The opinion of the court was delivered by: Small
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) & (1) 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.
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. . . .
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.
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 L. Ed. 2d 68 (Tax 1993), aff'd 14 L. Ed. 2d 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 L. Ed. 2d 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 ...