ADAMS, HAROLD & PATRICIA (2002) (O) (ST)
Topic Code: P098 personal liability Document Reference: 02300033
BEFORE THE IOWA DEPARTMENT OF REVENUE AND FINANCE
HOOVER STATE OFFICE BUILDING
DES MOINES, IOWA________________________________________________________________IN THE MATTER OF *
HAROLD AND PATRICIA ADAMS * ORDER OF DIRECTOR
2933 Prospect Circle * UPON REVIEW OF
Adel, Iowa 50003 * PROPOSED DECISION
*
Sales and Use Tax * DOCKET NO. 97-30-1-0201
Responsible Party for *
Adams Enterprises *
________________________________________________________________ On December 23, 1999, Harold and Patricia Adams, (Protester) appealed to the Director from an Administrative Law Judge's proposed decision issued on November 24, 1999. The Director scheduled a review of the proposed decision for February 15, 2000. The Director, having examined the record developed by the parties, issues the following order:STATEMENT OF THE CASE The Director adopts and incorporates into this order the Statement of the Case as set forth in the proposed decision, with one correction.FINDINGS OF FACT The Director adopts and incorporates into this order the Findings of Fact as set forth in the proposed decision.CONCLUSIONS OF LAW The Director adopts and incorporates into this order the Conclusions of Law as set forth in the proposed decision and adds the following: Although the requirement that a responsible party must have "intentionally" failed to pay the tax" to be held personally liable for the payment of tax, interest and penalty due and unpaid, has not been defined under Iowa Code section 421.26, the term willfully or willfulness has been defined under federal withholding case law to include the term "intentional". The term "willfulness" has been "defined almost universally as an intentional, voluntary, conscious act or omission." Feist v. United State, 607 F.2d 954 (CT. Cl. 1979) (emphasis added). The Adams' failure to obtain definitive information from the department regarding the taxability of hunting fees constitutes an intentional, voluntary or conscious omission and results in an intentional failure to pay the taxes under Iowa Code section 421.26. The proposed decision is fully supported by the record. The decision addressed the issues as defined in the hearing notice. Protester's contentions do not establish any grounds for reversal of the proposed decision denying the Protesters' requests for refund for correction of taxes. The Director's decision is the final order of the Iowa Department of Revenue and Finance. Dated at Des Moines, Iowa, this 13th day of March, 2000. IOWA DEPARTMENT OF REVENUE AND FINANCE BY____________________________________
G. D. Bair, Director IOWA DEPARTMENT OF INSPECTIONS AND APPEALS
ADMINISTRATIVE HEARINGS DIVISION
LUCAS STATE OFFICE BUILDING
DES MOINES IA 50319
IN THE MATTER OF: *
*
HAROLD D. ADAMS & *
PATRICIA L. ADAMS *
2933 PROSPECT CIRCLE * PROPOSED DECISION
ADEL, IA 50003 *
* DOCKET NO. 97-30-1-0201
v. *
*
DEPARTMENT OF REVENUE AND FINANCE *
*
SALES/USE TAX *
* STATEMENT OF THE CASEOn October 9, 1997, the Iowa Department of Revenue and Finance (department) issued a notice of assessment for personal liability for Adams Enterprises LTD., to Patricia L. Adams and another one to Harold D. Adams for sales/use tax for the period July 1, 1991 through June 30, 1995. Harold D. Adams and Patricia L. Adams (protesters) filed a protest on November 24, 1997. The department filed an answer to the protest on April 27, 1999. On May 26, 1999, the protesters filed an amended protest and request for contested case proceedings. An amended answer was filed by the department on June 3, 1999. A hearing notice was issued on June 30, 1999. An amended issue statement was issued on August 4, 1999.The evidentiary hearing was held on October 6, 1999. The protesters were represented by Lawrence H. Nordeen and the department was represented by its attorney, Gary L. Britson. Testimony was received from Harold Adams and Patricia Adams.The issue is whether Harold D. Adams and/or Patricia L. Adams are personally responsible for the taxes of Adams Enterprises LTD., incurred as a result of the fees charged in connection with the operation of a "hunt club."FINDINGS OF FACT1. In 1960, Harold Adams obtained his bachelor of science degree in education. In 1965, he obtained his masters degree in education at Omaha University. He has had additional training in the area of special education. At the present time he is the director of program services at the Woodward State Hospital School. He is a Public Service Executive IV. 2. Harold Adams was the president of Adams Enterprises, Inc. Adams Enterprises, Inc., was also known as "Doc's Dog Kennel and Hunt Club". His duties with that corporation included training the dogs, acting in the capacity of a guide and signing in the hunters. The hunt club was licensed by the Department of Natural Resources. Membership in the club was allowed by an individual paying a fee of $900.00 and a corporate membership was $2,000.00 per year.3. Patricia Adams is a high school graduate who worked in a bank after high school and was described as a natural bookkeeper. She later worked in a construction company and eventually was the office manager. She had over ten years experience in bookkeeping. Patricia Adams did all of the bookkeeping for the business. She prepared the books and records for the operation and they were then taken to a CPA who prepared the tax returns.4. Mrs. Adams testified that they hired Jim Smith, a CPA, to do their tax returns. They collected sales tax on the sales of dogs, supplies, and dog food. Each year she asked Jim Smith if the hunting fees were taxable. Jim Smith never responded that they were taxable, nor that they absolutely were not taxable, but told her not to worry about it.5. Patricia Adams testified that the previous owners had not collected the tax and had no problem. She also testified that the Adamses sold the business to several brothers, one of whom was a CPA. He researched the taxability of the fees and initially did not find the fees to be taxable. Later, however, the new owners did begin collecting and remitting the sales tax on the fees.6. Mrs. Adams testified that Adams Enterprises, Inc., was a member of the Iowa Hunting Preserve Association. A Mr. Thompson was the president of that group. In discussions with regard to sales tax on the hunting fees, Mr. Thompson told the association that the fees were not taxable. He was going to obtain this information in writing from the Iowa Department of Revenue and Finance. Mrs. Adams testified that she did not call the department herself because she felt the association was looking into the tax matter.7. Mrs. Adams further testified that she felt that the department's rule concerning the taxability of the hunting fees was not applicable because the hunting fee was involved as "agricultural." She did not believe that the hunting fees were applicable as a game because the hunting business was governed by the Department of Natural Resources.8. During the presentation of the evidence, the representative for the taxpayers conceded that Patricia Adams is a responsible party.9. The department presented no evidence.CONCLUSIONS OF LAWIowa Code section 422.43(11) states: "The following enumerated services are subject to the tax imposed on gross taxable services:...golf and country clubs and all commercial recreation;".The department's rule can be found at 701 IAC 26.24 which states as follows:26.24(422) Golf and country clubs and all commercial recreation. All fees, dues or charges paid to golf and country clubs are subject to tax. "Country clubs" shall include all clubs or clubhouses providing golf and other athletic sports for members. Persons providing facilities for recreation for a charge are rendering, furnishing or performing a service, the gross receipts from which are subject to tax. "Recreation" shall include all activities pursued for pleasure, including sports, games and activities which promote physical fitness, but shall not include admissions otherwise taxed under Iowa Code section 422.43.The department and the protesters have now arrived at an agreement that the hunting club operated by the protesters falls within the legal category of a club providing for recreational activities. The fees charged for membership to belong to the hunt club are subject to tax pursuant to the Code of Iowa and departmental regulations.The assessments were issued to Harold D. Adams and Patricia L. Adams individually as responsible parties for Adams Enterprises, Inc. The Iowa Code section which sets forth the personal responsibility for taxes of a corporation is found at Iowa Code section 421.26. That Code section is as follows:421.26 personal liability for tax due. If a licensee or other person under section 452A.65, a retailer or purchaser under chapter 422A or 422B, or section 422.52, or a retailer or purchaser under section 423.13 or a user under section 423.14 fails to pay a tax under those sections when due, an officer of a corporation or association, notwithstanding sections 490A.601 and 490A.602, a member or manager of a limited liability company, or a partner of a partnership, having control or supervision of or authority for remitting the tax payments and having a substantial legal or equitable interest in the ownership of the corporation, association, limited liability company, or partnership, who has intentionally failed to pay the tax is personally liable for the payment of the tax, interest, and penalty due and unpaid.The department contends that the protesters are educated persons responsible for the operations of Adams Enterprises. The department further maintains that "every citizen is assumed to know the law and is charged with knowledge of provisions of statutes". Millwright v. Romer, 322 N.W.2d 30,33 (Iowa 1982). The department further contends that determining when a person has "intentionally failed to pay the tax" is determined by the same standards applied to determine fraud.The protesters contend that they are not a responsible party for the taxes because they did not "intentionally" fail to pay the sales tax. They contend they acted reasonably and in making inquiry as to whether or not the hunting fees were taxable. In this regard, they made the inquiry in the following manner: 1. They asked their CPA on an annual basis.
2. The previous owners did not collect and remit the tax and did not have a problem. The subsequent owners did not collect and remit the tax and one of them was a CPA.
3. They were members of the Iowa Hunting Preserve Association and the president of the group had told everyone that the hunting fees were not taxable.
4. Mrs. Adams felt that game was an agricultural product which is exempt from tax because the hunting club was licensed by the Department of Natural Resources.
Harold and Patricia Adams, husband and wife, were jointly operating the business Adams Enterprises, Inc. Harold Adams was the president of the corporation. The president of a corporation is charged with the responsiblity for the overall operations of the corporation. Mr. Adams was actively involved in the business with regard to signing in hunters, taking care of the hunting dogs, and acting as a guide for the hunters. The fact that he did not participate in the bookkeeping or record keeping tasks is not sufficient to excuse him from liability as a responsible party. He did have a substantial legal and equitable interest in the ownership of the corporation and participated in the operational duties involved in the operations of Adams Enterprises, Inc. As a result, he is a responsible party. Patricia Adams was responsible for all of the bookkeeping and record keeping of the corporation. She also was deeply involved in all of the business operations of the company. It was conceded in the evidentiary hearing that she is clearly a responsible party as a result of her ownership and business activities involved in Adams Enterprises, Inc.The protesters dispute that they "intentionally failed to pay the tax". The department's rule 12.15 sets forth several criteria for determining personal liability of officers of a corporation. The protesters meet all that criteria. The question of what is "intentional" remains. The Iowa Supreme Court has defined "willfully" in regard to fraudulent practice under Iowa Code section 422.25(5) as an intentional violation of a known legal duty. State v. Osborne, 368 N.W.2d 68, 70 (Iowa 1985). A definition for the term "intentional" cannot be found in the Iowa statutes and there has been no specific court interpretation with regard to the term as contained in Iowa Code section 421.26. However, a similar discussion can be found in the statutes of Wisconsin. The Wisconsin Circuit Court for Dane County stated the following: The commission has previously stated that a showing of bad faith is not necessary to prove a willful or intentional failure to pay taxes. Michael A. Pharo v. Wisconsin Department of Revenue, Wis. Tax Rptr. [CCH] 202-968 (1988). To sustain the assessment, it has not been necessary to show that there was an intent to defraud. Id. Wisconsin Department of Revenue v. William Drilias, Case No. 94-CV-2864, Memorandum Decision and Order Dated and filed June , 1995.The 2nd Circuit Federal Court has defined "willful" as being something less than being culpable. It stated: "...a requirement that the conduct be 'willful' generally 'means no more than that the person charged with the duty knows what he is doing. It does not mean that in addition, he must suppose he is breaking the law.'(citations omitted) United States v. Scanio, 900 F.2d 485, 489 (2d Cir. 1990).The protesters did not have a malicious intent. They did pay sales and use tax on the items that they knew were subject to those taxes, such as the sale of hunting dogs, the sales of some supplies and services, and dog food. Does ignorance of a duty to pay taxes provide an excuse to claim that the taxpayer did not "intentionally" pay the taxes?Harold and Patricia Adams formed the corporation Adams Enterprises, Inc. They operated the hunting club known as Doc's Dog and Kennel Hunt Club in the corporate form. It is clear from the wording of Iowa Code section 421.26 that the Legislature did not want to excuse the persons who operate a business from paying taxes simply because they used a business entity, such as a corporation, a partnership or a limited liability corporation. Harold and Patricia Adams have acknowledged that they were the primary if not the sole operators of the hunt club. As officers of the corporation running the business, they are charged with the responsibilities of knowing the laws affecting their business and any regulatory rules which may govern the conduct or operations of that business. Likewise, as corporate officers, they were charged with the responsibility of knowing the tax laws applicable to the particular business that they were operating.The fact that Patricia Adams asked the accountant annually if they should be collecting the taxes indicated that she was concerned with regard to sales tax. She remembered the discussion of sales tax liability being one of the subject matters discussed at an association meeting. This should have indicated to her that this is an important responsibility for a person operating a hunting club. Patricia Adams and Harold Adams had sufficient business experience and education to know that they should have made a proper inquiry to determine their responsibility in operating a hunting club business. Harold or Patricia Adams should have hired an accountant or an attorney to research this information for them. At the very least, they should have called the Iowa Department of Revenue and Finance and made a determination for themselves. It is not sufficient to rely on someone else who claims to have made a call to the department, nor is it sufficient to rely on the fact that others in the business have not or are not paying taxes. Harold and Patricia Adams have sufficient business experience and education to know that this is not a way out of their duties and responsibilities as a corporate officer.The Oklahoma Supreme Court has explicitly set forth its ruling concerning ignorance of official duties. In the case Preston-Thomas Construction, Inc. v. Central Leasing Corp., 518 P.2d 1125 (1973), the court held as follows: Moreover, corporate directors and officers are presumed to know that which it is their duty to know and about which they have the means of knowing. Darling & Co. v. Petri, 138 Kan. 666, 27 P.2d 255 (1933). Or to state it another way the officials are bound to know what they ought to know and would have known by proper attention to their business. Baltimore & Ohio R.R. v. Foar, 84 F.2d 67 (7th Cir. 1936). And where the duty to know exists, ignorance resulting from neglected official duty creates the same liability as actual knowledge. Ashby v.Peters, 128 Neb. 338, 258 N.W. 639, 99A.L.R. 843(1935). Id. At 1127.Harold and Patricia Adams had a duty to learn the tax obligations of the business which they were conducting. Their ignorance cannot be used to rise to the level of saying that their actions were not intentional. To excuse the payment of taxes because of ignorance would render tax laws unenforceable. Public policy has long held that ignorance cannot be used to avoid a legal duty.Therefore, the department's assessment of Harold and Patricia Adams as responsible parties for the taxes for Adams Enterprises is sustained.No affidavit has been filed under 701 IAC 7.9 seeking the deletion of identifying details, if any.Pursuant to Iowa Code section 17A.15(3), this proposed decision becomes the final order of the Iowa Department of Revenue and Finance without further proceedings unless there is an appeal to, or a review on the motion of, the director of the Department of Revenue and Finance within thirty (30) days of the date of this proposed decision.Dated this 24th day of November, 1999.Philip S. DeatsAdministrative Law JudgePSD/daccc: Harold & Patricia Adams, CERTIFIED
2933 Prospect Circle
Adel, Iowa 50003 Lawrence H. Nordeen, CERITIFIED
Ernst & Young
801 Grand Avenue, Suite 3400
Des Moines, Iowa 50309-2764 Gary L. Britson, LOCAL Betty Maxwell, DIA