Adams v. Coveney

Opinion

USCA1 Opinion

                 United States Court of Appeals

                     For the First Circuit


No. 98-1510



                  MITCHELL ADAMS, AS HE IS THE 

              MASSACHUSETTS COMMISSIONER OF REVENUE,



                      Plaintiff, Appellant,



                                v.



                        ROBERT P. COVENEY,



                       Defendant, Appellee.


[Hon. George A. O'Toole, Jr., U.S. District Judge]



           APPEAL FROM THE UNITED STATES DISTRICT COURT



                FOR THE DISTRICT OF MASSACHUSETTS


Before



                     Boudin, Circuit Judge,

                 Bownes, Senior Circuit Judge,

              and Reavley*, Senior Circuit Judge.


Edward J. DeAngelo, Assistant Attorney General, with whom

Scott Harshbarger, Attorney General, was on brief for appellant.



     Arthur P. Bergeron for appellee.


December 4, 1998


____________________



     *Of the Fifth Circuit, sitting by designation.  BOWNES, Senior Circuit Judge.  The United States

Bankruptcy Court for the District of Massachusetts determined that

Robert P. Coveney was not personally liable for state taxes

incurred by a corporation of which he served as president where the

authority and responsibility for paying the taxes had been given

exclusively to the treasurer.  The Massachusetts Commissioner of

Revenue (the "Commissioner") challenged that conclusion in federal

district court.  The district court affirmed.  The Commissioner now

appeals from the district court's decision to uphold the bankruptcy

court's order.  We affirm.

                                I.

  On or about May 5, 1983, Coveney and his long-time friend

Lawrence Glynn formed Covynn, Inc. ("Covynn"), a Massachusetts

corporation, to own and operate the Piave Square Pub.  Ownership of

the real estate was taken in the name of Piave Realty Trust. 

Coveney held the title of president of the corporation, while Glynn

served as the treasurer.  Each of them, including their wives, held

the office of director and owned one-quarter of the corporate

stock.  An oral agreement   the existence of which is not disputed

  governed the division of labor between the officers.  Glynn, who

was a practicing lawyer and certified public accountant, was to be

exclusively responsible for preparing and filing necessary tax

returns and ensuring that taxes, mortgage, payroll, and insurance

payments were timely made.  Coveney, who had experience in food

services, would take sole responsibility for the day-to-day

management of the pub, including hiring and firing employees and

paying the pub's suppliers. 

  In 1986, the corporation purchased the Oxford Restaurant. 

This restaurant too was operated under the same bifurcated

arrangement.  Eventually, Glynn and Coveney decided that the

workload was too much for Coveney, and that Coveney's duties would

henceforth be limited to overseeing the Oxford Restaurant.  The

corporation subsequently leased the Piave Square Pub to two of

Glynn's brothers.  For a few years, the corporation prospered under

the business arrangement.  Then disaster struck.  Glynn twice

admitted to Coveney that he had fallen behind in paying state taxes

owed by Covynn, the first time in the spring of 1988 and the second

time in early 1989.  On each occasion, Coveney accepted Glynn's

suggestions for keeping the corporation afloat.  In the spring of

1988, Glynn informed Coveney that Covynn owed approximately

$200,000 in back taxes.  On June 6, 1988, Coveney and Glynn

borrowed $200,000 from Glynn's mother to pay off the tax liability. 

Coveney and Glynn co-signed a note for $200,000, which was secured

by a mortgage on the property of the Oxford Restaurant.  

  Believing the crisis resolved, Coveney returned to daily

management of the Oxford Restaurant.  During the next several

weeks, Coveney asked Glynn on several occasions whether corporate

taxes were being kept current.  Each time, Glynn assured Coveney

that the taxes were being paid on time.  Glynn changed his tune a

few months later, however, acknowledging that he had again fallen

behind in paying Covynn's taxes.  In March 1989, Glynn told Coveney

that he paid the due taxes from an escrow account maintained for

his non-Covynn legal clients, and that the money had to be

immediately returned to the fund.  Coveney was shocked at the new

developments, but again agreed to help Glynn out of the

predicament.  The two borrowed an additional $210,000 from Glynn's

mother.  This time, Coveney secured the loan by mortgaging his own

home.

  By mid-1989, the business had completely unraveled. 

Covynn filed for bankruptcy.  Creditors began to sue Covynn, naming

Coveney as a codefendant; protracted bankruptcy proceedings and

related litigation commenced.  In April 1994, the Commissioner

informed Coveney that the Commonwealth deemed him liable for

Covynn's unpaid meals and withholding taxes from January 1, 1988

through August 31, 1989.  By this time, Coveney and his wife had

filed for Chapter 13 protection.  Accordingly, the Commissioner

filed a proof of claim against Coveney for $63,144.64 and later

amended his claim upward.  All told, the Commissioner sought to

recover $251,527.03 in corporate back taxes from Coveney.

  The United States Bankruptcy Court for the District of

Massachusetts disallowed the Commissioner's claim, finding that

Coveney had no "duty to pay over the taxes" under Massachusetts law

because his obligations to the corporation "were confined to

supervising the restaurant's operations" and did not extend to

preparing tax returns or paying taxes.  In re Coveney, 202 B.R.

801, 804 (Bankr. D. Mass. 1996).  The court found Coveney to be a

victim of "a callous breach of . . . trust by his business

partner."  Id. at 802.  

  The Commissioner subsequently appealed the adverse

decision to the district court.  The district court held that the

bankruptcy court erred insofar as it refused to look to federal law

on the central question of liability, but concluded that the

outcome would have been the same had it done so and affirmed the

judgment.  This appeal ensued.

                               II.

  We review the bankruptcy court's ruling de novo,

deferring to its factual findings unless they are clearly

erroneous.  See 28 U.S.C.  158(d).  We consider the district

court's reasoning where it is persuasive, but otherwise accord no

"special deference" to the court's analysis.  See Palmacci v.

Umpierrez, 121 F.3d 781, 785 (1st Cir. 1997).

  Under Massachusetts law, an employer who fails to

withhold or pay employee taxes is liable to the Commonwealth for

those unpaid taxes.  The term "employer" as used in the statute

includes "an officer or employee of a corporation . . . who as such

officer [or] employee . . . is under a duty to withhold and pay

over taxes."  Mass. Gen. Laws ch. 62B,  5 (1988).  In like

fashion, liability for nonpayment of meals taxes may be imposed on

any "officer or employee of a corporation . . . who as such officer

[or] employee . . . is under a duty to pay over the taxes."  Mass.

Gen. Laws ch. 64H,  16 (1988). 

  The Commissioner has promulgated regulations defining "a

duty to pay over" as 

  an obligation to remit taxes that arises from

  a person's position, function, or

  responsibility undertaken on behalf of a

  corporation or partnership.  Such obligation

  need not be a legally enforceable agreement

  between the corporation or partnership and the

  responsible person.  

Mass. Regs. Code tit. 830,  62C.31A.1(2) (1998).  Whether a duty

to pay exists must be determined "based on the facts and

circumstances of the individual case."  Mass. Regs. Code tit. 830,

 62C.31A.1(4).  As the bankruptcy court correctly observed, under

the governing statute and regulations, the mere fact of holding

corporate office, standing alone, is insufficient to create a duty

to pay.

  There is no comprehensive or uniform set of factors that

must be evaluated in deciding if an individual has a personal duty

to pay corporate taxes.  In Commissioner v. Brown, 673 N.E.2d 1225

(Mass. 1997), the Supreme Judicial Court recognized the absence of

any "list[] [of] factors" bearing on the question of duty and

analyzed the facts before it in light of the federal law's focus on

whether the assessed individual "had the authority to have the

taxes paid."  673 N.E.2d at 1227.  Based on the court's

consideration of federal law, the Commissioner contends that the

Supreme Judicial Court has fully embraced the federal approach in

interpreting state tax laws.  Relying on Brown, the Commissioner

seeks the benefit of the federal "responsible person" test, which

broadly extends tax liability under the Internal Revenue Code to

"all with the responsibility and authority to avoid the default"

who wilfully fail to pay.  Vinick v. Commissioner, 110 F.3d 168,

172 (1st Cir. 1997).  

  Although the court in Brown sought guidance from federal

law in interpreting Chapter 62B, section 5 and Chapter 64H, section

16, we must be wary of reading too much into the court's decision

to look to federal cases for the following reasons.  The court did

not explicitly adopt the federal "responsible person" standard. 

Nor did it say that the phrase "duty to pay over" under state law

ought to be read as expansively as many federal courts   including

this Circuit   have construed the "responsible person" test. 

Rather, it observed only that "there is a close parallel between

the State and Federal statutes concerning the duty to pay over." 

Brown, 673 N.E.2d at 1227.  While federal courts often construe the

"responsible person" standard quite broadly, treating it as merely

a threshold inquiry, Massachusetts courts interpreting their own

laws have placed a greater emphasis on whether the individual at

issue was responsible for paying the taxes.  Indeed, the Browncourt considered not only whether the assessed individual had the

authority to pay over the taxes, but also whether it was his

responsibility either to remit the taxes or to supervise payment of

the taxes.  See id.

  Further, the usefulness of federal cases may be somewhat

complicated by the fact that the federal approach requires an

additional showing of "wilfulness," which is not required by

Massachusetts law.  The Supreme Judicial Court has not had occasion

to explore this difference in detail.  

  For these reasons, we do not read Brown to adopt federal

law wholesale so as to render synonymous the two standards. 

Instead, we look to federal cases only for secondary persuasive

authority.  But we must focus on Massachusetts precedent,

following its lead as to how to apply the "duty to pay over"

standard.  

     In practice, Massachusetts courts have not set forth a

single set of factors to be applied in all cases, but instead have

conducted a case-by-case inquiry, weighing a variety of

circumstances, including the formal governing framework within the

corporation, whether the alleged debtor bore explicit

responsibility for paying the taxes, the degree to which the

individual actually exercised control over the corporation's

financial affairs, and whether the assessed individual knew of the

tax default.  See, e.g., Berenson v. Commissioner, 604 N.E.2d 704,

705 (Mass. 1992) (assessed individual was president, treasurer, and

"the person responsible for paying sales taxes"); Fox v.

Commissioner, No. 194544, slip op. 688, 700 (Mass. App. Tax Bd.

June 30, 1998) (imposing personal liability on individual serving

as president and treasurer who exerted control over which creditors

to pay, regularly discussed the companies' sales tax liabilities,

and "was informed of the companies' cash needs on a daily basis");

cf. Godfrey v. United States, 748 F.2d 1568 (Fed. Cir. 1984)

(chairman of board not responsible person under federal law in

absence of evidence that he "had or exercised control of the

collection, accounting for, and payment over of taxes").  

      The recent case of Commissioner v. Brown, 673 N.E.2d

1225, provides the best guidance.  In Brown, the Commissioner

sought to hold the treasurer of a corporation accountable for the

corporation's unpaid sales taxes.  The Commonwealth's Appellate Tax

Board rebuffed the Commissioner's efforts, ruling that Brown was

under no duty to pay over the sales taxes.  On appeal, the Supreme

Judicial Court agreed that Brown was not personally liable for the

taxes.  Acknowledging that Brown was the corporation's treasurer

and had check-signing authority, the court nevertheless found

dispositive that "it was not his job to pay over the taxes," that

he did not, in fact, have supervisory responsibility for payment of

the taxes, and that he "had no decision-making authority over the

disbursement of the funds."  673 N.E.2d at 1227.

     The reasoning of Brown compels a similar finding of no

liability in this case.  Here, a binding agreement between the two

officers of the corporation (albeit an oral one) imposed the

exclusive duty to pay the corporation's taxes on Glynn, not

Coveney.  The existence of such an explicit arrangement

distinguishes this case from the typical case where a duty to pay

over must be inferred from often conflicting circumstances and in

the absence of a clear delineation of corporate responsibilities. 

See id. at 1227 ("The answer would be easily arrived at . . . if an

individual had been given express authority to pay over taxes as

part of his or her regular activities.").  The officers' oral

agreement here not only placed the tax-paying responsibility

squarely upon Glynn's shoulders, but by implication, withdrew the

same authority and responsibility from Coveney.  "The separation of

authority within a business enterprise, and the limitation on

authority held by officers is a practical reality which is

acknowledged and given effect by the courts."  O'Connor v. United

States, 956 F.2d 48, 51 (4th Cir. 1992); see also Godfrey, 748 F.2d

at 1576 ("The courts recognize the normal division of and

limitations on authority exercised by various representatives of a

particular business."); Bauer v. United States, 543 F.2d 142, 149

(Ct. Cl. 1976) (same).

     The actual practice of the officers confirms this

division of labor.  Each person's corporate duties were strictly

confined to his area of expertise:  Coveney to food service and

restaurant management and Glynn to meeting the corporation's

general legal and financial obligations.  Consistent with the

governing arrangement, Coveney never prepared or filed a tax return

nor did he sign a single tax check.  Like the corporate officer in

Brown, Coveney had general check-signing authority, but never once

actually exercised that power in connection with or intruded in any

way upon Glynn's exclusive tasks of paying the corporation's

mortgage, tax, and payroll liabilities.  See O'Connor, 956 F.2d at

51 ("Most corporate officers probably do have the authority to make

disbursements . . . .  The focus must instead be on substance

rather than form.").  Moreover, the two officers did not routinely

discuss the corporation's tax liability.  Coveney was kept in the

dark about the corporation's dire financial straits until disaster

loomed.  See Fox, slip op. at 700.  Virtually all of the relevant

tax, payroll, mortgage, and insurance records were maintained by

Glynn off-site.  These circumstances amply support the bankruptcy

court's determination that Coveney had no duty to pay over the

taxes. 

     We would reach the same conclusion even if we were to

rely more heavily on federal case law.  The Commissioner cites

various federal cases for the proposition that a responsible person

may not delegate the duty to pay taxes to another.  See, e.g.,

Keller v. United States, 46 F.3d 851, 854 (8th Cir. 1995).  That

principle, however, assumes a preexisting duty to pay.  We find no

such obligation here.  The cases cited by the Commissioner,

moreover, involved corporate officers who possessed "significant"

or "ultimate" control over the corporate finances such that the

person "can fairly be said to be responsible for the corporation's

failure to pay over its taxes."  Kinnie v. United States, 994 F.2d

279, 283 (6th Cir. 1993).  By contrast, Coveney's authority over

financial affairs was strictly limited to paying suppliers. 

Despite his title as president, he owned no more stock than any of

the other directors; he did not reserve power over other corporate

matters; and he never expanded his discrete authority by involving

himself more deeply in the corporation's legal and financial

obligations.  Coveney did not have final authority over the

corporation's finances or sufficient responsibility for paying

taxes such that he "can fairly be said" to have "had the authority

to have the taxes paid."  Brown, 673 N.E.2d at 1227. 

     The Commissioner, turning to what he believes to be his

ace-in-the-hole, urges us to draw an adverse inference from

Coveney's willingness to twice remedy the corporation's tax deficit

  if we were to accept the Commissioner's version of the facts,

Coveney's actions would show that he had taken on an individual

duty to pay the corporation's taxes.  Neither the bankruptcy court

nor the district court saw fit to draw such a conclusion, however,

and we see no error in their refusal to make such an inferential

leap.  To us, Coveney's decision to place his personal finances at

greater risk reveals nothing more than his natural desire to

maintain the financial viability of the corporation of which he was

a co-founder.  He was not fulfilling Glynn's corporate functions or

undertaking new ones. 

  We believe the bankruptcy court correctly held that

Coveney had no individual duty under state law to pay corporate

withholding and meals taxes to the Commonwealth. 

  Affirmed.  Costs on appeal awarded to appellee.