Officer Liability for Unpaid Corporate Taxes

By Randy Fisher, Esq.

 

Practitioners thinking about putting together a legal entity either domiciled in a foreign jurisdiction or in Maryland to operate in a foreign jurisdiction that they are not familiar with local law (much less licensed to practice) should study the case of Allen v. Michigan Department of the Treasury, MTT Docket No. 249514, Assessment Nos. G359968 and G050651, Account Nos. 38-2245122 (Corporate), 415-48-5925 (Individual), 2000 WL 1121394 (Mich. Tax Tribunal, May 1, 2000). In that case, James Allen was assessed by the Michigan Department of Treasury for the unsatisfied single business tax of Mt. Morris Coatings, Inc.

A standard tenet of a practitioner’s advice to business clients is to consider setting up a “legal entity” in order to protect themselves from personal liability. Imagine the shock to Mr. Allen when he found out the State of Michigan thought he was personally liable for unpaid fees to the State.

The derivative liability assessments against Allen pertained to three tax years (1989, 1990 and 1991). During a portion of those tax periods, Allen was “President” of the company. The assessments were issued against Allen under the Revenue Act, 1941 PA 122, as amended. Subsection 27a(5) of that act, 205.27a(5): MSA 7.657(27a)(5), added by 1986 PA 58, provides:

If a corporation liable for taxes administered under this act fails for any reason to file the required returns or to pay the tax due, any of its officers having control or supervision of, or charged with the responsibility for making the returns or payments is personally liable for the failure (emphasis added). The signature of any corporate officers on returns or negotiable instruments submitted in payment of taxes is prima facie evidence of their responsibility for making the returns and payments.The dissolution of a corporation does not discharge an officer’s liability for a prior failure of the corporation to make a return or remit the tax due. The sum due for a liability may be assessed and collected under the related sections of this act.

The issue the Tribunal considered was as follows: “For any or all tax years at issue, was Allen a liable corporate officer who, pursuant to MCL 205.27a(5): MSA 7.657(27a)(5), had ‘control or supervision of, or [who was] charged with the responsibility for, making the [tax] returns or payments’ which the liable corporation, for which he was employed, failed to pay?” Allen, 2000 WL 1121394, at p. 3.

Allen was able to show that he was a corporate officer in name only. Allen either signed, or his signature stamp was used upon, some company tax returns and he apparently signed, and was listed as President, Secretary and/or Treasurer, upon other company documents, including the company’s 1989, 1990 and 1991 Michigan Annual Reports. But the court felt, based upon testimony presented by Allen, that he was nothing more than a “corporate bystander, who was completely without knowledge of, and input into, the financial and operational concerns of Mt. Morris Coatings, Inc.” Id., at p. 10.

He was able to put on testimony (his own) that showed that he had no “awareness, nor understanding, of the financial condition of the company and no active participation in active management of the company. He testified that he had no supervisory authority over the CPA firm that prepared the company’s tax returns; and that the office manager, who he did not supervise, paid company taxes.” Id. Allen testified that he “signed anything that was placed before him, or his signature stamp was used in his absence by the office manager who, he explained, was also doing the bidding of Bailey.” Id.

The key to this case is that it is one of the few in which a corporate officer of a company that has not paid its state tax to Michigan avoids corporate liability. The depth of evidence, and therefore legal expense, is evident from the full text of the case and the administrative law judge’s opinion. The Michigan Treasury Department fought the determination and under cross examination, revealed the type of quagmire that can surround an unwary client.

The case history shows that any petitioner who receives a Notice of Intent to Assess is entitled to an Informal Hearing at the Department level. But in preparation for issuing the Notice and for the Informal Hearing, clerks with no legal training or tax training merely “look for signatures of a person, as an officer, on various documents, such as tax returns, Michigan Annual Reports and applications for registration, before sending out a ‘Letter of Inquiry’. The clerk also inputs into whether a Notice of Intent to Assess for officer liability should be issued for any of the Department’s various business taxes. Typical sources of tax records are the taxpayers, their representatives, bookkeepers and accountants.” Id. at p. 4. When records are received, the department conducts no independent investigation on the role of the indicated signatory. Id.

In this case, following the informal hearing, the Petitioner then appealed the finding of the Department ruling against the Petitioner. An Administrative Law Judge then reversed the department and ruled in favor of the petitioner. There was a final happy ending for the Petitioner, but the process was one that all legal practitioners should be aware of as well as the consequences of clients operating in foreign jurisdictions.