Livingstone v. Department of Treasury

• Decision Date: 12 June 1990
• Docket Number: Docket No. 83616
• Parties: Seabourn S. LIVINGSTONE, Petitioner-Appellant, and Gordon Wood, Petitioner, v. DEPARTMENT OF TREASURY, Respondent-Appellee. 434 Mich. 771, 456 N.W.2d 684
• Court: Michigan Supreme Court

Page 684

456 N.W.2d 684

Seabourn S. LIVINGSTONE, Petitioner-Appellant and Gordon Wood, Petitioner, v. DEPARTMENT OF TREASURY, Respondent-Appellee.

Docket No. 83616.

434 Mich. 771, 456 N.W.2d 684

Supreme Court of Michigan.

Argued Oct. 4, 1989.

Decided June 12, 1990.

[434 MICH 774] Bodman, Longley & Dahling by Michael B. Lewiston, Christopher J. Dine, Leonard K. Berman, Detroit, Mich., for petitioner-appellant.

Frank J. Kelley, Atty. Gen., Louis J. [434 MICH 775] Caruso, Sol. Gen., Lansing, Mich., E. David Brockman, Asst. Atty. Gen., Shirley L. Palardy, Asst. Atty. Gen., Detroit, Mich., for respondent-appellee.

OPINION

ARCHER, Justice.

We granted leave to consider whether the statute of limitations bars the majority of the alleged use tax ¹ sought to be assessed against the derivatively liable corporate officer, where there was no issuance of a notice of intent to assess against the officer and where the notice of final assessment was issued more than four years after a majority of the assessment and the taxable period.

We would hold that the use tax statute of limitation found in M.C.L. Sec. 205.100(3); M.S.A. Sec. 7.555(10)(3) ² has no application to derivatively liable corporate officers. Consequently, the limitation period does not bar a majority of the tax debt imposed upon the officer. Further, we would hold that the Department of Treasury is not required to send individual notice of personal liability to derivatively liable officers. Accordingly, the decision of the Court of Appeals is affirmed.

Facts

Appellant Seabourn S. Livingstone was the sole owner, chairman of the board of directors, and treasurer of the St. Clair Rubber Company, a corporation subject to the Use Tax Act. ³ Pursuant to the act, ⁴ the appellee, Department of Treasury, issued a notice of intent to assess St. Clair as a result of a use tax audit deficiency for the period July 1, 1978, through June 30, 1981. ⁵

St. Clair timely appealed the assessment to a Department of Treasury hearing referee. On July 12, 1982, the referee issued a recommendation that the intent to assess be finalized for the amount of the deficiency deemed owing.

The referee's decision was not appealed. ⁶ As a result, on September 29, 1982, under the authority of M.C.L. Sec. 205.22(2); M.S.A. Sec. 7.657(22)(2), ⁷ the department issued a notice of final assessment against St. Clair. St. Clair, nonetheless, failed to remit the taxes and interest due.

In accordance with M.C.L. Sec. 205.96(3); M.S.A. Sec. 7.555(6)(3), ⁸ the department issued notices of personal liability, individually, against appellant, Seabourn S. Livingstone, and H. Gordon Wood, the named secretary of the corporation, for the unpaid assessment against St. Clair. In a consolidated effort, both Livingstone and Wood appealed their liability to the Michigan Tax Tribunal.

On September 23, 1986, the tribunal issued its opinion and judgment. Citing Metro GMC Truck Center, Inc. v. Dep't of Treasury, 4 MTTR 54 (Docket No. 74377, September 6, 1985), and Rowland v. Collins, 48 Ohio St.2d 311, 358 N.E.2d 582 (1976), the tribunal concluded,

"[A]n unappealed final assessment becomes due and payable by operation of law. Because the corporate officer's liability for the overdue tax is derivative in nature, the corporate officer is bound by the oscitancy of the corporation. Petitioners, therefore, cannot raise the statute of limitations bar and exemption claim, nor challenge the method of computation once the assessment is final. The position of primary or secondary debtor has no effect on the right of the Petitioners to challenge the makeup of the assessment. The finality of the assessment is a factor which establishes a bar to such a challenge." ⁹

On October 13, 1986, Seabourn Livingstone filed a claim of appeal, arguing that assessments against derivatively liable corporate officers were separate and distinct from those against the corporation, as was the officer's right to assert the statute of limitations. The Court of Appeals affirmed the decision of the Tax Tribunal, holding that a corporate officer's liability for unpaid corporate taxes was not separate and distinct from the assessment against the corporation, and thus separate notice of an unfiled return or an unpaid tax was not required when the officer, by his responsible corporate position, already knew or should have known that the tax had not been paid. Further, the Court held that the "finality" of the assessment on the corporation barred the corporate officer from contesting the amount of taxes owed. ¹⁰ We subsequently granted leave to appeal. ¹¹

I

A

The issue before us involves the interplay between two provisions of the Use Tax Act. M.C.L. Sec. 205.91 et seq.; M.S.A. Sec. 7.555(1) et seq. The specific provisions at issue provide, in pertinent part:

"If a corporation licensed under this act fails for any reason to file the required returns or to pay the tax due, any of its officers having control, or supervision of, or charged with the responsibility for making the returns and payments shall be personally liable for the failure." M.C.L. Sec. 205.96(3); M.S.A. Sec. 7.555(6)(3).

"A deficiency, interest, or penalty shall not be assessed after the expiration of 4 years from the date set for the filing of the required return or the date the return was filed, which ever is

later." M.C.L. Sec. 205.100(3); M.S.A. Sec. 7.555(10)(3).

The first, and perhaps, least difficult aspect of the task before us concerns the determination of exactly when and under what circumstances a corporate officer may be held personally liable for unpaid corporate use taxes. In addressing this question, the Court of Appeals in Peterson v. Treasury Dep't, 145 Mich.App. 445, 450, 377 N.W.2d 887 (1985), held:

"In order to hold a person personally liable for a corporation's tax liability under [MCL 205.96(3); MSA 7.555(6)(3) ], the Department of Treasury must first show that the person is an officer of the corporation. Then it must show either (1) that this officer has control over the making of the corporation's tax returns and payments of taxes; or (2) that this officer supervises the making of the corporation's tax returns and payments of taxes; or (3) that this officer is charged with the responsibility for making the corporation's returns and payments of taxes to the state." See also Keith v. Dep't of Treasury, 165 Mich.App. 105, 108, 418 N.W.2d 691 (1987).

We agree that personal tax liability will not attach to corporate officers who simply have significant involvement in the financial affairs of a corporation. The involvement must be tax specific.

In this case, the appellant's "responsibility for making the returns and payments" of taxes pursuant to M.C.L. Sec. 205.96(3); M.S.A. Sec. 7.555(6)(3) is uncontested. ¹² It was further conceded at oral argument that the statute renders the appellant "derivatively" liable. On that account, the appellant cites the factually similar, Bloom v. United States, 272 F.2d 215, 221 (CA 9, 1959), in which the Court of Appeals for the Ninth Circuit espoused the following supposition regarding derivatively liable parties:

"In our view, [the applicable statutory section] imposes a separate and distinct liability upon the officer of the corporation who has the duty or is responsible for the collection and payment of the tax and who willfully fails either to collect the tax or to pay it over. While this liability is denominated 'penalty' it is 'to be assessed and collected in the same manner as taxes are assessed and collected.' While it might be said that the assessment made on appellant is derivative of the assessments made on the corporation, in that they both relate to taxes collected or withheld by the corporation, the liability imposed upon appellant by [the applicable statute] is statutory and in such cases the statutory limitations are controlling."

The conclusory nature ¹³ of the Bloom court's characterization and application of the terms "derivative," "solely of derivative character," and "separate and distinct," unfortunately diminishes their effect here. Hence, we believe that as a preliminary matter the term "derivative liability," as it pertains to corporate officers, in this context, ought to be clearly defined and effectively applied to the facts at bar.

The Random House Dictionary of the English Language (2d ed, unabridged), defines the term "derivative," as "not original; secondary." Black's Law Dictionary (5th ed) offers, "Coming from another; taken from something preceding; secondary. That which has not its origin in itself, but owes its existence to something foregoing. Anything obtained or deduced from another."

Our application of the preceding to the present facts leads us to the conclusion that the liability imposed upon the appellant was, indeed, strictly and solely derivative for several reasons. First, in 1923, St. Clair Rubber Company established itself as an incorporated entity under the laws of our state. Arguably, one of the most attractive features of modern incorporation is the opportunity for individuals to avail themselves of limited liability. See Henn & Alexander, Law of Corporations (3d ed), Sec. 79, p. 148. When a business person, such as the appellant, cognitively makes the decision to incorporate, we believe, he also cognitively enjoys the benefit of having shielded himself, in however limited a sense, from the direct or primary responsibility to answer, legally, in his own name.

Second, the tax liability imposed under M.C.L. Sec. 205.96(3); M.S.A. Sec. 7.555(6)(1), was created by St. Clair Rubber Company, the corporate entity, by its "storage, use, or consumption of tangible personal property or services." See M.C.L. Sec. 205.91 et seq.; M.S.A. Sec. 7.555(1) et seq. The ensuing corporate taxation was not based on or directed at the activities of Seabourn Livingstone, the individual. The responsibility for the tax originated from acts "solely" attributed to the entity, St....