95-0077-95-0078

PERSONAL PROPERTY

Signed 10/17/97

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

PETITIONER )

:

)

Petitioners, : FINDINGS OF FACT,

) CONCLUSIONS OF LAW,

v. : AND FINAL DECISION

)

AUDITING DIVISION OF THE : Appeal Nos. 95-0077 and 95-0078

UTAH STATE TAX COMMISSION, )

:

Respondent. ) Tax Type: Personal Property

_____________________________________

STATEMENT OF CASE

This matter came before the Utah State Tax Commission for a Formal Hearing on August 20, 1997. G. Blaine Davis, Administrative Law Judge, heard the matter for and on behalf of the Commission. Present and representing Petitioner PETITIONER was PETITIONERS REP., an attorney. Present and representing Petitioner PETITIONER wasPETITIONERS REP.. Present and representing Respondent were Mr. Gail Francis, Assistant Attorney General, together with Mr. Thomas Smith, from the Collection Division. This matter originally involved PETITIONER as a separate Petitioner for appeal no. 95-0079, which was consolidated with these two appeals. However, a stipulation had been entered into between Respondent and Petitioner PETITIONER, and such stipulation has been presented separately to the Commission. Therefore, this Order does not apply in any respect to Petitioner PETITIONER.

Based upon the evidence and testimony presented at the hearing, the Tax Commission hereby makes its:

FINDINGS OF FACT

1. The tax in question is a Personal Penalty assessment.

2. The periods in question are January 1, 1991 through July 31, 1993.

3. Respondent has made a non-payment personal penalty assessment against each of the Petitioners in an amount of approximately $$$$$, pursuant to the provisions of Utah Code Ann. '59-1-302. Respondent alleged that Petitioners were persons who were required to collect, truthfully account for, and pay over amounts of withholding tax, and that Petitioners failed to either collect, truthfully account for, or pay over the tax, or attempted to evade or defeat the tax or the payment of the tax. Petitioners allege that the personal penalty should not be imposed because their actions do not meet the statutory standard.

4. Petitioner, PETITIONER, was the President and Chief Operating Officer of COMPANY B, hereinafter referred to as ACOMPANY B@.

5.COMPANY A, Inc., hereinafter referred to as ACOMPANY A@, was a California Corporation whose majority shareholder was PETITIONER, hereinafter referred to as APETITIONER@.

6. Prime was a Utah Corporation, and was acquired by COMPANY A in 1987 as a wholly-owned subsidiary.

7. PETITIONER, hereinafter referred to as APETITIONER@ was employed by COMPANY A and was the controller of COMPANY A and was later the controller of COMPANY B. PETITIONER was also the Secretary-Treasurer of COMPANY B, and was responsible for getting employment tax returns prepared and reviewing them. PETITIONER alleges that he was not aware that he was the Secretary-Treasurer of COMPANY B until after his employment had terminated with COMPANY B.

8. The State of Utah assessed COMPANY B for unpaid payroll taxes for the period of June 1991 through June 1993. COMPANY B ceased doing business in either June or July 1993. As of June, 1993, the books and records of COMPANY B showed an inter-company receivable from COMPANY A in the amount of $$$$$. As of the end of 1992, that inter-company receivable was approximately $$$$$.

9. In early 1992, COMPANY A entered into a loan agreement with COMPANY C, whereby most of the receivables of COMPANY B were collected by COMPANY C. COMPANY B was not a party to the agreement, but it resulted in the accounts receivable of COMPANY B being sent to COMPANY C who remitted a percentage of the amounts received to COMPANY A, but the proceeds did not come directly to COMPANY B. Alamo would disburse funds as directed by PETITIONER. Only limited funds were remitted to COMPANY B by PETITIONER, and those funds were never sufficient to pay all of the debts or obligations of COMPANY B.

10. PETITIONER would prepare checks for the obligations which needed to be paid, including the payroll taxes, but would not receive enough funds to cover the checks and PETITIONER would therefore not release all of those checks. PETITIONER made the decision regarding which debts were in a crisis stage, and would thereafter send the checks for those debts. He would pay the obligations which were most critical to the business being able to maintain its operations.

11. Periodically, PETITIONER would prepare a list of the payables, and that list was provided to PETITIONER. The checks were normally signed by two signatories, who were normally PETITIONER and PETITIONER.

12. PETITIONER was also advancing funds to himself from COMPANY B, and the books and records show an advancement to him of approximately $$$$$ which could have been used to pay the taxes.

13. Several paychecks did not clear the bank, primarily paychecks that were due and owing to Wade Brooksby.

14. The checks that were received by the Tax Commission from Prime to pay the withholding taxes that were paid were signed by PETITIONER and PETITIONER. At least one check was not cleared, and was voided by someone in the accounting group. PETITIONER was aware that the check had been voided and the taxes were not paid. He said it was his intention to pay the taxes, but the check was voided because there was no money and COMPANY A would not forward enough to pay the amounts. He further testified that he kept believing that the inter-company account would be paid to COMPANY B by COMPANY A, but it never was. In December of 1991, a Promissory Note, Financing Statement, and Pledge Agreement were entered into between COMPANY A and COMPANY B evidencing a loan from Prime to Alamo in the amount of $521,243.03. Wade Brooksby signed that agreement on behalf of Prime.

APPLICABLE LAW

In addition to all other penalties provided by law, persons may be liable for a penalty in an amount equal to the tax, if such persons were required to collect, truthfully account for, or pay over certain taxes, and willfully failed to collect the tax, failed to truthfully account for and pay over the tax, or attempted in any manner to evade or defeat the tax or the payment of the tax. (Utah Code Annotated '59-1-302(2)).

The taxes for which a personal penalty assessment may be made are: state and local sales and use tax; transient room tax; resort communities tax; public transit tax; tourism, recreation, cultural and convention facilities tax; motor fuel, clean fuel, special fuel and aviation fuel taxes; and withholding tax. (Utah Code Annotated '59-1-302(1)).

Whether a person has willfully failed to collect, truthfully account for, or pay over any tax, is to be determined by the application of Utah Code Annotated '59-1-302(7) which provides, in relevant part, as follows:

(7)(a) In any hearing before the commission and in any judicial review of the hearing, the commission and the court shall consider any inference and evidence that a person has willfully failed to collect, truthfully account for, or pay over any tax listed in Subsection (1).

(b) It is prima facie evidence that a person has willfully failed to collect, truthfully account for, or pay over any of the taxes listed in Subsection (1) if the commission or a court finds that the person charged with the responsibility of collecting, accounting for, or paying over the taxes:

(I) made a voluntary, conscious, and intentional decision to prefer other creditors over the state government or utilize the tax money for personal purposes;

(ii) recklessly disregarded obvious or known risks, which resulted in the failure to collect, account for, or pay over the tax; or

(iii) failed to investigate or to correct mismanagement, having notice that the tax was not or is not being collected, accounted for, or paid over as provided by law.

(c) The commission or court need not find a bad motive or specific intent to defraud the government or deprive it of revenue to establish willfulness under this section.

DECISION AND ORDER

Based upon the testimony and evidence in this proceeding, it appears that the taxes for COMPANY B were not paid primarily because of the actions of PETITIONER and COMPANY A, Inc. The evidence in this proceeding would indicate that both PETITIONER and COMPANY A were siphoning off the funds of Prime which should have been used to pay the Utah State Tax Commission and the other creditors of COMPANY B. However, the issue in this proceeding is not to determine the party that is most responsible, but to determine each and every party who meets the statutory standards for failing to collect, truthfully account for, or pay over the taxes. The statute establishes a standard of imposing liability upon those who make a voluntary, conscious, and intentional decision to prefer other creditors over the state government or utilize the tax money for personal purposes. It also imposes liability upon those who fail to correct mismanagement, having notice that the tax was not or is not being paid over.

In this case, it is evident that both PETITIONER and PETITIONER were aware that taxes were due and owing to the Utah State Tax Commission, and they made a voluntary, conscious, and intentional decision to pay other creditors instead of the Utah State Tax Commission. It is certainly understandable that the pressures were greater to pay other creditors or else see the doors of the business close, but the statute does not relieve the individuals from liability simply because the pressures were greater from other directions.

Based upon the foregoing, it is the order of the Utah State Tax Commission that the audit assessment against PETITIONER and PETITIONER is hereby affirmed. The audit assessment against PETITIONER has been dealt with by way of stipulation, which stipulation has been approved by the Commission.

Because of the concern which the Commission has for the fact that the money appears to have been siphoned by COMPANY A, the Commission hereby orders the Respondent to immediately pursue a personal penalty assessment against COMPANY A Learning Systems based upon the testimony in this proceeding of the amount of inter-company transactions and the amount which was owed to COMPANY B by COMPANY A. The Commission further orders that no collection measures shall be taken against either PETITIONER or PETITIONER until the later of a determination by Respondent that the chances of collecting the money from COMPANY A are minimal, or 60 days from the date of this Order, whichever date is later.

In addition, the Auditing Division is ordered to examine the audit report, and to remove from the amounts due from Petitioners, the amounts of withholding tax attributable to paychecks, which were never cashed or cleared by the bank, especially those due to PETITIONER, and to further reduce it by the amounts agreed to be paid by Mr. Guy Hale in Case No. 95-0079. It is so ordered.

DATED this 17 day of OCTOBER, 1997.

BY ORDER OF THE UTAH STATE TAX COMMISSION.

W. Val Oveson Richard B. McKeown

Chairman Commissioner

Joe B. Pacheco Pam Hendrickson

Commissioner Commissioner

^^