Opinion ID: 2220767
Heading Depth: 1
Heading Rank: 3

Heading: The Problem of Officer Liability

Text: The taxes at issue in this case are the gross retail tax, Ind.Code Ann. § 6-2.5-3-2 (West 1989 & Supp.1990), and the withholding tax on employee wages, Ind.Code Ann. § 6-3-4-8 (West 1989). These are termed trust taxes because the obligors pay them to third parties designated by statute to collect, hold, and remit the money to the State. These third parties hold the funds in trust for the State and thus may be held personally liable when the funds are not remitted. More specifically, the gross retail tax is levied on the purchasers of retail goods, but the retail merchants must collect the tax as. . . agent[s] for the state. Ind.Code Ann. § 6-2.5-2-1(b) (West Supp.1993). [2] The Code also provides that individuals responsible for remitting these taxes may be held personally liable for any default. The liability provision reads: An individual who: (1) is an individual retail merchant or is an employee, officer, or member of a corporate or partnership retail merchant; and (2) has a duty to remit state gross retail or use taxes to the department of revenue; holds those taxes in trust for the state and is personally liable for the payment of those taxes, plus any penalties and interest attributable to those taxes, to the state. Ind.Code Ann. § 6-2.5-9-3 (West 1989). The collection and remittance of the withholding tax operates about the same way. Income tax is assessed on the wages of employees, but it is the employer who must deduct, retain, and pay the tax to the government. Ind.Code Ann. § 6-3-4-8(a). Moreover, the law provides that [i]n the case of a corporate or partnership employer, every officer, employee, or member of such employer, who, as such officer, employee, or member is under a duty to deduct and remit such taxes shall be personally liable for such taxes, penalties, and interest. Ind.Code Ann. § 6-3-4-8(f). The legislature enacted these personal liability provisions because when a business begins to falter, the trust taxes form a tempting reserve of cash. The temptation often proves too great, and those in charge of the failing enterprise sometimes convince themselves that they can use the money to save their business and pay the State later when business is better. Whether this gamble succeeds or fails, the State and the taxpayers cannot be made unwilling business partners. More bluntly, the taxpayer has already paid the tax; the business collecting the tax should not be allowed to divert these funds dedicated to public schools, safety, and other purposes to the business's private use. Thus, when the responsible individuals fail to perform their roles as trustees, they are held personally accountable. The method of determining whether a given individual is a responsible person is the same under the gross retail tax and the withholding tax. Dunkerson v. Department of Revenue (1987), Ind.Tax, 513 N.E.2d 209. An individual is personally liable for unpaid sales and withholding taxes if she is an officer, employee, or member of the employer who has a duty to remit the taxes to the Department. Because it is undisputed that Safayan was president of G.D.G.F. during the years in question, the only remaining issue is whether she had the duty to remit the taxes. The statutory duty to remit trust taxes falls on any officer or employee who has the authority to see that they are paid. See Department of Revenue v. Hogo, Inc. (1990), Ind.App., 550 N.E.2d 1320; Dunkerson, 513 N.E.2d 209; Van Orman, 416 N.E.2d 1301. Various factors are relevant to determining who has such authority. We consider, first, the person's position within the power structure of the corporation. The responsible person need not have been a corporate officer, but where the individual was a high ranking officer, we presume that he or she had sufficient control over the company's finances to give rise to a duty to remit the trust taxes. The presumption is especially strong where the person was both a high ranking officer and a member of the board of directors and a major shareholder in a closely held corporation. This presumption may be rebutted by showing the officer did not in fact have that authority. Dunkerson, 513 N.E.2d at 212. We also look to the authority of the officer or employee as established by the articles of incorporation, bylaws, or the person's employment contract. The explicit duties of the officer or employee may include oversight and payment of tax liabilities. Finally, we consider whether the person actually exercised control over the finances of the business. This would include, for instance, whether the person controlled the corporate bank account, signed corporate checks and tax returns, or determined when and in what order to pay creditors. [3] In this case, Mrs. Safayan was both the highest ranking official in G.D.G.F. and a member of its board of directors, and a major shareholder. Together, she and her husband controlled more than half of the shares. Given her position of power within the corporation, we presume that she had the authority to see that the State received its money. Safayan attempts to rebut this presumption with evidence that the responsibility for paying the taxes fell on the Grubbs, not on her. She contends she delegated responsibility to pay the taxes to the Grubbs, and cites G.D.G.F.'s bylaws, which provided that the secretary and treasurer (Mrs. Grubb) was to oversee the corporation's finances. She points to Mr. Grubb's employment contract, which required him to manage the day-to-day operations of the restaurant. The Department is not required, however, to prove that Safayan was the only responsible person. A party may be liable for trust taxes without having exclusive control over the corporation's funds. Hogo, 550 N.E.2d at 1324; Dunkerson, 513 N.E.2d at 211. Safayan's contention that she delegated the responsibility to pay the taxes to the Grubbs is also unavailing. In Van Orman, for example, the president, general manager, and majority shareholder of a hotel sought to avoid his responsibility for a default on the sales tax by pointing to a serious medical problem that prevented him from managing the affairs of the business. The Court of Appeals rightly upheld the president's liability. It reasoned that while others had taken over management of the hotel during the relevant period, the president had not relinquished his position of authority and that the exercise of the authority of his corporate office was a matter within his discretion and subject to his will. Van Orman, 416 N.E.2d at 1304. To be sure, G.D.G.F.'s articles of incorporation and bylaws did not specifically require Mrs. Safayan to monitor the company's taxes or finances. They simply outlined the general powers of a corporate president. [4] The Tax Court properly characterized these documents as neither rebutting the presumption that Safayan was responsible nor enhancing the Department's position. Safayan, 631 N.E.2d at 29. Safayan argues finally that she should not be held liable because she was not involved in the day-to-day operations of the restaurant and never exercised control of the business's finances. She contends that she was merely a passive investor who lacked the requisite authority and control to be held liable for these taxes. In essence, she denies responsibility because until a moment of emergency arrived she knew nothing, saw nothing, and did nothing. It is a tax code version of the Sergeant Schultz defense. [5] If she had been truly content to remain passive, her position as a major shareholder and a director of G.D.G.F. would have sufficed. Had Safayan desired some additional influence, she could have served as the chair or even the vice-chair of the board. Like many people who put up cash for a business venture, the Safayans wanted to be more than passive investors. They wanted some control, and with Mrs. Safayan as president, they secured that control. Moreover, the course of events demonstrated that Safayan possessed authority to manage corporate affairs without seeking board approval. As soon as she learned of the business's problems, she quickly sacked the Grubbs and put the restaurant in bankruptcy. She also moved to resolve the restaurant's tax difficulties while simultaneously attempting to protect herself from personal liability. She even formed a new corporation in an effort to keep the restaurant open. Our analysis of Safayan's liability is not unique. A number of federal circuit courts have held officers personally liable in similar circumstances under equivalent provisions of the federal withholding tax. [6] The Tenth Circuit, for instance, recently held the president and sole shareholder of a hotel liable for withholding taxes even though he delegated financial matters to a business manager. The court explained that [t]he existence of such authority, irrespective of whether that authority is actually exercised, is determinative of liability. Muck v. United States, 3 F.3d 1378, 1381 (10th Cir.1993). In addition, the Sixth Circuit held the vicepresident and fifty percent shareholder of a truck leasing and repair company liable for withholding taxes against the defense that he was merely a passive investor. The court acknowledged that the officer had not been heavily involved in the company before discovering its financial problems, but grounded its finding of liability on the fact that he stepped in and took over management once the troubles became apparent. The vicepresident displaced the president and like Mrs. Safayan, endeavored to revive the business, including starting a new corporation to continue operations. Kinnie v. United States, 994 F.2d 279 (6th Cir.1993). [7] It strains credulity to imagine that Safayan lacked the authority to see that G.D.G.F.'s taxes were paid. Individuals in such positions may not look the other way with impunity while their business partners dispose of taxpayer money. We agree with Judge Posner, who recently stated that these trustees cannot escape responsibility and Uabihty merely by compartmentalizing responsibilities within a business . . . and adopting a hear no evilsee no evil policy. Wright v. United States, 809 F.2d 425, 427 (7th Cir. 1987) (addressing willfulness requirement of federal withholding tax statute).