Title: Rock v. Department of Taxes

State: vermont

Issuer: Vermont Supreme Court

Document:

Rock v. Department of Taxes (97-398); 170 Vt. 1; 742 A.2d 1211

[Filed 10-Sep-1999]

       NOTICE:  This opinion is subject to motions for reargument under
  V.R.A.P. 40 as well as  formal revision before publication in the Vermont
  Reports.  Readers are requested to notify the  Reporter of Decisions,
  Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
  any errors in order that corrections may be made before this opinion goes
  to press.

                                 No. 97-398

John Rock	                                 Supreme Court

	                                         On Appeal from
     v.	                                         Chittenden Superior Court

Department of Taxes	                         November Term, 1998

Shireen Avis Fisher, J.

       William H. Sorrell, Attorney General, and Danforth Cardozo, III,
  Special Assistant Attorney      General, Montpelier, for
  Plaintiff-Appellee.

       Francis X. Murray, South Burlington, for Defendant-Appellant.

PRESENT:  Dooley, Morse, Johnson and Skoglund, JJ., and Norton, Supr. J., 
  	  Specially Assigned

       SKOGLUND, J.  We explore today under what circumstances the Tax
  Department may  hold an individual personally liable for a corporation's
  delinquent trust taxes, especially those of  a small, closely held
  corporation.  Appellant John Rock appeals the superior court decision 
  affirming the Tax Department's ("Department") determination that he is
  personally liable for  outstanding trust taxes owed by Whitecaps, Inc.  He
  argues that the Department applied the  wrong legal standard in concluding
  he was personally responsible for the taxes, that the  Department
  erroneously inferred a duty to remit taxes from the mere fact of his
  position as  president, and that the Department denied him due process.  We
  affirm.

                                I. Background

       The Department made the following findings.  In January 1990,
  appellant and Christina  Czechut incorporated Whitecaps, Inc. as a Vermont
  corporation to operate a snack bar and  catering business in a building
  leased from the City of Burlington.  Appellant held seventy 

 

  percent of the shares and was the president and a director of the
  corporation.  He negotiated the  ten-year lease of the business premises,
  personally guaranteed start-up loans and lines of credit  for $40,000, and
  was a signatory on the corporate checking account with unrestricted
  authority  to sign checks.  Appellant signed some payroll checks and checks
  for purchase of business  equipment.  He co-owned a vehicle with the
  business and also shared a post office box with it,  i.e., his personal
  address doubled as the business address for Whitecaps as well as his other 
  businesses, Fresh Water Haulers, Inc., and Modern Septic Tank Service, Inc. 
  Although  appellant denied opening Whitecaps mail, the Department chose to
  believe instead Czechut's  testimony that he opened all types of mail sent
  to his address including correspondence from the  Tax Department.  He used
  his personal accountant of twenty years to provide accounting  services for
  Whitecaps.  Appellant signed an undated application to obtain a federal
  identification  number for Whitecaps and was the designated person for
  Whitecaps tax matters on the 1991  federal corporate income tax return. 
  Appellant's accountant prepared 1990 and 1991 corporate  tax returns.  The
  business did not file returns for subsequent tax years.  A W-2 form for
  1992  reflects that appellant received approximately $4,400 in wages from
  Whitecaps.

       Czechut held thirty percent of the corporation's shares.  She acted as
  the treasurer and a  director of the corporation.  She took primary
  responsibility for the daily operations of the  Whitecaps restaurant,
  although appellant renovated the restaurant space initially and stopped by 
  almost daily to assist with the business.  Moreover, despite appellant's
  denial that he had hiring  or firing authority, the Department found that
  he did have such authority because he participated  in hiring at least one
  employee, his son.  In September 1991, appellant and Czechut began living 
  together, and in January 1992 they jointly purchased real estate as their
  primary residence.  The  couple ceased living together in May 1993, and
  Czechut resigned her corporate office in April  1994.  During her
  involvement with the business, Czechut discussed Whitecaps business affairs 
  and tax liabilities with appellant, such as Czechut's settlement of
  previous past due tax liabilities - which are not at issue here - with a
  Department compliance officer.  Czechut and appellant 

 

  prepared rooms and meals tax returns together either at the office,
  restaurant, or home.  The  Department did not believe appellant's testimony
  that he and Czechut discussed the financial  affairs of C.J. Enterprises,
  Inc., a second restaurant business in which they each held fifty  percent
  of the shares, but never discussed financial matters concerning Whitecaps.

       In March 1994 when appellant learned that the bank loan to Whitecaps,
  which he had  personally guaranteed, was not being paid, he locked Czechut
  out of the Whitecaps' leased  premises and arranged for another business to
  sublease the premises, take over operation of the  restaurant, and assume
  payments on the Whitecaps bank loan.  According to the Department,  Czechut
  then resigned in part out of her disagreement with the sublease terms
  appellant had  negotiated.  On October 18, 1994, the Department sent a
  personal tax assessment letter, signed  by Earle Fennessey, to appellant
  for Whitecaps' outstanding withholding taxes, rooms and meals  taxes, and
  sales and use taxes, totaling at that point, including interest, penalties,
  and late fees:   $16,480.37.  See 32 V.S.A. §§ 5844(a) (withholding), 9279
  (rooms and meals), 9701(14) and  9703 (sales and use).  The Department held
  Czechut personally liable as well for the trust taxes,  but had been unable
  to collect from her.

       At issue in this case are withholding, sales and use, and rooms and
  meals taxes.  These  are commonly termed "trust taxes" because the business
  withholds or collects the taxes on behalf  of the state from a third party
  and holds them in trust until remittance to the state is due.  See 32 
  V.S.A. § 5844(b) (sums withheld deemed to be held in trust for state);
  Crossman Plumbing &  Heating v. Comm'r, 142 Vt. 179, 185-86, 455 A.2d 799,
  801 (1982) (vendor is tax collector on  behalf of state, purchaser is
  actual taxpayer of sales tax); see also Slodov v. United States,