LESLIE A FOSTER, Debtor

INDIANHEAD CONSTRUCTION INC, Employer

INDIANHEAD CONSTRUCTION & DEVELOPMENT INC, Employer

The Department of Workforce Development issued an initial determination which held that the debtor Leslie Foster was personally liable for the payment of delinquent unemployment insurance taxes owed by Indianhead Construction and Development, Inc., in the total amount of $16,044.54 for the calendar year 2000 and the first and second quarters of 2001. The department issued a second initial determination holding that Ms. Foster was personally liable for the payment of delinquent unemployment insurance taxes owed by Indianhead Construction, Inc., in the total amount of $16,753.89 for the second through fourth quarters of 2001 and the first through third quarters of 2002. Following proceedings regarding the timeliness of Ms. Foster's requests for hearing on the adverse determinations, hearing on those determination themselves was held on December 7, 2005 in Eau Claire, Wisconsin before a department administrative law judge. On March 20, 2006, the administrative law judge issued appeal tribunal decisions reversing the initial determinations of personal liability. The Department of Workforce Development timely filed a petition for commission review of the adverse decisions, and the matters now are ready for disposition.

Based upon the applicable law and the records and other evidence in the case, the commission issues the following:

Indianhead Construction, Inc. and Indianhead Construction and Development, Inc. were general contractor construction concerns devoted primarily to the construction of industrial facilities and veterinarian clinics. Both businesses were organized as corporations, and Ms. Foster owned 100 percent of the shares of each. She also was an officer in both of the corporations. Her husband was president of the corporations and was in charge of their operations.

Wisconsin Stat. § 108.22(9) provides, in relevant part:

An individual who is an officer, employee, member or manager holding at least 20% of the ownership interest of a corporation or of a limited liability company subject to this chapter, and who has control or supervision of or responsibility for filing contribution reports or making payment of contributions, and who willfully fails to file such reports or to make such payments to the department, or to ensure that such reports are filed or that such payments are made, may be found personally liable for such amounts, including interest, tardy payment or filing fees, costs and other fees, in the event that after proper proceedings for the collection of such amounts, as provided in this chapter, the corporation or limited liability company is unable to pay such amounts to the department.

Pursuant to the statute, four conditions must be satisfied before one is personally liable for a corporation's delinquent taxes. One must hold at least 20% ownership interest; one must have control or supervision of or responsibility for making the tax payments; one must willfully fail to make those payments or ensure that they are made; and the department must first have undertaken proper proceedings to collect the monies in question from the corporation. In the present case, there is no issue as to the first and last criteria; the issue therefore is whether Ms. Foster had control or supervision of or responsibility for making the tax payments, and willfully failed to make them or ensure that they were made.

Courts generally give a broad interpretation to the term "responsible person." Denbo v. United States, 988 F.2d 1029 (10th Cir. 1993). The United States Court of Claims has held that any corporate officer with the power and authority to avoid default is a responsible party, within the meaning of 26 U.S.C. § 6672, a statute imposing personal liability upon responsible persons for the willful failure to pay over to the government employees' withholding taxes. Feist v. United States, 607 F.2d 954 (Ct. Cl. 1979). Included are persons having power to control the decision-making process by which the corporation allocates funds to other creditors, and persons with ultimate authority over the corporation's expenditure of funds. Godfrey v. United States, 748 F.2d 1568, 1575 (Fed. Cir. 1984). This responsibility is a matter of status, duty, and authority, indicia of which include the holding of corporate office, control over financial affairs, authority to disperse corporate funds, stock ownership, and the ability to retain and discharge employees. Thibodeau v. United States, 828 F.2d 1499, 1503 (11th Cir. 1987). "Responsible person" status generally attaches to "high corporate officials charged with general control over corporate business affairs who participate in decisions concerning payment of creditors and disbursement of funds." Monday v. United States, 421 F.2d 1210, 1214-15 (9th Cir. 1970). Although corporate office does not per se impose a duty to collect, account for, and pay over withheld taxes, liability does attach "to those with power and responsibility within the corporate structure for seeing that the taxes withheld from various sources are remitted to the Government." Monday, 421 F.2d at 1214.

Presumptions in this area are allowable. The court of claims has noted that, since a corporation acts through its officers, absent evidence to the contrary, a person who occupies the offices of vice president, secretary, and treasurer, and who has the authority to make corporate disbursements, also has the duty to carry out what the law requires of the corporation, here the payment of withholding taxes. Bolding v. United States, 565 F.2d 663, 670 (Ct. Cl. 1977).

An otherwise-responsible person likewise may not avoid liability simply by delegating the responsibility away from him or herself. Responsible persons have a fiduciary duty to properly account for proper management of funds; such a fiduciary cannot absolve him or herself from liability by disregarding that duty and leaving it to someone else to perform. Hornsby v. Internal Revenue Service, 588 F.2d 952, 953 (5th Cir. 1979). Even the claim that a corporate officer or director is "merely a figurehead" is without legal significance and does not relieve the individual of the responsibilities of his or her corporate offices. Burroughs v. Fields, 546 F.2d 215, 217 (7th Cir. 1976). Applying these principles to the present case, Ms. Foster must be deemed to have had control or supervision of or responsibility for making the payments at issue in these cases.

Ms. Foster was the sole owner of the corporations, and she was an officer in them as well. While she was not the primary check writer, she did have check-writing authority. Ms. Foster on occasion would contact office personnel to inquire whether a certain bill had been paid, and on at least one occasion she received notice that a tax bill had not been paid and brought the tax bill in question to the corporation's offices to inquire about the status of the bill. These indicia of oversight are sufficient to show control or supervision of or responsibility for making the tax payments at issue in these cases.

Wisconsin Stat. § 108.22(9) also requires that the failure to pay over unemployment taxes be wilful. In a civil context such as this proceeding, such willfulness requires only a conscious, voluntary decision on the actor's part. It is generally accepted, though, that willfulness also includes the "reckless disregard" of obvious or known risks.

There is little question but that Ms. Foster did not have actual knowledge of the corporations' specific tax deficiencies. Again, though, one may not avoid a finding of willfulness simply by delegating responsibility for payment to others. Hornsby v. Internal Revenue Service, 588 F.2d 952, 953 (5th Cir. 1979). In Hornsby, the president of the corporation had argued against a finding of willfulness on the ground that he was busy with other corporate affairs and thus had delegated to subordinates the corporation's accounting responsibilities (including the duty to make payments to the IRS). The court held that responsible persons owe a fiduciary obligation to care properly for funds temporarily entrusted to them for the government's ultimate use, that a fiduciary could not absolve him or herself merely by disregarding their duty and leaving it to someone else to perform.

The court of claims likewise has rejected the argument that delegation of authority precludes a finding of willfulness. Bolding v. United States, 565 F.2d 663 (Ct. Cl. 1977). In Bolding, the court rejected the taxpayer's argument that he was unaware of the withholding tax deficiencies, that he paid attention only to commercial accounts payable. The court noted that the taxpayer's argument amounted to the position that, even with knowledge of a corporation's financial straits, a responsible officer may immunize himself from the consequences of his actions by wearing blinders which will shut out all knowledge of liability for the nonpayment of its withholding taxes. Bolding, 565 F.2d 663, 674.

Ms. Foster's actions in this case are comparable to those which courts have found to be willful. One may not simply delegate his or her responsibility away, especially if he or she is an officer and the sole stockholder of a corporation. As indicated in Hornsby, such action constitutes a corporate officer's violation of his or her fiduciary duty to see that the funds in question are properly remitted. The situation in the present case is further analogous to that of the corporation in Bolding, in that that corporation also was experiencing financial difficulties. Ms. Foster's corporations obviously were experiencing financial difficulties, and she knew of them.

The issue of Ms. Foster's liability for the delinquent taxes essentially reduces to the imputation to her of knowledge of the failures of the corporations. To do so is consistent with both state and federal case law on the subject. The Wisconsin Supreme Court has noted, for example, that it is proper to impute knowledge to a director or officer of the corporation when the facts justify a finding that the director in question had or should have had knowledge of the matter in question. Kohl v. F.J.A. Christiansen Roofing Co., 95 Wis. 2d 27, 289 N.W.2d 329 (1980). The court acknowledged that a director or officer of a corporation is not necessarily responsible for knowledge of all the affairs of that corporation. The analysis to be undertaken, though, is determination whether the directors or officers in question are in a position to acquire the knowledge to be imputed to them as private individuals and whether diligence by the director or officers in performing their duties would have led to their acquisition of the knowledge. Kohl, 95 Wis. 2d 27, 36. As an officer and sole shareholder of the corporations, Ms. Foster had the responsibility to exercise such supervision over the corporations' financial affairs as to have made herself aware of the failures now at issue.

Ms. Foster was aware the corporations had significant financial troubles, yet never made any attempt to examine corporate records. She conceded at hearing that she did not inquire as to what bills the corporations were paying (as opposed to inquiring about specific bills, referred to above). Despite her knowledge of the corporations' continuing financial difficulties, she never followed up by either checking the corporations' books herself or making arrangement for their examination. This level of disregard of the business of the corporations is reckless as the courts have considered the term; the commission therefore must conclude that Ms. Foster's failures to make the necessary tax payments were willful as well.

The commission therefore finds that Ms. Foster was an officer in Indianhead Construction, Inc. and Indianhead Construction and Development, Inc., that she owned at least 20% of the ownership interest in those corporations, that she had control or supervision of or responsibility for making payment of unemployment tax contributions, and that she willfully failed to make those payments to the department or ensure that those payments were made. The file in this matter indicates, finally, and this is not disputed by Ms. Foster, that the department engaged in proper proceedings to collect the delinquent taxes now at issue from the corporations and that the latter were unable to pay those taxes to the department.

The commission therefore finds that Ms. Foster is personally liable, within the meaning of Wis. Stat. § 108.22(9), for the delinquent taxes due from Indianhead Construction and Development, Inc. for the calendar year 2000 and the first and second quarters of 2001. The commission further finds that Ms. Foster is also personally liable, under the same provision, for the delinquent taxes due from Indianhead Construction, Inc. for the second through fourth quarters of 2001 and the first three quarters of 2002.

The appeal tribunal decisions are reversed. Accordingly, Leslie A. Foster is personally liable for the delinquent unemployment insurance liabilities of Indianhead Construction and Development, Inc. and Indianhead Construction, Inc. as stated in the initial determinations in the cases.

Dated and mailed August 4, 2006
fostele . srr : 105 : 2  ER 451

/s/ James T. Flynn, Chairman

/s/ David B. Falstad, Commissioner

/s/ Robert Glaser, Commissioner

NOTE: The commission did not confer with the administrative law judge before determining to reverse the appeal tribunal decisions in these matters. The commission's reversals were not based upon differing assessments of credibility from those made by the administrative law judge; rather, the commission concluded as a matter of law that Ms. Foster's status as officer and sole owner of the corporations, coupled with undisputed evidence regarding her occasional oversight of the financial affairs of the corporations, renders her personally liable for the delinquent contributions under Wis. Stat. § 108.22(9).

cc:
Attorney Terry L. Moore
Attorney Peter W. Zeeh

Appealed to Circuit Court.  Affirmed  July 9, 2007            [Circuit court decision summary]

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