Memorandum of Decision Re: Responsible Person for Tax Liability

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re SEPPO ESSIO MALLINEN,                                                                              No. 1-90-00319        Debtor. ___________________________/ SEPPO ESSIO MALLINEN,        Plaintiff,    v.                                                                                                                     A.P. No. 1-90-0156 STATE OF CALIFORNIA EMPLOYMENT DEVELOPMENT DEPARTMENT,        Defendant. ______________________________/
Memorandum of Decision
     Debtor and defendant Seppo Mallinen is a heating and air conditioning contractor. In 1985, while working as a sole proprietor, he was called to do some repair work at the offices of two brothers who were medical doctors. The doctors took a liking to him, and proposed that they form a corporation with Mallinen. After some thought, Mallinen agreed.      The corporation was formed in September of 1985. At first, Mallinen was the president and 50% shareholder. He spent a good portion of his time in the office, and was responsible for most of the office duties, including the payment of payroll taxes.      On June 30, 1986, the corporation underwent a major reorganization. Mallinen stepped down as president, and was replaced by one of the doctors. The nephew of one of the doctors was brought in to run the office, and thereafter Mallinen spent almost all of his time in the field. Mallinen remained a signatory on the corporate bank account, and frequently signed checks when nobody else was available to do so.      In February, 1987, the corporation's bookkeeper and receptionist took Mallinen aside and told him that the nephew was not paying the corporation's payroll taxes. Mallinen became angry, and had an argument with the nephew and the doctors over the unpaid taxes. The doctors removed Mallinen as a signatory on the corporation's bank account; shortly thereafter, they parted company.      The issue now before the court is whether Mallinen is personally liable for the unpaid state payroll taxes. California law, like federal law, makes responsible corporate officers and employees personally liable for willful failure to pay corporate payroll taxes.      It is clear that the nephew is primarily responsible for the failure to pay the taxes. The question of law for the court to resolve is whether Mallinen is also responsible even though he did not know that the taxes were not being paid.      The state notes that there are no judicial decisions interpreting the state statute imposing personal liability for failure to pay corporate payroll taxes. However, the state argues that the analogous federal statute is very similar, and federal case law is regularly applied in state tax decisions. Accordingly, the court looks to federal case law for guidance.      It is very questionable whether Mallinen was a responsible person during the time the payroll taxes were not paid. A responsible person is someone who has the final word, or at least significant control, over what bills are paid. Wilson v. United States, 250 F.2d 312 (9th Cir.1958); Thurner v. United States, 423 F.2d 448 (9th Cir.1970). It is clear that after the reorganization it was the doctors and the nephew who had control over what bills were paid, and Mallinen had no control. When Mallinen argued with the doctors over what bills were being paid and not paid, they promptly removed him as a signatory on the corporate bank account.      Even if Mallinen was a responsible person, he cannot be said to have willfully failed to pay the taxes. He did not know the taxes were not being paid until the bookkeeper told him, and he promptly made an issue of it to the doctors and their nephew. Where a person has no knowledge that taxes are not being paid, he cannot be said to have willfully failed to pay them. Dudley v. United States, 428 F.2d 1198, 1202 (9th Cir.1970).      The court concludes that Mallinen was no longer a responsible person at the time the payroll taxes went unpaid. Even if he was, he had no knowledge that the taxes were not being paid and therefore cannot be said to have acted willfully. Accordingly, the court will enter a judgment in favor of Mallinen and against the State of California. The parties shall bear their own costs.      This memorandum constitutes the court's findings and conclusions pursuant to FRCP 52(a) and FRBP 7052. Counsel for Mallinen shall submit an appropriate form of judgment, which counsel for the state has approved as to form.
Dated: October 20, 1991                                                                          _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy