing of bankruptcy, RISC made payments to Mr. Genaitis totaling $669,979.96.  On cross-examination, Mr. Genaitis was questioned about the inconsistency between his testimony that he received no money from RISC and the bankruptcy filing.  He suggested that the reported amount represented "repayments" of additional funds he loaned to RISC throughout the year.
In support of the assessment, the Commissioner offered the testimony of two witnesses, Mr. Whyte, RISC president from November 1998 until March 10, 2000, and Mr. Miller, financial and accounting consultant during the period November 1999 through May 2000.  Mr. Whyte confirmed that when Mr. Genaitis first became associated with RISC in April 1999, Mr. Genaitis had no involvement in the day-to-day operations of the business and was not involved in the decision making with respect to the company's overall management, including financial matters.  At that time, Mr. Whyte explained, those responsibilities rested with himself and also the company's chief executive officer, Aaron Reibstein.  Then, Mr. Whyte testified, at the December 1999 board of directors meeting, Mr. Genaitis notified the members that under provisions of the loan documents, he was taking control of the company.  Mr. Whyte further testified that, shortly thereafter, during early January 2000, Mr. Whyte was told that he would no longer have any significant involvement in the company's financial affairs.  According to Mr. Whyte, those duties were assumed by Mr. Caianello acting as Mr. Genaitis' representative who, with the counsel of Mr. Genaitis, would make the decisions as to which bills to pay and other financial matters of importance.  
Then, in late February 2000, Mr. Whyte was told by Mr. Genaitis that his services at RISC were no longer needed.  Over the next few weeks, Mr. Whyte had several conversations with Richard Wise, the corporate counsel, and with Mr. Genaitis in an effort to finalize his termination agreement.  On March 10, 2000, Mr. Whyte officially terminated his employment relationship with RISC.    
Mr. Miller, who served as a financial and accounting consultant to RISC, also testified on behalf of the Commissioner.  Mr. Miller explained that his responsibilities to RISC included compiling information regarding the company's outstanding liabilities, including Massachusetts sales tax, and preparing spreadsheets summarizing the information which were then submitted for payment.  Mr. Miller testified that when he first started working at RISC, the spreadsheets which listed the outstanding obligations were submitted to Mr. Whyte, as president, for authorization of payment.    
Sometime around Christmas of 1999, Mr. Miller met Mr. Genaitis for the first time.  According to Mr. Miller, he expressed to Mr. Genaitis his views of how the business could be run more prudently.  At the same meeting, Mr. Genaitis informed Mr. Miller that a new chief financial officer and controller had been hired.  Shortly after this initial meeting, during which Mr. Miller testified Mr. Genaitis had expressed concerns regarding the condition of the company and its finances, Mr. Genaitis took a more active role in RISC's finances, particularly regarding where the money was going and which expenses were being paid.  At that time, Mr. Miller was instructed to send all spreadsheets and requests for payment of outstanding obligations either directly to Mr. Genaitis or to his designee Mr. Caianello, who would authorize payment and instruct Mr. Miller as to which bills to pay.  This procedure remained in effect until RISC's headquarters transitioned to Florida, during April or May 2000, at which time Mr. Miller was told that his services were no longer needed.
On the basis of the evidence presented, the Board found that during the periods at issue, Mr. Genaitis had the duty and authority to pay RISC's sales taxes.  The Board found that by the end of December 1999, at the latest, Mr. Genaitis had become fully aware of RISC's worsening financial condition and its failure to pay outstanding liabilities.  The Board further found, contrary to Mr. Genaitis' testimony, that in December 1999, in accordance with his authority under the loan documents, Mr. Genaitis hired a new chief financial officer and controller and notified the board of directors and others that he intended to take a more active role in the company finances.  In early January 2000, prior to the January 20, 2000 filing deadline for the December 1999 sales tax return, Mr. Genaitis put into place a cash management system under which he, together with his designee, Mr. Caianello, assumed responsibility for the payment of all bills.  Furthermore, during calendar year 2000, while Mr. Genaitis retained and exercised control over RISC's finances, and despite the company's failure to pay over sales taxes collected on behalf of the Commonwealth, payments totaling more than $669,000 were made to Mr. Genaitis.
Therefore, the Board found that at all material times Mr. Genaitis had control over RISC's financial matters and the disbursement of company funds and could have prevented the nonpayment of taxes from occurring.  Accordingly, and for the reasons stated in the Opinion, the Board ruled that Mr. Genaitis was personally responsible for the unpaid sales tax liabilities of RISC and decided this appeal for the appellee.


OPINION

	There was no dispute regarding either RISC's sales tax liability for the periods at issue or the amount of tax and related interest and penalties assessed by the Commissioner.  Rather, the only disputed issue was whether Mr. Genaitis was personally and individually liable for payment of RISC's sales tax liabilities for the periods at issue. 
The sales tax is commonly referred to as a "trustee" tax, i.e., a tax which a person "collects from those with whom it does business and is obliged to pay over to the Commonwealth."  Brown v. Commissioner of Revenue, ATB Findings of Fact and Report 1994-256 at 261, aff'd 424 Mass. 42 (1997) ("Brown").  Pursuant to G.L. c. 64H, § 16,
[e]very 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).  G.L. c. 62Cl, 31A provides that:  

[i]f 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 . . . section sixteen of chapter sixty-four H . . . the commissioner shall so notify that person in writing . . . . 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).  

	The Board noted that Mr. Genaitis was neither an officer nor an employee of RISC.  The Board ruled, however, that this does not insulate him from personal liability.  The Board ruled that G.L. c. 64H, § 16 is not limited to only officers and employees, but instead focuses on persons who had the requisite duty and authority within a corporation to make payment; such persons may include, but are not limited to, corporate officers and employees.  See 830 CMR 62C.31A.1; DOR Directive 02-6.  
As the Court of Appeals for the Ninth Circuit concluded, use of the word "include(s)" in the definition of "person," for purposes of determination of personal liability, suggests a "calculated indefiniteness with respect to the outer limits of the term."  Pacific National Insurance Company v. United States, 422 F.2d 26, 30 (9th Cir.) ("Pacific National").  The definition of person does not require that the individual be formally vested with a corporate office or employed by the corporation.  Id.  
In Neckles v. United States, 579 F.2d 938 (5th Cir. 1978), the Court of Appeals for the Fifth Circuit found that a taxpayer who was neither a director nor an employee of a corporation, but who was "a moving force in organizing the venture, invested in it . . . participated in just about everything that went on there," was, nevertheless, a "responsible person" pursuant to 26 U.S.C. § 6672.  Id. at 940.  The Court found that the taxpayer decided which creditors would be paid and which would not, and knew of the unpaid withholding taxes, yet continued to pay other creditors.  Id.  The Court concluded that "the fact that he [Neckles] received no remuneration and held no official position, while important, is not conclusive as to his liabilities under section 6672."  Id.   
The Fifth Circuit also addressed the issue of whether a creditor lending institution of the defaulting corporation could be found liable as a "responsible person."  Commonwealth National Bank of Dallas v. United States, 665 F.2d 743 (5th Cir. 1982).   The Court concluded that "in a situation in which a lending bank . . . ha[s] the power to see to it that the borrower's taxes are paid, to make final decisions concerning the disbursements of the funds of the borrower or to determine which creditors are to be paid," it would "affirm a judgment holding the bank . . . liable under § 6672."  Id. at 755.  See also, Adams v. United States, 504 F.2d 73 (7th Cir. 1974).
	In Commissioner of Revenue  v. Brown, 424 Mass. 42 (1996) ("Brown"), the Massachusetts Supreme Judicial Court found that, absent express authority pursuant to the terms of the individual's employment, no ready legal formula identified circumstances giving rise to an obligation to remit taxes on behalf of a corporation.  Id. at 44.  In upholding the Board's consideration of federal cases on this issue, the Court agreed with the Board that "[t]here is a close parallel between the State and Federal statutes concerning the duty to pay over."  Id.  Accordingly, the Court and this Board looked to federal case law in determining that "the issue of a duty to pay over [taxes] turns on whether the facts demonstrate that the person assessed had the authority to have the taxes paid."  Id., 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).
In their consideration of the meaning of responsible person, federal courts "have explicitly given the word 'responsible' a broad interpretation."  Caterino v. United States, 794 F.2d 1, 5 (1st Cir. 1986) ("Caterino").  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) ("Monday"); see also Slodov v. United States, 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 in question to sign checks; (3) the identity of the individual 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; [and] (6) the identity of the individual who hires and fires employees . . . .

Mandell v. Commissioner of Revenue, ATB Findings of Fact and Reports 1994-1 ("Mandell") (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 "core question 'is whether the individual has significant control over the enterprise's finances.'" Mahler v. United States, 121 F.Supp.2d 179, 183 (2nd Cir. 2000) ("Mahler") (quoting Fiataruolo v. United States, 8 F.3d 930 (1993)) ("Fiataruolo").  See also Gadoury v. United States, 77 F.3d 460 (1st Cir. 1996).  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) ("Gephart"); Caterino, 794F.2d at 5.  Further, "[t]his need for a responsible party to have significant control does not [] translate into a requirement of absolute authority."  Fiataruolo, 8 F.3d at 939.  A responsible person is "anyone with enough power over finances to 'rock the boat' so as to effect corporate action on delinquent trustee tax obligations."  Delia v. Commissioner of Revenue, ATB Findings of Fact and Report 2004-36, 49 ("Delia").  See also United States v. Kim, 111 F.3d 1351, 1362 (7th Cir. 1997) (quoting Thomas v. United States, 41 F.3d 1109, 1113 (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.'").
"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, 8 F.3d at 939; see also Bowlen v. United States, 956 F.2d 723, 728 (7th Cir. 1992)(responsible person status "encompasses all those connected closely enough with the business to prevent the [tax] default from occurring.")(citing Adams v. United States, 504 F.2d 73, 76 (7th Cir. 1974)).  
Carte blanche liability will not be imposed merely because of a person's status as a corporate officer, director, employee, shareholder, employee or partner; an evaluation of an individual's duties and other circumstances is needed to determine whether responsible person status is warranted.  See Delia, ATB Findings of Fact and Report 2004 at 49.  In Brown, the Supreme Judicial Court affirmed the Board's decision that the treasurer of a corporation, who was also a director and a minority shareholder, was not a responsible person where "Brown's role in [the corporation] was otherwise limited to raising capital and performing long-range financial planning" and he "participated in none of [the corporation's] day-to-day operations."  Brown, 424 Mass. at 43.  Because Brown "had no day-to-day management duties, and he had no decision-making authority over the disbursement of funds," the Supreme Judicial Court ruled that the Board was not compelled to find that he was under a duty to pay over the entity's taxes.  Id. at 45.  
	On the other hand, courts have found that significant control over the disbursement of funds will result in responsible person liability regardless of the individual's lack of status as an officer.  Monday, 421 F.2d at 1218.  Similarly, the Board has found that a non-officer can be held personally responsible for an entity's nonpayment of taxes, depending upon the taxpayer's level of involvement in the entity's financial affairs.  Mandell, ATB Findings of Fact and Report 1994 at 13.  In Mandell, the Board found that the taxpayer, who was not a corporate officer, director, or shareholder of the corporation, but who handled the corporate finances, wrote most of the checks, paid the corporation's bills, had discretion over which bills were paid, and was aware of the company's sales tax liability, was a responsible person.  Mandell, ATB Findings of Fact and Report 1994 at 13.
	"Moreover, the authority to pay or order the payment of delinquent taxes may not be delegated to others in order to avoid liability."  Mahler, 121 F.Supp. at 184 (citing Fiataruolo, 8 F.3d at 939; Hornsby v. IRS, 688 F.2d 952, 953-954 (5th Cir.));  see also, Rizutto v. United States, 889 F. Supp. 698, 704 (S.D.N.Y. 1995) ("A responsible person cannot absolve himself of liability merely by delegating this duty to another person."); Karet v. Commissioner of Revenue, ATB Findings of Fact and Report 1994 - 1232.
	In the present appeal, the Board found that by the end of December 1999, at the latest, and prior to the filing due dates for any of the tax periods at issue, Mr. Genaitis had knowledge of RISC's worsening financial condition and its failure to pay outstanding obligations.  Pursuant to the loan documents signed in connection with his loans totaling $1.5 million, Mr. Genaitis had the authority to, and did, appoint one-half of the board of directors; hire and fire employees; control the company through a voting stock trust; and through his designee, Mr. Caianello, approve the payment of company liabilities.  
The Board found that prior to the end of 1999, Mr. Genaitis hired a new chief financial officer and controller and made it known that he intended to take a more active role in the company finances.  In early January 2000, prior to the January 20, 2000 filing deadline for the December 1999 sales tax return, Mr. Genaitis put into place a cash management system under which he, through his designee, Mr. Caianello, assumed responsibility for the payment of all bills.  The Board further found that Mr. Genaitis' testimony to the contrary consisted of self-serving statements of little probative value.  See Karet v. Commissioner of Revenue, ATB Findings of Fact and Reports 1997-1232, 1242.
	Based on the evidence presented, the Board ruled that Mr. Genaitis failed to meet his burden of proving that he was not a person responsible under the applicable statutes and, therefore, was not entitled to an abatement of the taxes assessed for the periods at issue.  See London v. Commissioner of Revenue, ATB Findings of Fact and Report 1997-1245, 1253, (quoting 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 concluded that Mr. Genaitis possessed the requisite duty and authority to remit the unpaid sales taxes and therefore was a responsible person under G.L. c. 62C, § 31A for RISC's sales tax liability for the periods beginning December 1, 1999 and extending through November 30, 2000.

						THE APPELLATE TAX BOARD


						
				  By:__________________________________
					Frank J. Scharaffa, Commissioner





A true copy,

Attest:_____________________________
	  Assistant Clerk of the Board

11


	ATB 2006-704