Case Name: STATE OF NORTH CAROLINA v. FRANCIS M. KENNEDY
Court: North Carolina Court of Appeals
Jurisdiction: North Carolina
Decision Date: 1998-08-04
Citations: 130 N.C. App. 399
Docket Number: No. COA97-853
Parties: STATE OF NORTH CAROLINA v. FRANCIS M. KENNEDY
Judges: Judge LEWIS concurs.
Reporter: North Carolina Court of Appeals Reports
Volume: 130
Pages: 399–408

Head Matter:
STATE OF NORTH CAROLINA v. FRANCIS M. KENNEDY
No. COA97-853
(Filed 4 August 1998)
1. Taxation— sales taxes — embezzlement—retailer as trustee
The trial court in a criminal prosecution for embezzlement of sales and use taxes correctly charged the jury that a purchaser pays sales tax to a retailer as “trustee” for the State and county. While the collection of sales taxes by a retailer lacks some of the trappings of a traditional trust and while sales tax receipts are often commingled with other funds, the plain language of the relevant statutes provides that sales taxes are held by the retailer as “trustee for and on account of the State or county.” N.C.G.S. § 105-164.7, N.C.G.S. § 105-471.
2. Taxation— sales taxes — embezzlement—remedy
The criminal and civil penalties of the Tax Code do not provide an exclusive remedy for embezzlement of sales taxes collected by the retailer.
3. Evidence— embezzlement of sales taxes — tax controversy in another state
The trial court did not err in a criminal prosecution for embezzlement of sales taxes collected by a Massachusetts business by admitting extensive testimony about a tax controversy between the company and the Commonwealth of Massachusetts. Defendant was assessed a large sum by Massachusetts about the time he began to receive sales tax funds from a North Carolina lease, establishing a motive for his retention of the funds from the North Carolina transaction, and defendant himself testified that he used the North Carolina sales taxes to keep the company afloat as long as possible, paying other debts with the funds. The trial court limited the jury’s consideration of the evidence to the purpose of establishing motive. N.C.G.S. § 8C-1, Rule 404(b).
Judge Gkeene dissenting.
Appeal by defendant from judgment entered 24 October 1996 by Judge Narley L. Cashwell in Wake County Superior Court. Heard in the Court of Appeals 1 April 1998.
Attorney General Michael F. Easley, by Associate Attorney General Anne M. Middleton, for the State.
Tharrington Smith, L.L.P., by Roger W. Smith, E. Hardy Lewis, and F. Hill Allen, for defendant appellant.

Opinion:
HORTON, Judge.
In 1990, defendant Francis M. Kennedy was president and treasurer of Old Colony Group, Inc. ("Old Colony"), a Massachusetts corporation, which was in the business of arranging equipment financing. During that year, Carolina Freight Corporation ("Carolina Freight") entered into a lease with Old Colony for the use of a mainframe computer. Pursuant to the lease, Carolina Freight forwarded the sum of $176,064.98 each month to an Illinois bank. In addition, Old Colony invoiced Carolina Freight monthly in the sums of $5,281.95 for North Carolina sales tax and $3,521.30 for county sales tax, a total of $8,803.25. On 29 January 1991, Old Colony registered with the North Carolina Department of Revenue to collect sales and use taxes. The State's evidence tended to show that Carolina Freight paid the invoiced taxes of $8,803.25 to Old Colony in Massachusetts from March 1991 through September 1994. The State's evidence further tended to show that the tax payments were deposited in the Bank of Boston each month, that Old Colony paid none of the taxes to the North Carolina Department of Revenue, and that Old Colony had a balance of $4,245.40 in the Bank of Boston in September Í994.
Defendant offered evidence tending to show that Old Colony began to have financial difficulties in 1991, and that the tax money paid by Carolina Freight was received, deposited and spent to help keep Old Colony afloat. Defendant admitted that he avoided talking with agents of the North Carolina Department of Revenue, mistakenly treating them like other creditors, but claimed he always intended to pay the money back. Defendant also testified that Old Colony recorded the tax payments as "debt" on its books rather than income.
Defendant was convicted by a Wake County jury of the embezzlement of sales and use taxes belonging to the State of North Carolina, in violation of the provisions of N.C. Gen. Stat. § 14-91 (1993), and sales and use taxes belonging to the County of Gaston, in violation of N.C. Gen. Stat. § 14-92 (1993). Defendant contends that he did not hold the taxes "in trust" as required for conviction under the embezzlement statutes, and that in any event the internal civil and criminal penalties set out in the Tax Code (Chapter 105) provide an exclusive remedy for alleged nonpayment of sales and use taxes.
N.C. Gen. Stat. § 14-91 (Cum. Supp. 1997) applies to "any officer, agent, or employee of the State, or other person having or holding in trust for the same any... property and effects of the same ." N.C. Gen. Stat. § 14-92 (Cum. Supp. 1997) applies to persons "having or holding money or property in trust for . a county . . . ." Defendant argues that his receipt of the sales taxes intended for North Carolina and Gaston County did not create a traditional fiduciary/trustee relationship with those governmental entities, because there is no requirement that a retailer keep tax receipts separate from other funds; and retailers have "unfettered discretion" in the use of sales tax receipts, provided that they keep records of the same and remit them when due. While we agree with defendant that the collection of sales taxes by a retailer lacks some of the trappings of a traditional trust and that, by the very nature of things, sales tax receipts are often commingled with other funds of the retailer, we disagree with defendant's position based on the plain language of the relevant statutes. N.C. Gen. Stat. § 105-164.7 (1997) provides that the sales tax "shall be a debt from the purchaser to the retailer until paid" but when paid by the purchaser is held by the retailer "as trustee for and on account of the State . . . ." (Emphasis added.) Likewise, N.C. Gen. Stat. § 105-471 (1997) provides that the one percent local sales tax "shall be paid by the purchaser to the retailer as trustee for and on account of the State or county wherein the tax is imposed." (Emphasis added.) Pursuant to these statutes, the trial court correctly charged the jury in this case that a purchaser pays sales taxes to a retailer as "trustee" for the state and county.
Nor do we believe that the criminal and civil penalties of the Tax Code provide an exclusive remedy in this case. Defendant argues the revenue laws are a "comprehensive scheme" which provide an exclusive penalty in tax cases. We note, however, that pertinent subsections of N.C. Gen. Stat. § 105-236 set out penalties for Tax Code violations, but provide that such penalties are "in addition to other penalties provided by law[.]" N.C. Gen. Stat. § 105-236(7), (8) and (9) (1997). We find further support for our view in a recent amendment to the Tax Code, codified as N.C. Gen. Stat. § 105-236.1:
The Secretary may appoint employees of the Criminal Investigations Division to serve as revenue law enforcement officers having the responsibility and subject-matter jurisdiction to enforce the felony tax violations in G.S. 105-236 and to enforce any of the following criminal offenses when they involve a tax imposed under Chapter 105 of the General Statutes: G.S. 14-91 (Embezzlement of State Property), G.S. 14-92 (Embezzlement of Funds), G.S. 14-100 (Obtaining Property by False Pretenses), G.S. 14-119 (Forgery), and G.S. 14-120 (Uttering Forged Paper).
(Emphasis added.) This 1997 legislation supports the view that the legislature did not intend for the Tax Code to set out the only criminal penalties available for the nonpayment of tax funds.
Finally, we note the decisions from our sister jurisdictions support our view. See, for example, People v. Kopman, 193 N.E. 516 (Ill. 1934); State v. Sankey, 299 N.W. 235 (S.D. 1941); Anderson v. State, 265 N.W. 210, 212 (Wis. 1936). See also Annotation, "Retailer's Failure to Pay to Government Sales or Use Tax Funds as Constituting Larceny or Embezzlement," 8 ALR 4th 1068 (1981). Defendant relies on a decision from New York, People v. Valenza, 457 N.E.2d 748 (N.Y. 1983). At the time of the Vlienza decision, however, failure to pay sales taxes was not included in the criminal penalties section of the New York Tax Code. The New York court held that "[t]he Legislature's structuring of [the provision] to provide substantial civil penalties for failing to pay over sales tax and to exclude this conduct from the criminal penalties section must be deemed to manifest an intent to exclude such conduct from criminal prosecution under either the Tax Law or the Penal Law . . . ." Id. at 751-52. The State points out that at the next session of the New York legislature the New York Tax Code was amended to provide that "[t]he penalties provided in this section shall not preclude prosecution pursuant to the penal law . . . N.Y. Tax Law § 1145(d) (McKinney Supp. 1984-1985). We also note that our Tax Code has no provision excluding the nonpayment of sales taxes from criminal prosecution.
Defendant also contends the trial court erred in admitting over his objection extensive testimony about a tax controversy between Old Colony and the Commonwealth of Massachusetts. The evidence offered by the State tended to show that from 1988 to 1991, Old Colony did not file complete returns with Massachusetts, and that Massachusetts began an audit of Old Colony on 13 March 1991. Further, the records of Old Colony showed that Old Colony had been collecting Massachusetts sales tax, but filed tax reports stating it had no sales or use tax liability. Massachusetts assessed Old Colony $82,993.22 for the period 1986-1987 and $80,047.38 for the period 1988-1991. The State offered the evidence to show motive, intent, and absence of mistake under Rule 404(b). Later, however, the trial court limited the jury's consideration of the evidence only for the purpose of establishing motive. Rule 404(b) is "a clear general rule of inclusion of relevant evidence of other crimes, wrongs or acts by a defendant, subject to but one exception requiring its exclusion if its only probative value is to show that the defendant has the propensity or disposition to commit an offense of the nature of the crime charged." State v. Coffey, 326 N.C. 268, 278-79, 389 S.E.2d 48, 54 (1990). The State argues defendant has not brought himself within the narrow exclusion established by Rule 404(b), and we agree. Defendant was assessed a large sum by Massachusetts about the time he began to receive sales tax funds from Carolina Freight, establishing a motive for defendant's retention of the funds from the North Carolina transaction. We also note that defendant himself testified that he used the North Carolina sales taxes to keep Old Colony "afloat" as long as possible, and paid other debts with the funds. Although the State also offered the evidence in question for other purposes under Rule 404(b), such as to show defendant's intent, the trial court exercised its discretion in defendant's favor, limiting the jury's consideration of the evidence in question only to show motive. The trial court did not abuse its discretion in admitting evidence of Old Colony's liability to Massachusetts for unpaid sales tax.
After careful review of defendant's other arguments and assignments of error, we find them to be without merit. Defendant was vigorously defended by capable counsel and had a trial free from prejudicial error before an able trial judge and a jury. We decline, therefore, to disturb the jury verdicts and the judgment based thereon.
No error.
Judge LEWIS concurs.
Judge GREENE dissents.