In re Robert P. COVENEY, Debtor. Mitchell ADAMS, Commissioner, Com╜monwealth of Massachusetts, Depart╜ment of Revenue, Appellant, v. Robert P. COVENEY, Appellee., United States District Court, D. Massachusetts., 217 B.R. 362, Civ.A. No. 96-40241-GAO., March 4, 1998

In re Robert P. COVENEY, Debtor. Mitchell ADAMS, Commissioner, Com╜monwealth of Massachusetts, Depart╜ment of Revenue, Appellant, v. Robert P. COVENEY, Appellee.

United States District Court, D. Massachusetts.

217 B.R. 362

Civ.A. No. 96-40241-GAO.

March 4, 1998.

Edward J. DeAngelo, Atty. General's Of╜fice, Karen L. Paino, Massachusetts Dept. of Revenue, Boston, MA, for Appellant.

Arthur Bergeron, Badbois & Bereron, Marlboro, MA, for Appellee.

Denise Pappalardo, trustee, Worcester, MA, Pro se.

MEMORANDUM and ORDER

O'TOOLE, District Judge.

The Commissioner of the Massachusetts Department of Revenue ("DOR") appeals from a final order of the Bankruptcy Court disallowing the DOR's claim against the debtor, Robert P. Coveney ("Coveney"). In re Robert P. Coveney, 202 B.R. 801 (Bankr. D.Mass.1996). The Commissioner contends that the Bankruptcy Judge applied the wrong legal standard in interpreting Mass. Gen.L. ch. 64H, ╖ 16 and Mass.Gen.L. ch. 62B, ╖ 5 to determine whether Coveney was "under a duty" to pay over the state trust fund taxes withheld by Covynn, Inc., a corpo╜ration formerly owned in part by Coveney. The question whether the Bankruptcy Court applied the appropriate legal standard is sub╜ject to de novo review. Williams v. Poulos , 11 F.3d 271, 278 (1st Cir.1993). This Court concludes that the legal analysis applied by the Bankruptcy Judge was erroneous, but that application of the correct analysis leads to the same result. Accordingly, the judg╜ment of the Bankruptcy Court is affirmed.

BACKGROUND

The DOR filed a proof of claim against Coveney for withholding and meals taxes for the period between January, 1988 and Janu╜ary, 1989. At issue in this appeal is whether Coveney is a person "under a duty" to pay over the meals and payroll taxes of Covynn, Inc. ("Covynn"), a Massachusetts corpora╜tion, and so responsible to the DOR upon the corporation's default. The parties submitted an agreed statement of facts, supplemented by an affidavit by Coveney "containing state╜ments consistent with the agreed statement of facts." In re Coveney, 202 B.R. at 802. The judge accepted the undisputed facts as true. Id. The significant facts for present purposes are as follows:

Coveney and A. Lawrence Glynn together formed Covynn, Inc. in 1983 to purchase and operate an existing restaurant known as the Piave Square Pub, located in Marlborough, Massachusetts. Covynn's Articles of Organization named Coveney as President, Glynn as Treasurer, and Coveney's wife as Clerk. Coveney, Glynn, and their wives comprised the four-person Board of Directors, and each had a 25% stock interest in the company. Only Glynn and Coveney played any active role in the operation of the company.

By explicit oral agreement, Glynn and Coveney divided their responsibilities. Glynn, a practicing attorney and certified public accountant, was responsible for the preparation and filing of all of Covynn's tax returns, for payment of the taxes due, and for monthly payments to Covynn's lenders. Correspondingly, Coveney, whose back╜ground was in the food service business, was to be responsible for the day-to-day manage╜ment of the restaurant on a full-time basis.

Coveney signed checks payable to suppli╜ers and he deposited restaurant revenues into Covynn's checking account. Glynn, on the other hand, calculated the amount neces╜sary to pay Covynn's outside payroll service for the payroll and payroll taxes. Glynn signed the checks to the payroll service. He also calculated the amount needed to pay Massachusetts meals taxes. He arranged for payments to other creditors through a realty trust of which both Glynn and Coveney were trustees. Coveney never signed any checks on behalf of the trust.

In 1988, Glynn told Coveney that Covynn was $200,000 behind in paying federal and state taxes. The two partners thereafter borrowed $200,000 from Glynn's mother, signing a note secured by a mortgage on the real estate owned by Covynn. Glynn han╜dled the disbursement of all funds telling Goveney that the taxes were being kept cur╜rent. In February or March of 1989, Glynn told Coveney that taxes were behind by $210,000. Coveney and Glynn again execut╜ed a note in the sum of $210,000 payable to Glynn's mother, secured by the mortgage on their home. Glynn again handled the dis╜bursement of these funds through his law firm.

Subsequently, the DOR notified Coveney that it intended to hold him as a "responsible" party personally liable for the unpaid meal and payroll taxes pursuant to Mass.Gen.L. ch. 62B, ╖ 5 and Mass.Gen.L. ch. 64H, ╖ 16. The Bankruptcy Court dis╜allowed the claim on the ground that Cove╜ney was not found a person "under a duty" to make the payment so as to be within the liability imposed under the state statutes. After Coveney filed his petition under Chap╜ter 13 of the Bankruptcy Code, the DOR filed its proof of claim.

ANALYSIS

Mass.Gen.L. ch. 62B, ╖ 5 imposes person╜al liability on an employer who fails to with╜hold or pay Massachusetts income taxes from its employees' wages:

Every employer who fails to withhold or pay to the commissioner any sums re╜quired by this chapter to be withheld or paid shall be personally and individually liable therefor to the commonwealth. The term "employer," as used in this para╜graph and in section eleven, includes an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee or member is under a duty to withhold and pay over taxes in accordance with this section and section two. Any sum or sums withheld in accordance with the provisions of section two shall be deemed to be held in trust for the commonwealth.

The Massachusetts meals tax statute, Mass.Gen.L. ch. 64H, ╖ 16, has a similar requirement:

Every person who fails to pay to the commissioner any sums required by this chapter shall be personally and individual╜ly liable therefor to the commonwealth. The term "person," as used in this section, includes an officer or employee of a corpo╜ration, or a member or employee of a partnership, who as such officer, employee, or member is under a duty to pay over the taxes imposed by this chapter.

The question presented by this appeal is whether the Bankruptcy Judge properly de╜termined , that Coveney was not "under a duty" to pay over taxes as required by those statutes. The question had to be answered without the help of direct Massachusetts pre╜cedent construing the relevant language of the statutes. In analyzing the matter, the Bankruptcy Judge declined to rely upon the federal courts' interpretation of an analogous federal statute, 26 U.S.C. ╖ 6672(a), but rath╜er interpreted the Massachusetts statute without reference to the federal case law. That was an error.

As a general matter, Massachusetts courts look to the federal courts' construction of tax statutes which mirror or are similar to federal law. See Commissioner of Revenue v. Franchi, 423 Mass. 817, 673 N.E.2d 854, 857 (1996) (stating that the Supreme Judicial Court has consistently adhered to the mean╜ing of Federal tax language incorporated into Massachusetts state tax law absent contrary legislative intent); B.W Co. v. State Tax Comm'n , 370 Mass. 18, 345 N.E.2d 884, 887-╜88 (1976) ("If the State income tax law has incorporated Federal income tax provisions, those provisions should be interpreted at [sic] they are interpreted for Federal income tax purposes .... We should be reluctant to infer the existence of a State legislative in╜tent which would require us to disregard the meaning established under Federal tax law of unambiguous, common statutory lan╜guage.") (internal citations omitted). See also Packaging Indus. Group v. Cheney, 380 Mass. 609, 405 N.E.2d 106 (1980) (stating that where the state legislature enacts a statute following a federal statute, state courts should follow adjudged construction of the federal statute by federal courts).

Moreover, after the Bankruptcy Judge's ruling in this case, the Massachusetts Su╜preme Judicial Court issued an opinion in which it consulted the federal cases for guid╜ance in deciding whether an individual was a person liable under one of the statutes in╜volved here. Commissioner of Revenue v. Brown, 424 Mass. 42, 673 N.E.2d 1225, 1226 (1997) (noting a close parallel between state and federal statutes).

It is, therefore, appropriate in this case to look for guidance from relevant federal pre╜cedents. Interpreting 26 U.S.C. ╖ 6672(a), federal courts have defined the question as "a matter of status, duty, and authority, aimed at the ultimate determination of whether the person had the power to deter╜mine whether the taxes should be remitted or paid or had the final word as to what bills should or should not be paid and when." Vinick v. Commissioner of Internal Reve╜nue, 110 F.3d 168, 172 (1st Cir.1997) (internal quotations and citations omitted).

Who is a "responsible person" under the federal statute is predicated on the em╜ployee's function in the business and not simply on the office held. Id . at 172. In Vinick, the Court said, "At bottom, in order to be responsible, an individual must have had significant control over the financial af╜fairs of the company." Id. Furthermore,

[I]n the absence of uncontroverted evi╜dence establishing an individual's "precise responsibility" to pay withholding taxes, or of specific acts of management or financial decision-making that would manifest the level of control necessary for responsibili╜ty, various indicia may establish responsi╜bility under ╖ 6672(a). Such indicia in╜clude the holding of corporate office, the authority to disburse corporate funds, stock ownership, and the ability to hire and fire employees.

Id. (internal citations omitted).

In the present case, there is no evidence that Coveney had a "precise responsibility" to pay withholding taxes on behalf of Cov╜ynn. To the contrary, the uncontroverted evidence is that Glynn, not Coveney, had that responsibility. Coveney's "acts of manage╜ment" related to running the restaurant. While it may be true that Coveney had the "authority" in a legal sense to write checks from the corporate account, as a matter of his function in the corporation, he did not.

Most corporate officers probably do have the authority to make disbursements, par╜ticularly in a closely held corporation .... The focus must instead be on substance rather than form . . . . The substance of the circumstances must be such that the offi╜cer exercises and uses his authority over financial affairs or general management, or is under a duty to do so, before that officer can be deemed to be a responsible person.

O'Connor v. United States, 956 F.2d 48, 51 (4th,Cir.1992) (internal citations omitted).

In sum, there is no set formula for identi╜fying the essential factors which would give rise to a finding of responsibility under the Massachusetts statutes. Massachusetts courts are guided by analogous federal cases, which indicate that the inquiry must be a factual one, focusing on the actual, functional exercise of authority. The Bankruptcy Judge correctly drew from the uncontrovert╜ed facts the conclusion that, whatever legal authority Coveney may have had, he exer╜cised no actual responsibilities for tax report╜ing or payment on behalf of Covynn. In this circumstance, he was not liable under either of the pertinent statutes.

CONCLUSION

For the foregoing reasons, the judgment of the Bankruptcy Court is AFFIRMED.

IT IS SO ORDERED.

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