HENRY A WARNER, Employer

Pursuant to the timely petition for review filed in the above-captioned matter, the commission has considered the petition and all relief requested. The commission has reviewed the applicable records and finds that the appeal tribunal's findings of fact and conclusions of law are supported thereby. The commission therefore adopts the findings and conclusions of the appeal tribunal as its own.

The decision of the appeal tribunal is affirmed. Accordingly, Henry A. Warner is personally liable for the delinquent unemployment taxes of Excalibur Automobile Corporation in the amount of $123,110.32 (interest computed to May 31, 1991).

Dated and Mailed July 16, 1993

BY THE COMMISSION:

Pamela I. Anderson, Chairman

Richard T. Kreul, Commissioner

James R. Meier, Commissioner

Section 108.22 (9) of the statutes renders personally liable for unpaid unemployment contributions any officer or employee holding at least 20 percent of the ownership interest of a corporation subject to this chapter, who has control or supervision of or responsibility for filing contribution reports or making payment of contributions, who willfully fails to file such reports or to make such payments to the department. The first issue, therefore, is whether the appellant had control or supervision of or responsibility for making the unemployment contributions at issue. Discussion of this issue must be based on federal precedent, though, since there is very little state case law on the subject. The comparable federal statute is 26 U.S.C. sec. 6672, which imposes personal liability upon responsible persons for the wilful failure to pay over to the government employes' withheld taxes. Several general principles may be enunciated. First, courts have generally given a broad interpretation to the term "responsible person." Denbo v. United States, 988 F.2d 1029 (10th Ct. 1993). Thus, 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 section 6672. 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 employes. 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 enunciated the rebuttable presumption that a corporation founder, chief stockholder, president, and member of the corporation's board of directors is a responsible person under section 6672. Feist, 607 F.2d at 960. The same court 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). This responsibility should generally be consonant with the duties of the person's position within the corporation, though. For example, one's status as the chairman of the board, alone, is insufficient to make one responsible pursuant to section 6672, since the duties of a chairman of the board do not in themselves give rise to the (federal) duty to collect, account for, and pay over taxes. Godfrey, 748 F.2d at 1575-76.

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 dissolve 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).

In light of these principles, there is little doubt but that the appellant had supervision of or responsibility for making unemployment contribution payments. He was both the president and treasurer of the corporation, as well as the majority stockholder. The corporation's controller, to whom the appellant had delegated direct responsibility for payment of the taxes, reported to the appellant. Any failure by the appellant to actually know of the corporation's difficulties was due to the appellant's intentionally secluding himself from the corporation's operations. He specifically indicated that his practice was to retain persons to run the corporation, and then to let them run it. He essentially admitted having washed his hands of the corporation as of the summer of 1989 when, according to his testimony, "the investment of time was no longer prudent." The corporation's executive vice president indicated, finally, that in the summer the appellant was on his boat "virtually all the time."

The present circumstances may be contrasted with an example in which the court of claims held that a shareholder in a bankrupt corporation had not been responsible for the collection or paying over of withheld taxes. DiStasio v. United States, 90-2 U.S.T.C. par. 50,577 (199). In DiStasio, the taxpayer had owned and operated a plumbing concern, for which his wife and an outside accountant handled the bookwork. Following the merger of the taxpayer's corporation with another, the taxpayer had no part of or input into the corporation's financial affairs; nor did the taxpayer's wife continue performing bookkeeping services after the merger. The subsequent corporation's financial records were kept under lock and key, and the taxpayer had no knowledge of the corporation'[s finances. The tax court held that the taxpayer was not a responsible person within the meaning of section 6672. Others controlled the day-to-day management of the corporation. The taxpayer had little knowledge of the corporation's financial affairs, no ready access to the corporation's records, and could not have understood them even if he had had access. In the present case, on the contrary, the appellant retained the ultimate control over the affairs of the corporation, through the offices of president and treasurer. While it is true that the appellant may not have had any more knowledge of the corporation's affairs than did the taxpayer in DiStasio, yet in the latter case the taxpayer's ignorance was due to a legitimate separation of duties within the corporation. The taxpayer's exclusive area of expertise and involvement with the corporation was in the field. In the present case, on the other hand, the appellant can point to no activity connected with the corporation which reasonably could lead him to have remained as ignorant as he claims he was with regard to the corporation's non-payment of the unemployment contributions at issue. For all these reasons, the commission fully agrees with the appeal tribunal that the appellant had supervision of or responsibility for making the payments at issue.

WILFULNESS

Section 108.22 (9) imposes personal liability for wilful failure to pay over unemployment contributions. 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 wilfulness also includes the "reckless disregard" of obvious or known risks, and the commission so held recently in its Delaney decision. The notion of wilfulness as reckless disregard of an obvious or known risk is found in several areas of the law, including the Age Discrimination in Employment Act and Fair Labor Standards Act, federal tax law, and the law of negligence in Wisconsin. In the latter area, for example, the Wisconsin Supreme Court has held that punitive damages are available in negligence actions when "outrageous" conduct on a tortfeasor's part is proved. Brown v. Maxey, 124 Wis. 2d 426, 429, 369 N.W.2d 677 (1985). The court held it sufficient for the awarding of punitive damages that the wrongdoer exhibited reckless indifference to or disregard of the rights of others. Brown, 124 Wis. 2d at 434. On the date of the fire which injured the plaintiff and led to the action, there were no security employes on duty at the residential building; nor were there functional locks on the exit doors or doors within the building. The fire alarm systems had been rendered inoperable due to tampering with a circuit breaker. The court held the defendant owner of the building liable for punitive damages, reasoning that his knowledge of the security problems and history of fires at the residential complex, coupled with his conscious refusal to reduce the risk of fires, constituted a reckless disregard of the plaintiff's rights and safety. The defendant's outrageous conduct was his refusal to take action to protect his tenants from the possibility of future fires. Brown, 124 Wis. 2d at 441. The commission believes the appellant's management "style" of simply letting his subordinates run the corporation can be characterized as the reckless indifference (to whether the unemployment contributions were made) committed in Brown.

Federal tax law provides the most closely analogous situation to the state law personal liability provisions. Section 6672 of Title 26 of the United States Code imposes personal liability upon a corporation's responsible persons for their wilful failure to collect or pay over to the government taxes withheld from employes' wages. It therefore is appropriate to consider what constitutes a reckless disregard under federal tax law and, indeed, the commission has looked to federal precedent in this area.

There is little question but that the appellant did not have actual knowledge of the corporation's tax deficiencies before February of 1990, when he first spoke with the department's collections specialist. The federal law on the subject still allows a finding of wilfulness on the appellant's part, given the appellant's "hands off" management thereof. This is because one may not avoid a finding of wilfulness 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 wilfulness 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 wilfulness. 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 immunise 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 at 674.

The appellant's actions in this case in the commission's opinion are analogous to those which the above-mentioned courts found wilful. One may not simply delegate his or her responsibility away, especially if he or she is the president, treasurer, and majority 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 of this corporation is further analogous to that of the corporation in Bolding, in that that corporation also was experiencing financial difficulties. The record in the case now before the commission makes it clear that this corporation also was experiencing financial difficulties, and that the appellant knew of them (and, so, stopped taking a salary in mid-1989).

The issue of the appellant's liability for the delinquent taxes prior to February 1990 essentially reduces to the imputation to him of knowledge of the failures of the corporation. 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 directors or officers in performing their duties would have led to their acquisition of that knowledge. Kohl, 95 Wis. 2d at 36. As president and treasurer of the corporation, though, the commission believes the appellant had the responsibility to exercise such supervision over the corporation's financial affairs as to have made himself aware of the failures now at issue. The United States Tax Court has also indicated that no liability will attach where an otherwise-responsible person did not disregard his or her corporate duties and, to the contrary, undertook all reasonable efforts to see that the taxes in question would be paid. Feist v. United States, 607 F.2d 954 (Ct. Cl. 1979). In the case now before the commission, the appellant has admitted his failure to perform the duties the commission believes any president/treasurer/majority stockholder should perform in connection with his or her participation in a corporation. For all these reasons, the commission believes the appellant wilfully failed to supervise the corporation's payment of unemployment contributions, even before February of 1990.

The appellant's personal liability for the unpaid taxes is even less in question after February of 1990. The federal courts have generally indicated that taxpayers are under an even more rigorous standard of conduct, when the taxpayer has knowledge either of the corporation's previous delinquency or of the deficiency of whomever the corporation has designated responsible for remittance of taxes. The Fifth Circuit has indicated, for example, that a taxpayer has a duty to insure that taxes are paid before payments are made to other creditors, once the taxpayer is aware of the corporation's liability to the government. Mazo v. United States, 591 F.2d 1151, 1157 (1979). The Seventh Circuit held likewise in Wright v. United States, 809 F.2d 425 (7th Cir. 1987). In Wright, the court upheld the jury's finding that the taxpayer's failure to inquire into the state of the corporation's tax withholding accounts was reckless. The court held the jury's determination was reasonable, given that the corporation had recently been delinquent in its remittance of taxes and that the taxpayer was aware of the continuing deterioration of the corporation's finances. Wright, 809 F.2d at 428. The Eleventh Circuit also is in line with the above-mentioned decisions. See Smith v. United States, 894 F.2d 1549 (11th Cir. 1990). In Smith, the court held the president liable for the delinquent withholding taxes because of his refusal to have listened to his comptroller's pleas that he look into the corporation's financial problems. The court held that the taxpayer's refusal constituted a reckless disregard of an obvious risk that the government would not receive the withholding taxes to which it was entitled, and indicated that he "cannot avoid liability by showing that he closed his eyes to (the corporation's) problems." Smith, 894 F.2d at 1554 n.5.

A leading case, and one which well illustrates the point at which liability will attach because of unreasonable refusal to deal with corporate finances (following good faith ignorance before the point at which liability attaches) is United States v. Leuschner, 336 F.2d 246 (9th Cir. 1964). Leuschner was the director and general manager of both the Yosemite Creek and the Kadota Creek corporations. At issue were 1952 delinquent taxes of Yosemite Creek and 1953 and 1954 delinquent taxes of Kadota Creek. Yosemite Creek's controller had kept that corporation's books, made out and filed tax returns, and paid bills, including taxes. Leuschner had spent most of his time in the field, handling sales, buying goods, and supervising harvesting and shipping. He travelled extensively in his work and relied upon the controller to see that creditors were paid. Leuschner in addition spent a good deal of time seeing that the controller had funds to meet Yosemite Creek's obligations. Yosemite Creek was forced to close, however, so Leuschner arranged for Kadota Creek to carry on the same business Yosemite Creek had. Leuschner operated the second corporation in the same manner as he had the first, and so did the controller. That is, Leuschner did not instruct the controller to see that withheld taxes were paid; nor did Leuschner inquire whether the controller was keeping current on the corporation's tax obligations. The court of appeals held that Leuschner was not personally liable for the first corporation's delinquent taxes. In so doing, the court of appeals implicitly held that the taxpayer's failure to have kept apprised of the corporation's finances was a legitimate failure, and due to a reasonable division of labor within the corporation. With regard to the second corporation's taxes, on the other hand, Leuschner's failure did constitute a wilful violation of the withholding law. Leuschner was the controller's superior, he had a duty to see that the taxes were paid, and he knew that the controller had failed previously to properly manage the monies in question. (Leuschner's failure with regard to the first corporation is distinguishable from the appellant's failure in the case before the commission, in that the appellant's lack of involvement with the corporation's finances was not due to a legitimate division of labor within the corporation or to any other legitimate factor making reasonable the appellant's lack of concern.) These cases thus make clear that, once a taxpayer has knowledge of a corporation's failure with regard either to tax liability or to a corporation's financial difficulties, the taxpayer has an increased responsibility to supervise the corporation's payment of taxes to the government.

The Age Discrimination in Employment Act and Fair Labor Standards Act also allow so-called "punitive" damages in cases of "wilfull violations" by defendants. The United States Supreme Court summarized the development of the civil standard of reckless disregard, in Trans World Airlines v. Thurston, 469 U.S. 111 (1985). The Court noted that courts have found an employer subject to criminal penalties under the FLSA when the employer "fully disregards the law . . . without making any reasonable effort to determine whether the plan (the employer) is following would constitute a violation of the law." Trans World Airlines, 469 U.S. at 126 (quoting Nabob Oil Co. v. United States, 190 F.2d 478, 479 (10th Cir. 1951), cert. denied, 342 U.S. 876 (1951)). In adopting this standard, the Court noted that it was substantially in accord with the court of appeals' interpretation of "wilful" as with knowledge of or reckless disregard for whether the conduct in question is prohibited. The Court initially had held, in the context of criminal failure to pay tax, that wilful conduct included that marked by careless disregard for whether or not one has the right to so act. United States v. Murdock, 290 U.S. 389 (1933) (overruled on different ground by Murphy v. Waterfront Commission of New York Harbor, 378 U.S. 52 (1964); the Court then noted its adoption of the Murdock definition of wilful in the civil context in United States v. Illinois Central Railroad, 303 U.S. 239 (1938).

Our federal circuit, the seventh, also is in line. In a case arising in Madison, a division head who discharged a protected-age plaintiff (47) had believed the discrimination statute did not apply until a worker reached the age of 50. Price v. Marshall Erdman, 966 F.2d 320 (7th Cir. 1992). The court considered it an "extraordinary mistake" for the defendant, with annual sales of $200 million in the year the plaintiff was fired, to have kept a division head ignorant of a basic feature of the ADEA. The court held that the jury could have found reckless the defendant's conduct, so far neglecting its responsibilities for compliance with the ADEA as to have allowed a supervisory employe to whom it had delegated the power to retain and discharge, to remain ignorant of one of the most basic features of the law: the age at which workers become protected by it. As was the case in Trans World Airlines, the appellant made so little effort to determine the validity of the corporation's treatment of its unemployment contributions, that that effort can be characterized as with reckless disregard for the legal sufficiency thereof.

The above assumes that the corporation had monies with which to pay the taxes in question, but the record supports a finding to that effect. Department wage records indicate that the corporation paid wages in all of 1988 and in the first two quarters of 1989. The corporation in addition must have paid wages in the latter quarters of 1989 and the first two quarters of 1990, given the initial determinations of liability (which the corporation did not appeal) for taxes due on wages through the second quarter of 1990. Further, the corporation's vice president of trademark licensing testified that the corporation had sufficient funds in the first two quarters of 1990 to be able to approve budgets she proposed for expenses connected with the corporation's attendance at trade shows.

The commission also notes, finally, Wisconsin precedent which, although relatively old, yet stands for the proposition that the appellant had an obligation to rebut the inference of wilfulness the record established. See Winn. v. Itzel, 125 Wis. 19, 103 N.W. 220 (1905). There, the supreme court held that where a plaintiff, charging fraud, had proven certain facts, he had established a prima facie case, even though without necessarily having produced any direct evidence of fraudulent acts or words by the defendant. Even so, the defendant then is obligated to rebut the inference of fraud so raised, by affirmative proof of good faith on the defendant's part. So in this case the commission believes the appellant could be expected to have raised as an affirmative defense the corporation's inability to meet its tax obligations when they came due.

QUANTUM OF PROOF

A remaining matter is the level of proof the department has to meet, when attempting to show a wilful failure to pay taxes under section 108.22 (9) of the statutes. The commission believes the appellant is correct in his assertion that such proof must be by the so-called middle standard of proof, clear and convincing evidence, but the commission believes the evidence in the record meets that standard. In addition to several recent, unpublished decisions by the court of appeals, there is the Wisconsin Supreme Court decision of Kuehn v. Kuehn, 11 Wis. 2d 15, 104 N.W.2d 138 (1960). In Kuehn, the court noted that in the class of civil cases involving fraud, gross negligence, and criminal acts, the certitude (of proof) must be of a greater degree than in ordinary civil cases. In Wisconsin, the idea of gross negligence gradually evolved to that of reckless disregard, the current standard allowing a finding of wilfulness pursuant to section 108.22 (9) of the statutes and its federal counterparts. For this reasons, the commission believes the middle level of proof must also be applicable to the commission and department's determinations of personal liability under 108.22 (9), when that liability is based upon an appellant's alleged reckless disregard of his or her duties to monitor or pay over unemployment contributions.

The Wisconsin Civil Jury Instructions contain commentary upon the various levels of proof in civil matters. The so-called ordinary burden of proof is "the greater weight of the evidence." This means evidence which, when weighed against evidence opposed to it, has more convincing power. The instruction ends with the caveat that, if one has to guess what the answer should be after discussing all evidence which relates to a particular question, then the party having the burden of proof as to that question has not met it. This notion of "greater weight," according to the instruction, is an exact synonym for "fair preponderance" and looks to replace the latter phrase as the proper definition of the ordinary burden of proof.

The so-called middle burden of proof is "clear, satisfactory, and convincing" evidence. This instruction contains the same caveat as the ordinary burden instruction, that is, if one has to guess what the answer should be after discussing all evidence which relates to a particular question, then the party having the burden of proof as to that question has not met it.

The commission believes the evidence meets the middle burden of proof, since it is based almost entirely upon department records not challenged and upon the appellant's own admissions of lack of involvement with the corporation's financial affairs. Application of these facts to the clear case law on the subject is straightforward.

warnehe . ssd : 105 : 1

cc: ATTORNEY ALAN DEUTCH
     ATTORNEY MICHAEL J MATHIS

Appealed to circuit court.  Affirmed, May 18, 1994    [Summary of Circuit Court decision]

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