STATE OF WISCONSIN
LABOR AND INDUSTRY REVIEW COMMISSION
P O BOX 8126, MADISON, WI 53708-8126 (608/266-9850)

ACTION EXPRESS, Employer

NICHOLAS L FIORE, Employer

UNEMPLOYMENT INSURANCE CONTRIBUTION LIABILITY DECISION
Account No. 176706 PL, Hearing No. S0700097MW


An administrative law judge (ALJ) for the Division of Unemployment Insurance of the Department of Workforce Development issued a decision in this matter. A timely petition for review was filed.

The commission has considered the petition and the positions of the parties, and it has reviewed the evidence submitted to the ALJ. Based on its review, the commission makes the following:

FINDINGS OF FACT AND CONCLUSIONS OF LAW

The appellant (Fiore) was the sole shareholder of Action Express, Inc. (Action Express), from an unspecified date prior to January 1, 2004, through October 31, 2005.

The issue is whether Fiore is personally liable to the department for the unpaid balance of $30,238.81 in unemployment insurance taxes, penalties, and interest arising from the indebtedness of Action Express.

It was stipulated by the parties that, through its 20+-year history prior to January 1, 2005, Action Express had promptly filed all required UI reports, and promptly paid its UI taxes, including those after rate changes.

Effective January 1, 2004, Action Express signed a power of attorney agreement with Paychex. Pursuant to this agreement, UI mailings would continue to be sent to Action Express, but Paychex would be authorized to represent Action Express in UI matters.

The record shows that, after January 1, 2004, any UI mailings from the department would be placed, by the worker who processed the mail, in the human resources unit mail basket, and then forwarded by the human resources unit to Paychex.

A department witness testified that department records (exhibit no. 1) show that the UI tax rate for Action Express was, on or around October 18, 2004, changed from 4% to 6.6%, to be effective January 1, 2005. This witness also testified that it was the department's standard practice to mail a notice of a rate change to the affected employer, and the date of the mailing to Action Express would have been on or after October 18, 2004. It should be noted that a copy of the mailing is not maintained by the department, and that this witness, although working in the tax and accounting unit in 2004, was not responsible at that time for overseeing these mailings. This evidence is insufficient to support a finding that notice of the rate change was actually mailed to Action Express in October 2004.

For the first quarter of 2005, Action Express promptly paid its UI taxes, but at the 4% rate, not the new 6.6% rate, i.e., it paid $25, 191.94 rather than $41, 566.69.

For the second quarter of 2005, Action Express promptly paid its UI taxes, but again at the 4% rate, not the 6.6% rate, i.e., it paid $8,432.47 rather than $13,913.57.

In a determination dated and mailed on August 17, 2005, to Action Express's address of record with the department on West Zellman Court in Milwaukee, the department indicated that Action Express had underpaid its UI taxes for the first quarter of 2005, and now owed $16,864.43 in taxes and interest. Action Express did not file an appeal of this determination prior to the September 7, 2005, appeal deadline.

In a determination dated and mailed two days later, on August 19, 2005, to Action Express's address of record with the department on West Zellman Court in Milwaukee, the department indicated that Action Express had underpaid its UI taxes for the second quarter of 2005, and now owed $5,535.91 in taxes and interest. Action Express did not file an appeal of this determination prior to the September 9, 2005, appeal deadline.

Effective November 1, 2005, Action Express ceased doing business and its assets were sold to Action Messenger, in which Fiore held a one-third interest. Prior to the sale, Action Express had been profitable and had $200,000-$300,000 in its bank account

For the third quarter of 2005, Action Express promptly paid its UI taxes, but again at the 4% rate, not the 6.6% rate, i.e., it paid $5,452.59 rather than $8,996.77.

In a determination dated and mailed on November 21, 2005, to Action Express's new address of record with the department, a post office box in Milwaukee, the department indicated that Action Express had underpaid its UI taxes for the third quarter of 2005, and now owed $3,579.62 in taxes and interest. Action Express did not file an appeal of this determination prior to the December 12, 2005, appeal deadline.

In a letter to Action Express, mailed to Action Messenger's address on South Howell Avenue in Milwaukee, and dated February 21, 2006, the department's collection section stated that Action Express owed UI taxes and penalties for 2005 in the amount of $29,695.26. When he received and reviewed this letter, Fiore first became aware that Action Express had not paid its full UI tax liability for 2005.

In a March 1, 2006, letter to Patrick Madden (Madden), attorney for Action Express, the department confirmed an "installment arrangement to cover delinquent unemployment compensation taxes," and enclosed payment coupons.

In an April 6, 2006, letter to Madden, the department stated in part:

You have expressed an interest in submitting an offer in compromise to resolve the outstanding liability....You must complete, sign and return the attached Offer in Compromise and Statement of Financial Condition in order for any compromise to be considered...A pending offer in compromise does not require the department to halt collection proceedings...

In a June 16, 2006, letter to Action Express at an Ohio address, the department provided notice that a tax warrant was being placed "on your real and personal property," and that additional legal notice to collect the debt may be taken without further notice.

In a June 20, 2006, letter to Fiore at an Oconomowoc address, the department quoted Wis. Stat. § 108.22(9), relating to personal liability for UI taxes, and indicated he should contact the department if he felt he should not be held personally liable for Action Express's remaining UI tax liability for 2005.

In a determination dated and mailed on March 22, 2007, the department imposed personal liability on Fiore. Fiore timely appealed this determination, and this issue of personal liability is now before the commission.

Wisconsin Statutes § 108.22(9) provides as follows:

9) 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 any required 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. Ownership interest of a corporation or limited liability company includes ownership or control, directly or indirectly, by legally enforceable means or otherwise, by the individual, by the individual's spouse or child, by the individual's parent if the individual is under age 18, or by a combination of 2 or more of them, and such ownership interest of a parent corporation or limited liability company of which the corporation or limited liability company unable to pay such amounts is a wholly owned subsidiary. The personal liability of such officer, employee, member or manager as provided in this subsection survives dissolution, reorganization, bankruptcy, receivership, assignment for the benefit of creditors, judicially confirmed extension or composition, or any analogous situation of the corporation or limited liability company and shall be set forth in a determination or decision issued under s. 108.10.

Pursuant to this provision, there are four requirements for holding an individual personally liable for a corporation's unpaid UI taxes: at least 20% ownership interest in the corporation; control or supervision of, or responsibility for, making tax payments; willful failure to make those payments or to ensure they were made; and the inability of the corporation to pay after proper, unsuccessful proceedings by the department to collect the taxes. See, David M. Zuehlke & Associates, Inc., UI Hearing No. S0300206AP (LIRC Nov., 29, 2005).

The record shows, and Fiore does not appear to dispute, that he held at least a 20% ownership in Action Express during 2005, he had ultimate responsibility for the tax payments, and Action Express was unable to pay the subject taxes after proper but unsuccessful efforts by the department to collect them.

Fiore argues, however, that he did not willfully fail to pay the taxes at issue, or to ensure that they were paid.

The ALJ relied upon an incorrect interpretation of Wis. Stat. § 108.22(9) in concluding that Fiore should be personally liable. The statutory language in question is:

..., 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,...

The ALJ held that the word "willfully" modifies the first phrase, i.e., the "to file...or to make" phrase, but not the second phrase, i.e., the "to ensure" phrase, and, as a result, a simple negligence standard applies to the second phrase. Obviously, the words "willfully fails" necessarily apply to both phrase one and phrase two, given the manner in which the provision is organized. In addition, the word "fails" must necessarily apply to the second phrase in order for it to make sense within the context of the provision, and there is nothing in the statutory language or otherwise which could possibly support the use of the word "willfully" to modify the word "fails" as it applies to the first phrase, but not to the second. As a result, it is improper to apply a simple negligence standard to this requirement.

The commission has held that the "willfulness" requirement of Wis. Stat. § 108.22(9) is met if the responsible individual acts with a reckless disregard of a known risk that the taxes have not been paid. See, Cory Wilson, UI Hearing No. S0600098MW (LIRC March 13, 2008); S.B.R., Inc., UI Hearing No. S9900041MD (LIRC Nov. 24, 1999). The commission has also held that "reckless disregard" in this context is tantamount to gross negligence, and is established if the responsible individual clearly ought to have known that there was a grave risk that taxes were not being paid and he was in a position to find out for certain very easily. See, Cory Wilson, supra.

This standard is not met here. The scenario most consistent with the evidence of record is that, upon retaining Paychex to represent it in UI matters, Action Express simply forwarded to Paychex without review all UI communications from the department. It was perhaps negligent for Fiore not to require that his staff review each piece of UI correspondence from the department before forwarding it to Paychex, but not grossly negligent.

Moreover, there is not even a hint in the record that Fiore intended, or had reason, to avoid any part of Action Express's 2005 UI tax liability. The UI tax record of the corporation, for the more than twenty years of its existence prior to 2004, was, as characterized by the attorney for the department, "as clean as a hound's tooth." Fiore was aware that timely quarterly UI tax payments for 2005 had been remitted by Action Express, and the record does not show that he had any reason to suspect that they were for the incorrect amount. There was $200,000-$300,000 in Action Express's bank account immediately prior to its transfer to Action Messenger in October 2005, and there would have been no reason for Fiore not to have paid Action Express's UI unpaid 2005 tax liability from these funds had he been aware of it.

The circumstances in this case distinguish it from those in which the commission has found personal liability.

The other cases generally involve individuals who were aware, or could have been aware by simply examining corporate financial records, that quarterly UI taxes were due but had not been paid. See, Leslie A. Foster, UI Hearing No. S0500006EC (LIRC Aug. 4, 2006); David M. Zuehlke & Associates, Inc., supra.; Carl E. Olson, UI Hearing No. S9900256GB (LIRC Jan. 31, 2002); Michael A. Pharo, UI Hearing No. S9900158MD (LIRC Dec. 28, 2001); Leo J. Schilz, UI Hearing No. S0100133MW (LIRC Dec. 10, 2001); SBR, Inc., supra.

Here, Fiore was aware that quarterly UI taxes were due for 2005, as they had been due for every quarter of every other year Action Express had been in business; was aware quarterly tax payments had been made for 2005; but was unaware, until February 2006, that 2005 UI taxes had been underpaid. This circumstance is distinguishable from those in which the individual makes no effort to determine whether quarterly UI taxes had been paid (Foster), is aware UI taxes for certain quarters have not been paid by a service retained to perform this function but takes no action to remedy this (S.B.R., Inc.), or makes a conscious decision not to pay the taxes (Zuehlke, Olson, Pharo, Schilz).

Accordingly, Fiore is not personally liable to the department for the unpaid 2005 taxes, penalties, and interest of Action Express within the meaning of Wis. Stat. § 108.22(9).

DECISION

The decision of the administrative law judge is reversed. Accordingly, Nicholas L. Fiore is not required to pay to the department the unpaid 2005 unemployment insurance tax, penalty, and interest liability of Action Express, Inc.

Dated and mailed December 17, 2008
fioreni . srr : 115 : 1   ER 451

/s/ James T. Flynn, Chairperson

/s/ Ann L. Crump, Commissioner

 

NOTE: The commission did confer with the administrative law judge (ALJ) before reversing his decision. The ALJ indicated that he had no recollection of Fiore or the other hearing witnesses, and was unable as a result to impart any demeanor impressions. The ALJ, in his decision, although finding that knowledge of the tax rate change/department determinations should be imputed to the employer, never found that Fiore himself was actually aware of them prior to February 2006. The ALJ stated at the credibility conference, however, that he believed, based upon the plausibility of the evidence of record, that Fiore was aware prior to the sale of Action Express to Action Messenger of the unpaid 2005 tax liability. However, the commission need not, and in this case, the majority did not, defer to the ALJ on this point, since the ALJ was not in a superior position to determine the plausibility of Fiore's version of events. Unlike credibility determinations based upon the evaluation of witness demeanor, credibility determinations based upon an assessment of the plausibility of a version of events does not require observation of the testimony of hearing witnesses but instead simply a review of the written evidence of record. The commission has carefully reviewed this evidence, and, considering all of the relevant circumstances, including but not limited to Fiore's and Action Express's 20-year history of prompt and complete payment of its unemployment tax liability, and the availability of ample resources to meet its total 2005 liability prior to the sale of Action Express, found that Fiore, as he had testified, was not aware of the unpaid 2005 taxes, penalties, and interest until February 2006, several months after the sale of Action Express.

 


 

ROBERT GLASER, Commissioner, (dissenting):

I respectfully dissent from the majority opinion in this case.

In my opinion, the nature and frequency of the department's direct 2004/2005 communications with Action Express, of which Fiore was the owner, require a finding that he was necessarily aware of the change in the tax rate as well as the determinations of unpaid tax liability. This knowledge, coupled with the failing of Action Express to satisfy this liability, establish that Fiore's actions were willful within the meaning of Wis. Stat. § 108.22(9) and that he be held personally liable for the $30,238.81 at issue.

/s/ Robert Glaser, Commissioner

 


 

cc: Attorney Peter W. Zeeh


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