The Wisconsin Tax Appeals Commission has issued a final ruling in a tax dispute that began eight years ago, holding executives of an affiliated group of marinas personally liable for the payment of sales taxes.
Found liable were Richard Heckel and Robert Heckel II, who owned three now-defunct, separately incorporated marinas in the state and also served as corporate officers (president and vice president, respectively) of all three.
It’s not unusual for mom-and-pop businesses to encounter financial difficulties and then use sales-tax collections to fund continuing operations, notes Jeremiah Lynch, a principal with Ryan, a tax-services provider.
But this case was indeed unusual, and for two reasons. First, the marinas collectively may have been larger than what most observers would consider to be a mom-and-pop. The private companies’ revenues were not available, but during 2007 they were indebted to a bank, Marshall & Ilsey (M&I), by an amount that at times exceeded $7 million.
Second, M&I played a significant role in the tax dispute, one that Lynch characterizes as quite unusual.
According to the ruling by the tax appeals commission, the Heckels got into financial trouble in 2007 after they had borrowed money from M&I in a bid to expand their business. They soon defaulted on the debt.
In an attempt to stave off foreclosure on their real estate, the Heckels acquiesced to several bank demands to sign forbearance agreements. Under the agreements, they deposited all financial inputs, including sales receipts and sales tax, into a bank-controlled account, and allowed M&I to choose which creditors would be paid and when.
The tax appeals commission said in its ruling that the Heckels’ agreement to flow all financial inputs into a single account was a “mistake,” and that they “could have and should have segregated the sales taxes into a separate account that the bank could not touch.”
In mid-2008, the marinas went bankrupt and out of business. The Wisconsin Department of Revenue was listed as the primary first creditor for sales taxes but, according to the tax appeals commission’s ruling, was bumped down the creditors list at some point — and the Heckels knew it.
After that, “credible evidence” indicated that M&I and GE Capital, which financed the marinas’ inventory of new boats and parts, regularly were first in line whenever cash became available in the account, according to the ruling.
Subsequently, the Heckels attempted to pay the department for the delinquent sales taxes, owed for March through June 2008, using funds in their bank account. But by the time the check reached the department, the bank had already withdrawn all funds from the account to pay other creditors. That left the Heckels with the responsibility to pay the taxes owed out of their pockets, so they appealed to the Wisconsin Tax Appeals Commission.
Although the case took years to resolve, as is common in taxation disputes, the result was not surprising, according to Lynch. Despite trying to deflect responsibility by showing the bank’s control of the marinas’ operations, the Heckels were still liable for the tax.
By admitting they were corporate officers of the marinas, collected tax from sales at the marinas, knew that sales tax was not being paid to the state, and signed checks to other creditors, the officers admitted to all criteria for establishing personal liability under Wisconsin law, according to the tax appeals commission’s ruling.
But didn’t the bank’s actions make it at least partially responsible for the state’s loss of tax revenue? Almost surely not, says Lynch. “I can’t tell you that if [the Heckels] left the country the Wisconsin Department of Revenue wouldn’t try to seek remediation from the bank,” he says. “But the officers of the company are the first step in the process.”
Nonetheless, he says, “the way the bank stepped in and redirected the sales-tax monies was a real twist” among cases involving corporate officers’ liability for sales-tax payments.
When it comes to sales taxes collected by companies, no creditor can have higher priority that a state tax department, notes Lynch. Indeed, the Wisconsin Tax Appeals Commission noted in its ruling that in such cases, “even if paying the taxes over to the Department brings hardship and leaves little hope of paying other creditors, the taxpayer still has no legal alternative.”
Acquiescing to M&I’s demands was among many mistakes the Heckels took on the way to the demise of their business, the commission wrote:
“This is a sad case which results from a long series of unfortunate events and poor choices. Petitioners made some questionable business decisions, trusted the wrong people, and hoped it would be best for the long-term viability of their business…. Now, the law fails them as well, as we hold them liable for the remaining sales taxes outstanding from their failed marinas.”