ORDERS:
FINAL ORDER AND DECISION
STATEMENT
OF THE CASE
The
above-captioned case is before this court pursuant to a request for a contested
case hearing filed by Edwin Rowland (Taxpayer) pursuant to S.C. Code Ann. §
12-60-460 (Supp. 2007). The caption in this case previously referenced
Taxpayer as "Anonymous Taxpayer." However, the recent enactment of
legislation allows the proceedings and records before
this court in this contested case hearing to be open to the public. See S.C. Code Ann. § 12-60-3312 (Supp. 2007). Therefore, the caption
in this case is hereby amended as reflected above.
Taxpayer
seeks review of a Final Agency Determination issued by Respondent South
Carolina Department of Revenue, in which the Department held Taxpayer
responsible as a withholding agent for non-payment of withholding taxes,
penalties and interest for the quarters ending June 30, 2000 (2nd quarter 2000) and September 30, 2000 (3rd quarter 2000). Taxpayer does
not dispute that he was a withholding agent with respect to the taxes in
question but argues that the Department’s assessment of his liability as a
withholding agent falls outside the three-year statute of limitations under
S.C. Code Ann. § 12-54-85 (2000). The Department maintains that it issued a
Notice of Assessment against Taxpayer's S corporation, Maintenance Plus of
Hilton Head, Inc. (Maintenance Plus) within the limitations period and that the
Taxpayer's personal liability for the withholding taxes is not contingent on a
separate assessment being issued to him personally within the limitations
period. The Department also argues that even if a separate assessment is
required to impose liability on Taxpayer, that assessment is exempt from the
three-year limitations period pursuant to section 12-54-85(C) because Taxpayer
had a fraudulent intent to evade the taxes.
After timely notice to the parties, a hearing of this case was conducted
on April 9, 2008, at the Administrative Law Court in Columbia, South Carolina.
Based upon the evidence and arguments presented at that hearing, and upon the
applicable law, I find that the Department's assessment against Maintenance
Plus clearly fell within the three-year statute of limitations and was effective
for purposes of imposing personal liability on Taxpayer. Therefore, the court
need not address the Department's fraudulent intent argument.
FINDINGS
OF FACT
Having carefully considered all testimony, exhibits,
and arguments presented at the hearing of this case, and taking into account
the credibility and accuracy of the evidence, I make the following Findings of
Fact by a preponderance of the evidence:
1. Maintenance
Plus was incorporated on February 11, 2000 as a sub-chapter S corporation,
allowing all of its profits and losses to flow through the entity to Taxpayer,
who was the sole shareholder. Taxpayer served as the corporation's president and
registered agent. Maintenance Plus was located and doing business in Hilton
Head performing maintenance for condominiums.
2. An
individual other than Taxpayer, Frank Vajo, managed the business. Maintenance
Plus also had a bookkeeper, who withheld taxes from the employees’ earnings and
prepared tax returns, among other duties. Taxpayer did not participate in the
day-to-day operations of the business; however, he was the only person with
authority to sign large checks and withholding tax returns. Further, Taxpayer
was the only individual who had authority to pay withholding taxes.
3. The
corporation's withholding return for 2nd quarter 2000 was due on
July 31, 2000, but the corporation did not file the return until August 31,
2000. The corporation's bookkeeper prepared the return, and Taxpayer reviewed
and signed the return. On October 24, 2000, the Department issued a Notice of
Assessment for a late filing penalty at the address provided by the
corporation. The assessment became a lien by January 1, 2001.
4. The
corporation filed its withholding return for 3rd quarter 2000 on October
31, 2000, and indicated a refund due of $177.35. Taxpayer prepared and signed the
third quarter return.
5. The
Department determined that $850.41 of the tax withheld from employees of
Maintenance Plus for the third quarter had not been remitted. On March 30,
2001, the Department issued a Notice of Assessment to Maintenance Plus at the
address provided by the corporation in the amount of $913.95 for withholding
taxes, penalties and interest. The assessment progressed to a lien and a
warrant was issued on June 28, 2001.
6. In
his deposition, Taxpayer testified that he did not have access to the very post office box that
he referenced as the corporate address in the withholding tax returns for 2nd quarter 2000 and 3rd quarter 2000. He also testified that the post
office box referenced in the returns was not his post office box, but that
"[i]t was the one that Frank Vajo set up" for the corporation to receive
mail. Taxpayer asserts that Maintenance Plus ceased doing business and began
to wind up its affairs, including closing its post office box, in August 2000.
Taxpayer also asserts that the post office box was closed before the Department
sent the notices of assessment to Maintenance Plus. The business left numerous
debts outstanding, including federal withholding taxes.
7. On
June 17, 2005, in an attempt to collect the amounts owed to it, the Department
sent to Taxpayer a “Notice of Proposed Assessment—Responsible Party” seeking
$1,545.57 for the outstanding withholding tax amounts, penalties and interest.
8. Taxpayer
filed a timely protest contesting his personal liability for the withholding
tax assessments. On May 23, 2007, the Department issued its Final
Determination. Taxpayer then timely requested a contested case hearing before
this court. Taxpayer asserted the three-year statute of limitations as his
sole defense. He does not dispute that he was a withholding agent for
Maintenance Plus. Rather, as he testified in his deposition, his complaint is
that he did not receive actual notice of the assessments against Maintenance
Plus within the three-year statute of limitations.
9. Taxpayer
is sophisticated in tax matters. He has not only a license to practice law in South
Carolina but also an employment history indicating significant experience in
tax planning. Before opening his own law practice, he served as tax counsel
for Arthur Andersen, manager of tax reorganization for Gulf Oil and senior tax
counsel for Ashland Oil.
CONCLUSIONS
OF LAW
Based upon the foregoing Findings of Fact, the
court concludes the following as a matter of law:
1. This
court has jurisdiction over this contested case pursuant to S.C. Code Ann. §
12-60-460 (Supp. 2007), which allows a taxpayer to
seek relief from a Final Determination of the Department by requesting a
contested case hearing before the Administrative Law Court.
2. The burden of proof is on the party asserting the
affirmative in an adjudicatory administrative proceeding. 2 Am. Jur. 2d Administrative Law § 354 (2004). In the instant case, it is the taxpayer who has requested
a contested case hearing to challenge the Department's proposed assessment. Thus,
Taxpayer asserts the affirmative in this case and must carry the burden of
proving that the Department's proposed assessment should not be upheld. Cf. S.C.
Tax Comm'n v. S.C. Tax Bd. of Review, 278 S.C. 556, 562, 299 S.E.2d 489, 492-93 (1983) (holding that a presumption exists that an assessor's valuation
is correct). Other jurisdictions have
reached the same conclusion. See, e.g., In re Broce Const. Co., Inc., 27 Kan. App. 2d 967, 980, 9
P.3d 1281, 1290 (2000) (“[O]ur Supreme
Court has long held that “the tax found by the tax commission to be due is
presumed to be valid [and] the taxpayer has the burden of showing its
invalidity.‘’). (Citations omitted).
3. The standard of proof in these
proceedings is a preponderance of the evidence. See Anonymous v. State Bd. of Med. Examiners, 329 S.C. 371, 496 S.E.2d 17
(1998).
4. The weight and credibility assigned
to evidence presented at the hearing of a matter is within the province of the
trier of fact. See S.C. Cable Television Ass'n v. S. Bell Tel. & Tel. Co., 308 S.C. 216, 222, 417 S.E.2d
586, 589 (1992). Furthermore, a trial
judge who observes a witness is in the best position to judge the witness'
demeanor and veracity and to evaluate the credibility of his testimony. See,
e.g., Woodall v. Woodall, 322 S.C. 7, 10, 471 S.E.2d 154,
157 (1996); Wallace v. Milliken & Co., 300 S.C. 553, 556, 389 S.E.2d
448, 450 (Ct. App. 1990). In presiding
over this contested case, this court serves as the finder of fact and makes a de
novo determination regarding the matters at issue. Reliance Ins. Co. v. Smith, 327 S.C. 528, 534, 489 S.E.2d
674, 677 (Ct. App. 1997); see also S.C. Code Ann. §
1-23-600(B) (Supp. 2007).
Withholding
5. An employer paying wages at
the rate of eight hundred dollars or more a year to an employee shall withhold income tax for that employee. S.C. Code Ann. § 12-8-520(A) (2000). A person located, doing business,
or having gross income in this State and an employer having an employee earning
income within this State are subject to South Carolina's withholding laws. S.C.
Code Ann. § 12-8-510 (2000). "Employer"
means the person for whom an individual performs or performed a service, of
whatever nature, as the employee of the person. S.C. Code Ann. § 12-8-10(4)
(2000). "Person" means an individual,
trust, estate, partnership, receiver, association, company, corporation, or any
other entity including the United States, a state, a political subdivision or
agency of the United States or any state, and a municipality located in this
State. S.C. Code Ann. § 12-8-10(1) (2000).
6. An
amount withheld for income taxes must be held in trust for
the State and is a lien against all property, both real and
personal, tangible and intangible, of the withholding agent. S.C. Code
Ann. § 12-8-2030 (2000). The lien becomes effective
after it has been properly recorded in the county where the withholding agent's
business is located. Id.
7. S.C.
Code Ann. § 12-8-2010 (2000) provides as follows:
(A) A withholding agent who fails to withhold or pay to the
department an amount required by this chapter is personally and individually liable for the amount of tax not withheld or paid.
(B) If a withholding agent fails to remit an amount withheld
from a taxpayer under this chapter to the department, the taxpayer is allowed a
credit for the amount of income tax withheld from him but not remitted.
(C) The amount required to be withheld may not be collected
from a withholding agent who fails to withhold income tax as required under the
provisions of this chapter after the taxpayer whose wages or payments should
have been withheld upon pays the tax applicable to that withholding. However,
the payment by the taxpayer does not relieve the withholding agent from
liability for penalty and interest.
(D) For purposes of this section, the term "withholding
agent" includes an officer or employee of a corporation, or
a member or employee of a partnership, who as such officer, employee, or member
is under a duty to perform the act in respect of which the violation occurs.
(emphasis
added). Essentially, subsection (D) codifies, with respect to withholding
taxes, the common law principles of holding corporate principals liable for
corporate debts under appropriate circumstances and places those individuals on
notice that a tax debt that is timely assessed against a corporation will be
considered a debt of those individuals associated with the corporation who are
responsible for withholding. The provision does not create any new liability,
but simply clarifies existing common law.
8. The
term "withholding agent" means
a person required to withhold income taxes under the provisions of Chapter 8 of
Title 12 of the South Carolina Code. S.C. Code Ann. § 12-8-10(2)
(2000).
9. During 2nd quarter 2000 and 3rd quarter 2000, Maintenance Plus was an employer and
withholding agent subject to South Carolina withholding laws. Taxpayer was
also a withholding agent during this time pursuant to section 12-8-2010(D)
because he had a duty to ensure that withholding taxes were paid to the
Department in a timely manner. S.C. Code Ann.
§ 12-8-2010(D) (2000); City of Columbia v. American Civil Liberties Union of
South Carolina, Inc., 323 S.C. 384, 475 S.E.2d 747 (1996) (holding that if a statute's language is plain and unambiguous, and
conveys a clear and definite meaning, the court has no right to look for or
impose another meaning and that the court must apply the statute's terms
according to their literal meaning and may not resort to subtle or forced
construction in an attempt to limit or expand the statute's scope); see
also Rock v. Department of Taxes, 170 Vt. 1, 742 A.2d 1211
(1999) (adopting the following factors as determinative of whether a corporate
officer or employee has a duty to remit withholding taxes: (1) the person's
position within the power structure of the corporation; (2) the authority of
the officer or employee as established by the articles of incorporation, bylaws,
or employment contract; and (3) whether the person actually exercised control
over the finances of the business.). This duty
stems from Taxpayer's status as the sole shareholder and president of
the corporation and his actions in reviewing and signing withholding tax
returns and corporate checks for large amounts. In sum, he had control over
the corporation's finances even though he may not have been involved in the day-to-day
operations of the business.
Statute of
Limitations
10. Generally, taxes must be determined and assessed within thirty-six months from the date the return or document was filed or
due to be filed, whichever is later. S.C. Code Ann. § 12-54-85(A)
(2000). Certain exceptions to the three-year limitations period are listed in subsection
(C) of section 12-54-85. The only exception at issue in this case is the
exception for evidence of the taxpayer's fraudulent intent to evade taxes.
11. Under
the South Carolina Revenue Procedures Act, the term "assessment" means the Department's recording of the taxpayer's liability in
the Department's office, subject to the restrictions in section 12-60-440. S.C. Code Ann. § 12-60-30(2) (2000); see also S.C. Code Ann. § 12-60-410 (2000) ("An
assessment is made by an employee of the department
recording the liability of the taxpayer in the office of
the department in accordance with rules or procedures prescribed by the
department. "). S.C. Code Ann. § 12-60-440 (2000) provides
that the Department may not assess a deficiency until thirty days after sending the proposed assessment as provided in section
12-60-420, but this restriction does not apply to penalties, interest or amounts
reported on a return. S.C. Code Ann. § 12-60-440(2)-(4) (2000). When the restriction does apply to a deficiency, the Department
may send by first class mail or deliver to the taxpayer a proposed assessment,
which must explain the basis for the
proposed assessment and state that an assessment will be made unless the taxpayer submits a protest as provided in section 12-60-450. S.C. Code
Ann. § 12-60-420 (2000). Notably, the proposed
assessment is effective if mailed to the taxpayer's last
known address even if the taxpayer refuses or fails to take delivery, is
deceased, or is under a legal disability, or, if a corporation, has terminated
its existence. Id.
12. In the instant case, the Department issued
the notice of assessment for 2nd quarter 2000 on October 24, 2000,
which fell within three years from August 31, 2000, when Maintenance Plus filed
the second quarter return. The Department issued the notice of assessment for
3rd quarter 2000 on March 30, 2001, which fell within three years
from October 31, 2000, when Maintenance Plus filed the third quarter return.
Therefore, the Department timely assessed withholding taxes, penalties and
interest against Maintenance Plus for 2nd quarter 2000 and 3rd quarter 2000 within the three-year limitations period set forth in section
12-54-85.
13. The Department's notices of
assessment sent to Maintenance Plus served as sufficient constructive notice to
Taxpayer that the corporation was liable for withholding taxes, penalties and
interest and that, as a principal of the corporation, he would be ultimately
liable for this debt. Taxpayer argues that his lack of actual notice of the
assessment against Maintenance Plus until after the three-year limitations
period had run bars the Department from imposing personal liability on him.
This argument has no merit. The Department sent the notices of assessment to
the address provided by Taxpayer. In this regard, several allegations of
Taxpayer are troubling. Initially, Taxpayer contends that he did not have
access to the corporation's post office box. He further contends that the
Department sent the notices of assessment after the post office box had
closed. Additionally, he maintains that he did not receive those notices of
assessment.
In
light of the fact that Maintenance Plus ceased doing business and began to wind
up its affairs in August 2000, this court finds it incredible that Taxpayer
would not have known that the post office box that he referenced in the
withholding tax returns was either already closed or about to be closed. At
the very least, Taxpayer violated his corporate responsibilities in providing
the Department with an address to which he claimed he had no access. Taxpayer
could have chosen to provide to the Department his home address or some other address
to which he had access to ensure that he received any important correspondence
from the Department concerning Maintenance Plus. Therefore, any failure to
receive the notices of assessment against the corporation was due to Taxpayer's
dereliction of his duties rather than any mistakes by the Department. If it is
true that Taxpayer had no access to the post office box that his corporation
used, that was a problem for Taxpayer to work out with his employees.
Further,
if the post office box was closed before the Department had sufficient time to
send the notices of assessment, it was the responsibility of the Taxpayer, as
part of an orderly winding up of corporate affairs, to notify the Department
before the box was closed and to immediately provide the Department with an
alternate address. To penalize the Department for Taxpayer's sloppy corporate
practices by concluding that the Department was required to send a separate
assessment to Taxpayer at an address not supplied by him would encourage
taxpayers with failing businesses to avoid responsibility for taxes by providing
unreliable contact information to the Department.
In
sum, Taxpayer seeks relief from a debt, which he does not dispute, on the
ground that the Department's assessment is time-barred when, in fact, his own
behavior created the circumstances that he now asserts prevented him from
finding out about the assessments until after the limitations period had run.
Under these circumstances, Taxpayer received sufficient constructive notice of
the assessments against Maintenance Plus within the three-year limitations
period.
14. In any event, because of Taxpayer's liability as a
withholding agent under S.C. Code Ann. § 12-8-2010(D) (2000),
notice of the assessments given to Maintenance Plus as a withholding agent
served as notice to Taxpayer as a withholding agent, such that no separate
notice of assessment was required to be sent to Taxpayer at an address other
than the corporate address provided by Taxpayer in the withholding tax returns.
There
are no South Carolina cases construing S.C. Code Ann. § 12-8-2010 (2000).
However, an Indiana case, Ball v. Indiana Dept. of
Revenue, 563 N.E.2d 522 (1990), is instructive. In Ball, the Supreme Court of
Indiana examined a corporate officer's personal liability for withholding taxes
under a statute similar to S.C. Code Ann. § 12-8-2010 (2000). The court
held
[u]nder I.C.
6-2.5-9-3, only those persons who have a
duty to remit such assessments can be held personally liable for the failure to
remit those taxes that are to be held in trust for the State. Thus, because
these persons serving the corporation have direct and immediate control of the
internal corporate processes dealing with these entrusted funds, it may be
safely assumed that they are aware of the responsible officer statute which is
the source of their potential personal liability and that they are aware of
and privy to corporate correspondence relating to their corporate duties
including notices of assessment sent to the corporation.
Ball, 563 N.E.2d at
524 (emphasis added). Like section 12-8-2010 of the South Carolina Code,
section 6-2.5-9-3 of the Indiana Code establishes liability for corporations and their responsible principals:
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 (as
described in IC 6-2.5-3-2) to the department;
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.
The
Ball court emphasized that separate and additional notice to the responsible
officer of the corporation is not required where there is timely notice to the
corporation of the assessment because the statute is, ipso facto, sufficient
notice to the responsible officer that a duty exists to remit the tax fund held
in trust. 563 N.E.2d at 524 (citing Van Orman v. State, 416 N.E.2d
1301 (1981)).
The
court further held that where the Indiana Department
of Revenue fully complies with I.C. 6-8.1-5-1 and provides the corporation with notice of the
assessment, personal notice to the responsible officer then in charge is not
required. The court explained that such notice to the corporation satisfies the
due process requirement of notice and opportunity to be heard in that it is
reasonably calculated to afford the responsible officer actual notice of the
corporation's potential liability and his own potential liability. 563
N.E.2d at 524.
15. Taxpayer's
liability for the assessments made against his corporation, Maintenance Plus,
for the 2nd quarter 2000 and 3rd quarter 2000 is not
contingent upon the Department serving a separate assessment on him personally
within three years of the filing date of the withholding tax returns. See S.C. Code Ann. § 12-54-85(A) (2000) (requiring assessment to be made within
thirty-six months of date returns were filed); S.C. Code Ann. § 12-60-30(2) (2000)
(definition of assessment); City of Columbia v. American Civil Liberties
Union of South Carolina, Inc., 323 S.C. 384, 475 S.E.2d 747 (1996) (holding
that if a statute's language is plain and
unambiguous, and conveys a clear and definite meaning, the court has no right
to look for or impose another meaning and that the court must apply the statute's
terms according to their literal meaning and may not resort to subtle or forced
construction in an attempt to limit or expand the statute's scope); Ball v. Indiana Dept. of Revenue, 563 N.E.2d 522 (1990)
(construing Indiana statute similar to South Carolina statute and holding that
timely notice to corporation is effective notice for corporate principal); cf. S.C. Code Ann. § 12-60-420 (2000) (stating that a proposed assessment is effective if mailed to the taxpayer's last
known address even if the taxpayer refuses or fails to take delivery, is
deceased, or is under a legal disability, or, if a corporation, has terminated
its existence).
ORDER
Based
on the foregoing, IT IS ORDERED that the Department's Final
Determination holding Taxpayer personally liable for withholding taxes,
penalties and interest for 2nd quarter 2000 and 3rd quarter 2000 is upheld.
IT
IS FURTHER ORDERED that the caption in this case is amended as reflected
above.
AND
IT IS SO ORDERED.
______________________________
July 24, 2008 JOHN
D. GEATHERS
Columbia, South Carolina Administrative
Law Judge 1205
Pendleton Street, Suite 224
Columbia,
South Carolina 29201
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