MANUEL LORENZO, : TAX COURT OF NEW JERSEY
:
Plaintiff, :
:
:
v. :
: DOCKET NO. 009219-93
:
DIRECTOR, DIVISION OF TAXATION, :
:
Defendant. :
:
___________________________________:
Decided: April 7, 1995
Written Opinion Dated: April 25, 1995
Richard D. Picini, Esq., for plaintiff
(Picillo Caruso, attorneys).
Gail L. Menyuk, for defendant
(Deborah T. Poritz, Attorney General
of New Jersey, attorney).
SMALL, J.T.C.
This written opinion amplifies my oral opinion of April 7,
1995.
Manuel Lorenzo ("Lorenzo") appeals from a determination of the
Director of the Division of Taxation ("Director") that he was
personally responsible under N.J.S.A. 54A:9-6 (f) & (l) for the
failure of M & L Construction Co., Inc., ("M & L") to remit
$103,302.39 tax (plus penalty and interest) withheld from employee
wages under the New Jersey Gross Income Tax Act. N.J.S.A. 54A:1-1
to :9-27 for the years 1989 thru 1992. I have determined that
Lorenzo is not personally responsible for M & L's failure to remit
taxes and accordingly, I cancel the Director's assessment against
him.
Lorenzo was born and educated in Spain. He left school at the age of 12. He worked in construction in Spain and Germany and was in the army. He immigrated to the United States early in 1968. Within a week of his arrival in the United States he began work in a factory and later in 1968 he began working in construction, a trade in which he continued working.
Lorenzo met Louis Lovejoy ("Lovejoy") while they were both working at a New Jersey construction company where Lovejoy was an estimator and superintendent of construction and Lorenzo was a laborer and foreman.
In 1979 Lovejoy had approached Lorenzo indicating that it would be advantageous for them to form a minority-owned construction company to bid on public contracts. Lorenzo qualified as a minority. Despite Lorenzo's misgivings about undertaking such a venture, given his inability to read and write English, Lovejoy assured Lorenzo that he, Lovejoy, would take care of the paperwork. They formed M & L. Lorenzo held a 51" stock interest and the title of President of the corporation. Lovejoy held the remaining 49" stock interest and was Vice President and Secretary.
Several witnesses including Lorenzo testified as to the actual roles that Lorenzo and Lovejoy played in the operation of M & L. Lovejoy ran the office and supervised everyone except laborers, who were supervised by Lorenzo. Lovejoy controlled the finances of the company, bid jobs, secured bonds, supervised bookkeeping, authorized all payments above $500 and signed most of the checks.
From time to time, Lorenzo signed checks as directed by Lovejoy.
Lorenzo signed loan documents, gave personal guarantees and signed
other business papers as directed by Lovejoy or as guided by other
corporate employees. This was necessary as Lorenzo could not read
English.
Lorenzo and Lovejoy received salaries of approximately $70,000
per year. There was another corporate employee, Tom Johnson, who
seems to have been paid slightly more than Lorenzo, at least in
some of the years. Lorenzo and Lovejoy each had company cars.
From 1987 to 1991 Lovejoy received approximately $600,000 in
payments from M & L. His wife's nurse had been paid in part by M
& L, his chauffeur was paid by M & L, and his mortgage was paid by
M & L. Lorenzo's mortgage was also paid by M & L ( Lorenzo had
loaned M & L the $45,000 proceeds from a mortgage taken on a home
he had owned free and clear. There was no evidence at trial that
Lovejoy ever contributed any money to M & L).
The record is not clear but sometime in the late 1980's or
early 1990 Lorenzo increasingly had to press Lovejoy to pay bills
so that suppliers would continue delivering materials to
construction sites and subcontractors would continue working.
Despite Lovejoy's assurance that the company was doing well, it
seemed to be very slow in paying its bills.
In 1992 the company received notice that it was delinquent in
its payment of Federal Income Tax withholdings from its employees.
John Crowley ("Crowley"), the Financial V.P. of M & L, was asked by
Lovejoy to prepare a response to a Federal IRS questionnaire in
which his draft indicated that Lovejoy was responsible for the
payment of these taxes. Lovejoy instructed Crowley to change the
form to indicate that Lorenzo was responsible and also instructed
Crowley not to tell Lorenzo about it. Nevertheless, Crowley told
Lorenzo. Lorenzo refused to sign the document and sought legal and
accounting help to resolve their problems.
During the course of the investigation by newly hired
accountants and lawyers, Lorenzo, the 51" shareholder and
President, was advised that since Lovejoy was not making books and
records available, that Lovejoy should be fired. Lovejoy was fired
by Lorenzo. (A Newark police officer had been called to witness
the firing because it was known that Lovejoy kept a .45 caliber
handgun in his desk. At the time of the firing the police officer
confiscated the gun.).
A thorough examination of the books revealed that Lovejoy had
been taking cash and paying personal expenses at about ten times
the rate of Lorenzo's salary and benefits. Based on the advice of
counsel, Lorenzo sold his 51" interest in M & L to Lovejoy for
$100,000 which proceeds he gave to his son.
Despite his controlling stock interest and title of President,
Lorenzo did not assert any authority in the company until he fired
Lovejoy. Lorenzo testified that he trusted Lovejoy and did what
Lovejoy told him to do, signed what Lovejoy told him to sign, in
the belief that it was all in the best interests of M & L.
Employees of M & L, those who contracted with M & L, and Lorenzo
all testified that Lovejoy ran the company's office and business
functions. He was seen as "the boss". Although Lorenzo had the
title of President, he was the field supervisor of laborers; other
more skilled field workers were supervised by Lovejoy. Lorenzo
would occasionally show up in the office perhaps for an hour at the
end of the day to review and plan field activities and sign papers
and checks at Lovejoy's direction. Lorenzo, perhaps mistakenly,
relied on Lovejoy to handle all business and tax functions of M &
L.
I observed Lorenzo on the stand and heard his testimony. I
believe him to be an honest, hard-working laborer and construction
supervisor unable to read or write English. His testimony and the
testimony of others revealed him to be unsophisticated in business
matters, recklessly trusting of Lovejoy and, in effect, little more
than a field supervisor in the operations of M & L. He was used as
a "front" for M & L so that it could qualify as a minority
contractor. Despite his paper position, he played a subservient
role to Lovejoy at M & L. Because he innocently, perhaps
ignorantly, trusted Lovejoy, Lovejoy was able to divert a
disproportionate share of the company's assets to himself while
ignoring corporate obligations, including taxes.
Individual liability for corporate employee withholding taxes under the New Jersey Gross Income Tax is governed by statute:
If any employer, without intent to evade or defeat any tax imposed by this act or the payment thereof, shall fail to make a return and pay a tax withheld by him at the time required by or under the provisions of section
54A:7-4, such employer shall be liable for such tax and
shall pay the same . . . .
[N.J.S.A. 54A:9-6(f).]
For purposes of subsections (f), (g), (h) and (i), the
term person or employer includes an individual,
corporation or partnership or an officer or employee of
any corporation (including a dissolved corporation) or a
member or employee of any partnership, who as such
officer, employee, or member is under a duty to perform
the act in respect of which the violation occurs.
[N.J.S.A. 54A:9-6(l).]
The question that must be resolved by this court is whether Manuel
Lorenzo was "under a duty" to collect and remit the New Jersey
Gross Income Tax withheld from the wages of M & L employees. In
New Jersey only one reported case has dealt with this issue.
Cooperstein v. Director,
13 N.J. Tax 68 (Tax 1993), aff'd
14 N.J.
Tax 192 (App. Div. 1994), petition for certif. filed, (July 11,
1994)(No. 39,079). In another case, the related issue of personal
liability under the New Jersey Sales & Use Tax, N.J.S.A. 54:32B-1
to -29, was analyzed with reference to Cooperstein. Skaperdas v.
Director,
14 N.J. Tax 103 (Tax 1994). Cooperstein established nine
factors to be analyzed with respect to personal liability for
corporate trust fund taxes. It is helpful to analyze each of those
nine factors as they relate to Lorenzo.
1. Contents of the corporate bylaws. There is no question
that under M & L's bylaws, Lorenzo, as President, had general
responsibility for the payment of taxes as he had general
supervisory responsibility for all activities of the corporation.
2. Role as officer and shareholder. Lorenzo was the
President and held 51" of the stock. On paper he was in complete
control of M & L.
3. Authority to sign checks and actual signing of checks.
Lorenzo had the authority to sign checks. He did sign checks, but
his role was somewhat different than a person who normally signs
checks because he couldn't read English. He signed what he was told
to sign. Lovejoy had given instructions to those who actually
prepared the checks that Lorenzo was not to sign a check in excess
of $500 unless approved by Lovejoy.
4. Authority to hire and fire employees. Clearly Lorenzo
had authority to hire and fire employees. In fact he only hired
and fired laborers. The evidence adduced at trial indicates that as
to other employees when Lorenzo tried to get involved he was
overruled by Lovejoy.
5. The responsibility to prepare and sign tax returns.
Other than his paper position as President, it is clear that in the
operation of M & L Lorenzo had nothing to do with taxes.
6. Day to day involvement in business management. Lorenzo
really had no involvement in the day to day operations of M & L
except to the extent that he was involved in field operations.
7. Power to control payments to creditors and payments of
taxes. On paper Lorenzo had this power. In fact, Lorenzo did not
have that power and Lovejoy did. This is why Lorenzo had to plead
with Lovejoy to get suppliers and subcontractors paid in order to
maintain delivery of supplies and work of subcontractors.
8. Knowledge of failure to remit taxes. I find that Lorenzo
had no knowledge of M & L's failure to remit taxes until Crowley
spoke to him about the IRS inquiry. It might normally be expected
that someone like Lorenzo who was signing documents and checks
would or should have knowledge of the corporation's failure to
remit taxes. Lorenzo's inability to read English makes his
position that he lacked knowledge of M & L's tax problems more
credible than would be the case with a literate individual.
9. Derivation of substantial income and benefits. Lorenzo
was paid a salary of $70,000, had a car and some other benefits.
These amounts do not seem to be out of line as compensation for
Lorenzo as a labor foreman, the use of his Hispanic surname, and
his personal guarantees of loans and other corporate obligations.
This nine part analysis, as I indicated at trial, is not
something to be weighed on an arithmetic basis, i.e., if five
factors point to liability then an individual is responsible, if
only four factors point to liability than he is not. The nine
factors are each examined and then the court must make a
qualitative determination based on the totality of the analysis.
Comparing Lorenzo to Cooperstein in Cooperstein v. Director,
supra, I find that Lorenzo was less responsible. Cooperstein makes
the crucial distinction between a duty to act and authority to act
and holds that mere authority is not sufficient to impose personal
liability. Duty alone imposes the liability. There is no question
that Lorenzo had authority to act for M & L. See also Skaperdas v.
Director, Div. of Taxation.
Joseph Cooperstein became involved with a floor covering
business, Robert W. Bahr & Sons, in order to facilitate the
retirement of its proprietor, Robert Bahr. Cooperstein, supra, 13
N.J. Tax at 71-72. To that end, Cooperstein drafted a business
plan whereby the business was incorporated so that three of Robert
Bahr's family members could purchase it. Cooperstein became one of
two incorporating directors and corporate president, as well as
controlling shareholder via revocable proxy. Id. Although the by-laws gave him, as president, authority to manage the business,
Cooperstein's sole function was to obtain financing so that the
family members could purchase the business from Bahr. Id. at 73.
Cooperstein was not involved in day-to-day operations and had no
substantial involvement in the corporation's finances, including
tax payments, until becoming owner of two-thirds of the stock
following departure of two of the family members. Id. at 75-76.
He was unaware of the unpaid state taxes until that time. Ibid.
Lorenzo's position in M & L was limited as was Cooperstein's
position at Robert W. Bahr and Sons. His knowledge and role in the
corporation was more limited than Cooperstein's with respect to the
business and taxes of the corporation. Cooperstein was a
sophisticated businessman; Lorenzo was an unsophisticated laborer.
Like Cooperstein, Lorenzo was placed in his position for a specific
purpose: Cooperstein to secure financing, Lorenzo to be a front
for minority contracting. In each case, others were responsible
for the payment of bills and taxes. Although Lorenzo signed checks
and Cooperstein did not, Lorenzo only signed checks at the
direction of Lovejoy, who had given directions that no check was to
be prepared in excess of $500 for Lorenzo's signature without
Lovejoy's approval. Although Lorenzo had authority to remit taxes,
the duty clearly was with others in the office under Lovejoy's
supervision. Although Lorenzo received a salary and Cooperstein
did not, Lorenzo was paid less than at least one other corporate
employee. Although there was no testimony as to what a field
supervisor would be paid, given that he had lent his Hispanic
surname to the corporation, guaranteed loans, gave Lovejoy a free
hand to run the corporation, in fact, to use it as his personal
bank account, $70,000 a year does not seem out of line. Testimony
at trial revealed that a $70,000 per year salary was well below the
standard of the construction industry for the President of a
construction company, like M & L, which had annual sales of
$10,000,000.
There can be more than one responsible officer in a
corporation. See Skaperdas v. Director, supra 14 N.J. Tax at 112-13; Barnett v. IRS,
988 F.2d 1449 (5th Cir. 1993). Clearly,
Lovejoy is responsible based on the evidence that I heard.
Despite his title and shareholdings, Lorenzo was not an equal
partner. He had legal authority based on the papers, but based on
an examination of the evidence, he was not capable of running this
business, he did not run this business, no one expected him to run
this business, and he did not hold himself out as running this
business. Only when disaster struck did Lorenzo seek the counsel
he needed. Lorenzo worked for the company as a laborer and
foreman, lent the company his Hispanic surname, and lent the
company his money. Although Lorenzo had paper authority, all power
was in Lovejoy. Lorenzo had no duty to act for M & L in the area
of tax obligations. Until the IRS knocked on the door and Mr.
Crowley, against Lovejoy's directions, advised Lorenzo of the
company's tax problems, Lorenzo had no knowledge or understanding
of M & L's tax obligation or tax defaults.
Harry Skaperdas was a director and officer of a fur company.
He received dividends, used corporate losses for personal tax
deductions, and obtained life insurance from the company. 14 N.J.
Tax at 107. His sole involvement consisted of signing corporate
documents, performing tailoring during the busy season, and
assisting the sales staff. The rest was left to his three
"partners". Id. at 108. He was not responsible for hiring
employees or preparing tax returns. On occasion he did sign tax
returns. Although he had the authority to control payment of
creditors and tax liabilities, he did no exercise it, and he had no
knowledge of unpaid taxes. Id. at 110-11.
I cannot imagine that there will be many cases like this one.
Based on the evidence in this case and that in Skaperdas, I would
conclude that Lorenzo, like Harry Skaperdas, the tailor, was an
unsophisticated individual whose corporate position made him, on
cursory examination, a responsible officer. The actual involvement
of both Lorenzo and Harry Skaperdas in the running of the
corporations' businesses, coupled with their lack of
sophistication, the actual role of others in the running of the
corporations, and in Lorenzo's case, his inability to read and
write English, absolve Lorenzo as it absolved Harry Skaperdas of
personal liability.
The Director cites me to Barnett v. IRS, supra. Barnett, whom
the court found to be a responsible person under federal lawSee footnote 1, was
a 20" director, and officer of a drilling company which he formed
with a business associate. His primary responsibility was
directing day-to-day drilling operations; he purchased supplies as
well as hired, fired, and supervised employees. 988 F.
2d at 1450.
His associate, Anderson, was a CPA who took care of the company's
financial affairs, although Barnett reviewed bills, conferred on
major business decisions, and recommended which creditors should be
paid. Id. at 1451. Barnett also had the authority to sign checks
without Anderson's permission. Ibid. When the company began
experiencing difficulties, Barnett became more involved in the
financial side and eventually discovered unpaid federal trust fund
taxes. Id. at 1452. However, Barnett, who eventually obtained
control of the company's finances, did not use incoming payments to
satisfy outstanding tax liabilities, but to meet payroll and make
payments of $70,000 to himself and $20,000 to "cash". Ibid. The
company then went bankrupt.
I find Lorenzo's involvement in M & L substantially different
from Barnett's. Lorenzo did not decide which bills would be paid,
did not participate in discussions regarding financing and
acquisition of equipment, and did not negotiate loans. Lorenzo did
not play a central role in M & L's day to day operations. Unlike
Barnett, Lorenzo did not choose to pay others rather than meet the
corporation's tax liabilities or write checks to himself for
$70,000 or to cash for $20,000.
Attached as an appendix to this opinion is a chart analyzing
and comparing the activities of Messers. Cooperstein, Harry
Skaperdas, Barnett, and Lorenzo with respect to each of the nine
factors that Cooperstein has established as the standards to be
applied in determining whether an individual is personally liable
for New Jersey gross income taxes when they are not collected and
remitted by a corporation.
Lorenzo was not under a duty to act and cannot be held
personally responsible for the unremitted withholding taxes of M &
L.
The assessment of the Director against Manuel Lorenzo will be
canceled.
COOPERSTEIN
H. SKAPERDAS
BARNETT
LORENZO
1. Corporate By-laws.
As
President, had
authority to
supervise and
control business
Not available.
Not available.
As President,
had authority to
supervise and
control
business.
2. Role as
office &
shareholder.
President,
Director.
Controlled Board
of Directors
through
revocable proxy,
which was never
exercised. Later
held 2/3 of
stock.
Vice President,
Director
Held 15.75" of
shares.
Vice-President,
later President.
Director.
Held 20" of
shares.
President.
Held 51" of
stock; complete
control on
paper.
3. Authority to
sign checks.
Actual signing
of checks.
Had authority to
sign checks.
Did not actually
sign any
corporate
checks.
Had authority to
sign checks.
Signed checks.
Had authority to
sign checks.
Signed payroll
checks on one
occasion while
Vice-President;
paid employees
outside
creditors and
himself after
becoming
President.
Had authority to
sign checks.
Did sign checks,
but could not
read English.
Signed what he
was told to
sign.
4. Authority to
hire and fire
employees and
actual exercise
of this
authority.
As President had
authority,
although it was
not exercised.
Actual
authority, did
not hire or
supervise
employees.
Actual
authority,
hired, fired,
and supervised
field personnel.
Actual
authority, but
was allowed to
hire and fire
laborers only.
5. Responsi
bility to
prepare & sign
tax returns.
Did not
participate in
preparation of
tax returns nor
was expected to.
Did not
prepare. Appears
to have signed
tax returns.
Did not prepare
and was not
responsible for
filing tax
returns.
Other than paper
position as
President, had
nothing to do
with taxes.
6. Day-to-day
involvement in
business or
responsibility
for management.
No involvement
in day-to-day
operations or
overall
management of
corporate
affairs.
Signed checks
and documents.
Involvement on
operational side
but not involved
in financial &
bookkeeping
affairs on day-to-day basis.
No involvement
in day-to-day
operations
except field
operations.
7. Power to
control payments
to creditors and
taxes.
Authority, but
not exercised.
Only arranged a
single loan to
effectuate
transfer of
corporate
ownership. Did
not sign
corporate checks
to pay bills.
Authority-though
apparently not
exercised.
Authority.
Reviewed bills
from creditors
but did not have
final word on
who got paid.
Conferred on
major business
decision but did
not have final
word.
Authority, but
not exercised.
Actual power to
pay creditors
stayed with
other corporate
officer.
8. Knowledge of
failure to remit
taxes.
No knowledge
until he assumed
control of
corporation; tax
obligations paid
in a timely
manner
thereafter.
None
No knowledge
until he assumed
control of
corp.; after
discovery, did
not pay taxes
but rather made
payments to
payroll and
himself.
None until he
was told about
IRS inquiry.
9. Derivation of
substantial
income &
benefits
Rec'd no income,
salary or
commissions
during tax
period at issue.
Rec'd dividends;
used losses for
personal tax
reduction; life
insurance.
After assuming
control of corp.
made $72,500.68
check payable to
himself and
$20,000 check
payable to cash
as well as
salary.
Rec'd salary,
use of car and
other benefits
commensurate
with his value
to the corp.
Footnote: 1 The standards for imposing personal liability on corporate officers and employees under Internal Revenue Code § 6672(a) and the New Jersey Gross Income Tax, N.J.S.A. 54A:9-6(f), differ: the Code imposes liability only if there is a willful intent; the Gross Income Tax has no such requirement. (Note however, there is an additional liability imposed for "willful" acts under the New Jersey Gross Income Tax. N.J.S.A. 54A:9-6(g)). Nevertheless, the definitions of responsible individuals are identical in the two statutes. N.J.S.A. 54A:9-6(l) and 26 U.S.C. §6671(b). Both impose the requirement that an individual must be "under a duty to perform the act in respect of which the violation occurs" (emphasis added). See Cooperstein, supra, 13 N.J. Tax at 80.