Frederick E. Hazard v. Commissioner of Revenue (March 21, 2006)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD


FREDERICK E. HAZARD 	   v.	COMMISSIONER OF REVENUE

Docket No. C261103				Promulgated:
							March 21, 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 withholding taxes assessed against Frederick E. Hazard ("appellant") under G.L. c. 62B, § 5, as a responsible person under G.L. c. 62C, § 31A, for the quarterly tax periods ending September 30, 1990 and December 31, 1990 ("Tax Periods at Issue").      
Commissioner Scharaffa heard the appeal and was joined in the decision for the appellee by Commissioners Egan and Rose.  
These findings of fact and report are made at the request of the appellee pursuant to G.L. c. 58A, § 13 and 831 CMR 1.32.

Bruce L. Leiter, Esq. for the appellant.

John J. Connors, Jr., Esq. and Arthur Zontini, Esq. for the appellee.


FINDINGS OF FACT AND REPORT
On the basis of a Statement of Agreed Facts and testimony and exhibits submitted at the hearing of this appeal, the Appellate Tax Board ("Board") made the following findings of fact.
F.E. Hazard, Ltd. ("Corporation") was a Connecticut corporation that performed electrical contracting.  The Corporation had contracted to perform work in Massachusetts during the Tax Periods at Issue.  On April 10, 1995, the Corporation filed Massachusetts Quarterly Return of Income Taxes Withheld for Employer Paying Weekly ("Form M-941D") for the Tax Periods at Issue.  The Form M-941D for the quarter ending September 30, 1990 reported tax due of $7,738.33 but included no payments, and the Form M-941D for the quarter ending December 31, 1990 reported tax due of $9,347.07 but included no payments.  Both Forms M-941D were signed by Stephen Gesseck ("Mr. Gesseck"), as the controller of the Corporation.  The parties stipulated that Mr. Gesseck was the accounting manager of the Corporation at all relevant times.
The Commissioner sent the appellant a Notice of Proposed Determination of Personal Liability and Deemed Assessment, dated May 30, 2000, for the Corporation's unpaid withholding taxes for the Tax Periods at Issue.  After a conference with the appellant, the Commissioner sent a Notice of Determination of Personal Liability and Deemed Assessment, dated October 11, 2000, for the unpaid withholding taxes.  The appellant timely filed an Application for Abatement with the Commissioner on December 6, 2000.  The Commissioner denied the Application for Abatement and sent the appellant a Notice of Abatement Denial dated May 2, 2001.  On June 29, 2001, the appellant timely appealed to the Board.  On the basis of these facts, the Board found it had jurisdiction over this appeal.  The Commissioner claimed, and the appellant does not contest, that the Corporation's withholding tax liability for the Tax Periods at Issue, as of February 11, 2003, was $74,012.84, which included interest and penalties.
At all relevant times, the appellant was the president, treasurer, and sole shareholder of the Corporation.  He also performed the functions of a general manager of the Corporation, including overall supervision, estimating, bidding, purchase of equipment and materials, assignment of labor, and supervision of work.  The appellant, as well as other individuals, had the authority to hire, fire, and supervise the employees of the Corporation.  The appellant acted as guarantor on loans to the Corporation.  Moreover, he alone had authority to sign checks on behalf of the Corporation.  The appellant, along with Mr. Gesseck, was responsible for the accounting functions of the Corporation, including but not limited to maintaining the daily books and records of the Corporation and paying the Corporation's bills.  The appellant signed the tax returns of the Corporation.  Finally, the appellant authorized the payment of bills and taxes of the Corporation.  
The Corporation incurred the quarterly withholding tax liabilities at issue when it was contracted to perform electrical work for the Stonegate subdivision project in South Hadley, Massachusetts.  The owner of the Stonegate property failed to make payment for the labor, material, and equipment provided by the Corporation.  The Corporation brought suit against the Stonegate owner and the Town of South Hadley.   While the Stonegate suit was pending, the Corporation suffered severe financial difficulties arising from another dispute over a large payment owed for services provided by the Corporation to the Long Island Lighting Company ("LILCO").  
The Corporation filed a Chapter 11 bankruptcy petition in federal Bankruptcy Court in Connecticut on September 18, 1992.  The Master Mailing List and Claims Register Report included the Massachusetts Department of Revenue ("DOR") as a named creditor.  After the Corporation filed its bankruptcy petition, the appellant continued to prepare estimates, submit bids, and perform other services for the Corporation.  However, the appellant exercised no further control over the financial affairs of the Corporation relating to prioritization or payment of debts because all payments made by the Corporation required approval of the Bankruptcy Court.  The appellant has never filed for personal bankruptcy.  
During the pendency of the bankruptcy action, the Stonegate suit was settled.  All sums collected were paid into the bankruptcy estate after the settlement was approved by the Bankruptcy Court on September 9, 1994.  Also during the pendency of the bankruptcy action, DOR filed proofs of claim for Massachusetts taxes with the Bankruptcy Court.  On February 10, 1995, a Debtor's Liquidating Plan of Reorganization ("Plan") was filed in the bankruptcy action.  The appellant was named as the Plan administrator.  With respect to the Corporation's tax liabilities, the Plan provided that "[e]ach allowed tax claim [would] be paid in full with interest at the rate of seven (7%) percent per annum from the Effective Date, out of up to fifty (50%) percent of the proceeds, after counsel fees and expenses of the LILCO claim."  After notice to all creditors, the Plan was approved without objection by the Bankruptcy Court on March 23, 1995, with an Effective Date of April 2, 1995.
The Commissioner acknowledged the Plan in a letter to the Corporation's bankruptcy attorneys dated April 18, 1995 signed by James M. Wong ("Mr. Wong"), a Tax Examiner for DOR's Bankruptcy Unit.  The April 18, 1995 letter outlined a payment schedule of $709.85 per month for 41 months, totaling $29,103.85, which was based on the payment terms in the Plan.  No payments were made in accordance with the letter's schedule.  On August 18, 1995, the Commissioner, through Mr. Wong, sent a Notice of Default and Demand for Unpaid Taxes to the Corporation.  The Corporation's bankruptcy attorneys responded to Mr. Wong in a letter dated August 28, 1995, informing Mr. Wong that no resolution of the LILCO claim had yet been reached.  The LILCO claim was later settled on behalf of the bankrupt estate for $25,000.  The bankruptcy attorneys for the Corporation applied the total settlement amount to their legal fees, leaving no sums available for tax payments.  No payments were ever made towards the liabilities for the Tax Periods at Issue.  
The appellant conceded, and the Board found, that the agreed facts support a finding that he had the duty and authority to remit the withholding taxes of the Corporation during the Tax Periods at Issue and that therefore he was a person responsible for remitting these taxes.  However, the appellant argued that he was no longer a person responsible for remitting the taxes once the Corporation filed for bankruptcy and, therefore, at the time that the Commissioner made its assessment against him.  The appellant also argued that, even if he were found to be a person responsible for the Corporation's withholding taxes, his liability for the interest and penalties on the unpaid taxes should be calculated according to the Plan, which resulted in a lower liability than that calculated under G.L. c. 62C, §§ 32 and 33.  
For the reasons stated in the Opinion, the Board found that the appellant was a person responsible for the unpaid taxes of the Corporation for the Tax Periods at Issue, and therefore, the assessment against him was proper.  The Board also found that the appellant's liability was properly calculated under Massachusetts tax law, G.L. c. 62C, §§ 32 and 33.  Accordingly, the Board issued a decision for the appellee in this appeal.


OPINION
Responsible person liability in Massachusetts is prescribed by G.L. c. 62C, § 31A, which provides in pertinent part 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 section five of chapter sixty-two B . . . the commissioner shall so notify such 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 of the corporation or partnership, which shall be deemed to be assessed against such person, . . . . 

(emphasis added).  G.L. c. 62B, § 5 provides as follows:
Every employer who fails to withhold or pay to the commissioner any sums required by this chapter to be withheld or paid shall be personally and individually liable therefor to the commonwealth.  The term "employer" . . . includes 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 withhold and pay over taxes in accordance with this section . . . . 

In upholding the Board's consideration of federal cases on this issue, the Supreme Judicial Court noted the "close parallel between the State and Federal statutes concerning the duty to pay over . . . ."  Brown v. Commissioner of Revenue, 424 Mass. 42, 44 (1997) ("Brown").  "Under the Federal cases, 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 (2nd Cir. 1994); Purcell v. United States, 1 F.3d 932, 937 (9th Cir. 1993); Barnett v. IRS, 988 F.2d 1449, 1454-55 (5th Cir.), cert. denied, 510 U.S. 990 (1993); and O'Connor v. United States, 956 F.2d 48, 50-51 (4th Cir. 1992)).  
The factor most probative of a duty to pay over taxes is "significant control over disbursement of the company's funds."  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); 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) ("[A]ll 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 from its employees.'")).  Responsible person status essentially "encompasses all those connected closely enough with the business to prevent the default from occurring."  Bowler v. United States, 956 F.2d 723, 738 (7th Cir. 1992) (citing Adams v. United States, 504 F.2d 73, 76 (7th Cir. 1974)).  
In the present appeal, the appellant served as the president and treasurer of the Corporation during the Tax Periods at Issue.  The appellant was the Corporation's sole shareholder.  He, along with others, had the authority to hire, fire, and supervise the employees of the Corporation.  The appellant, along with Mr. Gesseck, was responsible for all accounting functions of the Corporation, including but not limited to maintaining the daily books and records of the Corporation and timely paying the Corporation's bills.  The appellant also listed himself as the guarantor for loans to the Corporation.  Moreover, the appellant was the only individual with check-signing authority on behalf of the Corporation, and he authorized the payment of bills and taxes of the Corporation.  All of these factors gave the appellant significant control over the financial operations of the Corporation and, accordingly, placed him under a duty to pay over the taxes at issue.  See Mandell v. Commissioner of Revenue, ATB Findings of Fact and Reports 1994-1 at 11-12 ("Mandell").  In fact, the appellant conceded that he was under a duty to pay over collected withholding taxes during the Tax Periods at Issue.  Based on the foregoing, the Board ruled that the appellant had the requisite duty and responsibility to pay the withholding taxes of the Corporation and, therefore, he was a person responsible for the payment of the Corporation's withholding taxes for the Tax Periods at Issue.  
However, on the dates that the Commissioner issued his Notices of Proposed Determination of Personal Liability and Deemed Assessment and the Notice of Determination of Personal Liability and Deemed Assessment, the Corporation had already filed for bankruptcy.  The parties agreed that the appellant exercised no further control over the financial affairs of the Corporation relating to prioritization or payment of debts because all payments made by the Corporation required approval of the Bankruptcy Court.  The appellant contended, therefore, that he was no longer a person responsible for the payment of the Corporation's withholding taxes when the notices were issued and that he should not be liable for the Commissioner's assessment of taxes.
The Board addressed the timing of a responsible person assessment in Kent v. Commissioner of Revenue, ATB Findings of Fact and Reports 1998-660 ("Kent").  The taxpayers there conceded that they had been persons responsible for the corporation's unpaid sales and use taxes during the tax periods at issue and during the audit period, but they argued that they were no longer responsible persons when the Commissioner issued the notices of personal liability against them because they had resigned their positions as president, treasurer, and members of the board of directors.  Id. at 661-62.  In that case, the Board ruled that the timing of the Commissioner's responsible person assessment was not relevant:                       
There is, however, nothing in [G.L. c. 62C, § 31A] to mandate or even suggest that the Commissioner may only issue the notice while the taxpayers are in a position to pay over the taxes.  In fact, the statute explicitly provides that the Commissioner may notify the person at any time that the liability remains unpaid.  To accept Appellants' interpretation would render the purpose of the statute null and void by allowing a taxpayer to escape responsibility simply by beating the Commissioner to the punch and removing himself from a position of authority before the notice of personal liability is issued.

Id. at 664-65 (emphasis in original).  In upholding the Commissioner's assessments against the appellants, the Board ruled that "[t]he operative date for determining whether an individual has the requisite duty and responsibility to pay over the tax is the date the tax became due from the corporation, not the date the Commissioner makes the assessment."  Id. at 665 (citing Mandell and Brown).  In the instant appeal, it was uncontested that the appellant had the requisite duty and responsibility to pay over the Corporation's collected withholding taxes for the Tax Periods at Issue.  Therefore, consistent with the Board's ruling in Kent, the Board ruled that the appellant was a person responsible for the payment of these taxes.  
The appellant contended in the alternative that, if he is found to be a person responsible for the payment of the Corporation's withholding taxes, then he should be required to pay only the interest and penalty amounts calculated under the Plan, not the amounts calculated under G.L. c. 62C, §§ 32 and 33.  Citing Commonwealth v. Two Parcels of Land, 48 Mass. App. Ct. 693, 697-98 (2000), the appellant claimed that collateral estoppel precluded the Commissioner from assessing the Corporation's full liability against him, because the Bankruptcy Court had already determined the collection amount pursuant to its order.  The appellant equated the Bankruptcy Court's approval of the Plan as a "final judgment on the merits in the prior adjudication" and contended that, because the Commissioner was a listed creditor in the prior bankruptcy adjudication, collateral estoppel should preclude the Commissioner's assessment.  Id. ("'Before a party will be precluded from relitigating an issue, a court must determine that (1) there was a final judgment on the merits in the prior adjudication; (2) that the party against whom preclusion is asserted was a party (or in privity with a party) to the prior adjudication; and (3) the issue in the prior adjudication was identical to the issue in the current adjudication.'") (quoting Tuper v. North Adams Ambulance Serv., Inc., 428 Mass. 132, 134 (1998)).  
However, it is well settled in Massachusetts law that a responsible person is to be held liable for the full amount of a corporation's tax liability, including the full amount of interest and penalties.  In Berenson v. Commissioner of Revenue, 413 Mass. 831, 832 (1992) ("Berenson"), the Supreme Judicial Court, in affirming the Board's decision, held that Massachusetts personal liability statutes prescribe "personal liability for 'any sums' due the Commissioner.  Penalties and interest are sums due the [C]ommissioner."  This principle from Berenson is unaffected by a corporation's filing of a bankruptcy petition, because the responsible person assessment creates a new liability in the taxpayer for the full amount of the Corporation's unpaid taxes.  General Laws c. 62C, § 31A provides that the unpaid tax of the corporation "shall be deemed to be assessed against such [responsible] person."  As the Board explained in Cole v. Commissioner of Revenue, ATB Findings of Fact and Reports 2000-21 ("Cole"), "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."  Id. at 30 (emphasis added); see also Heritage Bank for Savings v. Doran, 399 Mass. 855, 861 (1987) ("While § 31A expressly provides that the liability of the corporation 'shall be deemed to be assessed' against the responsible officer, the deemed assessment as contemplated by the statute does not arise until thirty days from the date that the Commonwealth notifies a liable individual that an assessment against the corporation remains in existence and the taxes remain unpaid.").  
Moreover, the federal bankruptcy statute, 11 U.S.C. § 524, paragraph (e) specifically provides that "discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt."  Therefore, "[w]hile it is true that the bankruptcy court's confirmation of the plan binds the debtor and all creditors vis-à-vis the debtor, it does not follow that a discharge in bankruptcy alters the right of a creditor to collect from third parties."  First Fidelity Bank v. McAteer, 985 F.2d 114, 118 (3rd Cir. 1993) ("First Fidelity Bank").  See also In re: Western Real Estate Fund, Inc., 922 F.2d 592, 600 (10th Cir. 1990) ("[A] discharge in bankruptcy does not extinguish the debt itself . . . .  The debt still exists, however, and can be collected from any other entity that may be liable.").  Massachusetts courts recognize that "§ 524(e) permits a creditor to recover against any other entity who may be liable on the debtor's behalf."  Perez v. Cumberland Farms, 213 B.R. 622, 623 (D. Mass. 1997).      
In the instant appeal, the Corporation's taxes remained unpaid.  The Bankruptcy Court's acceptance of the Plan did not limit the Commissioner's ability to collect the full liability from the appellant as a person responsible for the unpaid taxes.  Accordingly, the Commissioner was not barred from collecting the unpaid taxes, plus interest and penalties, by making a separate assessment against the appellant pursuant to § 31A.  


Conclusion
In the present appeal, the appellant had the requisite duty and responsibility to pay over the withholding taxes of the Corporation on the dates that the taxes became due from the Corporation.  The appellant was thus a person responsible for the payment of these taxes even after the Corporation filed for bankruptcy protection.  
Furthermore, the liability prescribed under G.L. c. 62C, § 31A was specifically assessed against and collectible from the appellant, not the Corporation.  The Commissioner's acceptance of the Plan did not alter the fact that the debt "remain[ed] in existence and unpaid."  Section 31A thus enabled the Commissioner to assess the appellant as the person responsible for the full amount of the Corporation's unpaid taxes together with interest and penalties as calculated under G.L. c. 62C, §§ 32 and 33.  
Based on the foregoing, the Board ruled that the appellant failed to meet his burden of proving that he was entitled to an abatement of the taxes assessed against him as a person responsible for the taxes assessed for the Tax Periods at Issue.  See Staples v. Commissioner of Corp. & Tax, 305 Mass. 20, 26 (1940)(finding that a 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 issued a decision for the appellee in this appeal.

				THE APPELLATE TAX BOARD



By:  ____________________________________
Anne T. Foley, Chairman

     
____________________________________
Frank J. Scharaffa, Commissioner


_____________________________________
Donald E. Gorton, III, Commissioner


     ____________________________________
Nancy T. Egan, Commissioner

  
____________________________________
James D. Rose, Commissioner 



   
A true copy,



Attest:_____________________________
  	    Assistant Clerk of the Board

  The appellant does not dispute that the Commissioner's computer system accurately reflected the withholding tax liabilities for the Tax Periods at Issue as follows:

Tax quarter
ending       Tax per return   Interest     Penalties   Total       Paid
9/30/90	 $7,738.33        $22,393.88   $3,874.13   $34,006.34    0 
12/31/90	 $9,347.07        $25,985.87   $4,673.56   $40,006.50    0

ATB 2006-172