Appeal from the Circuit Court of Cook County No. 98 L 51116 The Honorable Alexander P. White, Judge Presiding.
The opinion of the court was delivered by: Presiding Justice Cousins
Wayne and Alan Young were president and vice-president, respectively, as well as the owners, of Power Lift, Inc. (Power Lift). The Illinois Department of Revenue (the Department) assessed a penalty against Wayne, Alan and another officer of Power Lift for wilfully failing to pay the corporation's obligations under the Retailers' Occupation Tax Act (ROT Act) (35 ILCS 120/1 et seq. (West 1996)). They challenged their personal liability, and a hearing was held before an administrative law judge (ALJ). Wayne died and his estate was substituted for him. The ALJ recommended that the Department uphold the penalties, and the Director accepted the recommendation.
Wayne's estate and Alan appealed to the circuit court under the Administrative Review Law (735 ILCS 5/3-101 et seq. (West 1996)). The circuit court issued a memorandum ruling in favor of the Department. Wayne's estate and Alan then appealed to this court. They argue that the Department's finding that their failure to pay Power Lift's taxes was wilful was clearly erroneous. The Department, for its part, argues that we do not have jurisdiction to hear the appeal since the notice of appeal from the circuit court decision was filed before the final order.
Wayne Young and his brother Alan organized Power Lift in the 1970s. Power Lift was in the business of selling, renting and servicing lifting equipment and aerial work platforms. Wayne was the president and owned 80% of the stock. Alan was the vice-president and owned 20% of the stock. They and Richard Feltz, Power Lift's general manager, were the directors of the corporation. Feltz was a childhood friend of Wayne's and had no formal training in financial matters. It was Feltz who oversaw the day-to-day operations of the company. In 1991, Power Lift had 86 employees and assets of $5,950,000. Wayne drew a salary of over $185,000 per year. Alan drew a salary of over $95,000 per year. At that time Robert Hodgetts, a Certified Public Accountant (CPA), was its comptroller. The building in which Power Lift operated was owned by JWA Properties (JWA), a partnership owned by the Youngs and their father. Power Lift paid JWA about $15,000 per month in rent.
In the course of its business, Power Lift collected tax monies, which it would put into its bank account before sending them to the Department. This was the same bank account from which it paid salaries and other corporate obligations. Approval from Wayne, Alan or Feltz was required to draw a check on this account.
According to the Youngs, Power Lift had a system in place for paying taxes, which operated as follows. Mary O'Malley, an employee at the Power Lift office, prepared the sales tax returns from the company's books and records. Then she would sign the returns as "preparer" and give them to Hodgetts. Hodgetts checked over the returns and, if they were correct, requested approval for a check to pay the tax due. After the check was drawn, Hodgetts gave the check and the return to Feltz, who would then sign for the taxpayer and send them to the Department. The payment of the tax would be recorded in Power Lift's books.
In the early 1980s the Youngs had trouble with a separate company they ran. The company underpaid federal withholding tax and the Internal Revenue Service (IRS) sought to impose personal liability on the Youngs. Because of this experience, the Youngs instituted a policy at Power Lift "to pay taxes first, insurance second, payroll third and then [its] vendors." Nevertheless, Power Lift filed each retailers occupational tax (ROT) return between July 1990 and most of 1991 late.
In 1991, Power Lift was having grave financial problems. The books did not balance in 1990 or 1991. Power Lift was on a cash-on-delivery basis with Nissan, its main supplier. A bank accelerated Power Lift's repayment for a line of credit. The company's bills were left unpaid for up to 120 days. Some vendors would only do business with Power Lift on a cash basis, and some refused to do any further business at all with the company. It incurred about $86,000 in unpaid federal withholding taxes which the Youngs paid personally. Power Lift faced a multimillion dollar tort liability from a fatal accident involving one of its vehicles. The claim exceeded the limits of the company's insurance policy. It was widely known within the company that Power Lift was having cash flow problems.
Alan admitted that Power Lift's accounting was "screwed up." The comptrollers that the Youngs had hired had not been able to clear up the bookkeeping problems. According to the service manager, there was a "rotating door" for comptrollers. Although the books were supposed to reflect payment of taxes, Hodgetts conceded that this did not always happen. When he joined Power Lift in 1990 the books "didn't balance to a lot of things." He knew that the ledger system was "a mess." Accordingly he would only ask Wayne or Feltz about an unreconciled check if it were for a large amount. Power Lift had a practice of not mailing out checks if there was not enough money in the account to honor them. The Youngs or Feltz made the decision whether to hold a check.
Alan had a "hands off" attitude toward the finances, since he was not "a financial guy," but he was generally aware of Power Lift's cash flow problems. Neither he nor Wayne personally examined the books. When they had questions about a financial matter they generally asked Feltz. Feltz usually responded with an assurance that he had the situation in hand. The service manager stated that at one point he saw a stack of unpaid bills in a drawer in Feltz' desk, along with something that looked like a tax return.
In late September 1991, Wayne ordered Hodgetts to make an investigation of the state of Power Lift's finances and tally up the assets and outstanding obligations. During the course of this investigation, Hodgetts found that the checks and returns for Power Lift's taxes from March 1991 to September 1991, along with checks to pay other Power Lift liabilities, had never been mailed. The reported tax liability was $61,975.74. He retrieved the checks from Feltz. Hodgetts corrected the books to reflect the unpaid taxes. Wayne signed the late returns over Feltz' partially erased signature and filed them by December 1991.
Wayne called a meeting of the board on October 4, 1991, to discuss the company's financial situation. At the meeting, the unpaid obligations were disclosed. The company had about $45,000 in available funds. The Youngs decided to file for reorganization under chapter 11 of the Bankruptcy Code (11 U.S.C. §101 et seq. (1988)) and to strip Feltz of all financial authority. Most of the available cash was used to retain a bankruptcy attorney.
On October 11, 1991, Power Lift filed its petition for reorganization. According to the petition, Power Lift had assets of $5,950,000 and liabilities of $5,685,000. Power Lift filed a plan of reorganization on March 20, 1992. Under the plan all tax obligations were to be paid. However, the plan was rejected by the creditors, in particular the tort claimant. Accordingly, Power Lift was forced to change to a chapter 7 bankruptcy proceeding and sell all its assets.
In July 1992, Power Lift sold its aerial lift division for $1,941,157. In March 1993, Power Lift sold its lift-truck division for $1,603,000. During this period Power Lift paid Nissan $266,000 and paid Mitsubishi $37,000. It continued to pay rent to JWA before and during the bankruptcy and continued to pay the Youngs' salaries. The Department was not paid.
On October 19, 1994, the Department issued notices of penalty liability to the Youngs and Feltz totaling $103,595.88, representing the unpaid tax, penalty and interest. The penalties were assessed pursuant to section 13½ of the Retailers' Occupation Tax Act (Ill. Rev. Stat. 1991, ch. 120, par. 452½ (repealed effective January 1, 1993; replacement provision enacted as section 3-7 of the Uniform Penalty and Interest Act, 35 ILCS 735/3-7 (West 1996))), for wilful failure of a responsible officer to remit ROT taxes. The penalties covered the periods from March 1991 to September 1991, August 1992 through September 1992, and December 1992. All but $9,157.34, however, was for the period from March 1991 until September 1991.
Feltz and the Youngs administratively protested the penalties. On March 14, 1996, Wayne Young died. The ALJ granted the Department's request to substitute his estate as defendant. Wayne's sister Candace was named the executor of the estate. The administrative hearing was convened on April 8, 1998. Alan, Feltz, Hodgetts and O'Malley all testified, along with a former Power Lift service manager. At the hearing Feltz denied that he had any responsibility for the filing of taxes at Power Lift. The ALJ found that this was false. The ALJ issued a decision on August 13, 1998, recommending that the penalties be upheld, and the Director accepted the recommendation on October 19, 1998.
The ALJ found that the penalties against the Youngs were justified on the basis that: (1) the Youngs had recklessly ignored the danger that taxes were going unpaid during the period before Hodgetts turned up the checks that had been withheld; and (2) during the period after the checks were discovered, the Youngs paid other creditors, including themselves, without paying the Department.
Alan and Wayne's estate then petitioned the circuit court for administrative review. The circuit court issued a memorandum decision on July 15, 1999, upholding the Department's decision. The court found that the finding of willfulness was justified on the basis of the reckless disregard of the possibility that taxes were not being paid before the unsent checks were discovered. The circuit court did not address the Youngs' conduct after the discovery.
On August 3, 1999, Alan and Wayne's estate filed a notice of appeal in the circuit court. On August 8, 1999, the Department filed a motion for entry of a judgment order. On August 11, 1999, the circuit court entered a memorandum of judgment and a judgment order.