Case Law Summaries

State of New Jersey v. Pessolano

• Opinion Date: August 6, 2001
• Business Law
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TAXATION; CRIMINAL LIABILITY—Intentional failure to remit state employment and withholding taxes can expose a responsible party to criminal as well as administrative consequences.

At relevant times, a company was managed by its “official” president, a vice president that “unilaterally appointed himself president,” and a financial manager. Apparently, the vice president pushed out the president because some of the shareholders were dissatisfied with the president’s performance. In any event, the financial manager testified that when the vice president started to act as president, “he took over personnel and all of the financial responsibility” because the actual president was often absent from work. Prior to the switch, the financial manager sought the president’s authorization to make payments but, a time came when the vice president moved the company’s accounts to a new bank and excluded the president as signatory from the general operating account. As a result, the president no longer saw corporate bank statements, did not write checks on the general account, and signed only payroll and occasionally vendor check. The financial manager testified that she needed the vice president’s approval for all payments, including taxes. The vice president, however, denied having control over the company’s finances, instead alleging that the financial manager had been appointed to the position of treasurer and that the financial manager was in “total control” of all records and accounting books. There was no question that it was the financial manager’s responsibility to make the unemployment and disability payments, but she testified that there was always insufficient money in the payroll with which to do so. Her testimony was that she often asked the vice president to deposit additional money, but he would only cover payroll. She testified that she discussed this issue weekly with the vice president for two years, “telling him it was his responsibility as a corporate officer to make the payments,” but he still refused to do so. Also, according to the financial manager, the company received five late notices from the Department of Labor, but the vice president “told her to do nothing until contacted by them.” The non-payment of taxes led to an investigation by an investigator from the Division of Taxation. That investigation indicated that the company deducted tax withholdings from employee paychecks but did not remit those funds to the State. A further investigation revealed that the vice president did not file personal income tax returns for six years and that the corporation did not file corporate tax returns for two years. Further, the vice president received his “remuneration” from the company through payments to a separate company and that separate company did not file corporate tax returns for six years. Even after the second company’s corporate charter was vacated for non-payment of state taxes, it remained in business and accepted the vice president’s salary payments after that date. The state commenced a criminal action against the president and vice president. The president pled guilty to several counts, but the vice president went to trial by jury. He was convicted of two counts of theft by failure to make required disposition of property received, N.J.S. 2C:20-9, 2C:2-6, and 2C:2-7. He was also found guilty of misapplication of entrusted property and property of government, N.J.S. 2C:21-15, 2C:2-6, and 2C:2-7, as well as for failure to turn over employer withholding taxes under N.J.S. 54:52-15. Similarly, he was convicted of several counts of failure to file personal tax returns and corporate business tax returns. On appeal, the vice president argued that his convictions regarding his failure as a corporate officer to remit unemployment and disability payments to the State were without “basis in law because the unemployment compensation law, N.J.S.A. 43:21-1 et. seq. is entirely self-contained and therefore provides the only penalties which may be applied to violations of its provisions.” Under that statute, he would have been exposed to a fine or to imprisonment not to exceed ninety days, or both. The Court, however, pointed out that “[i]t is axiomatic that ‘[s]pecific conduct may violate more than one statute.’ Therefore, “where criminal statutes overlap in prohibiting the same basic act, the [prosecutor] in the sound exercise of discretion committed to him may proceed under either act ... so long as judgment is not entered against the defendant ‘under more than one statute for the same offense.’ Further, the vice president argued “that employer contributions to State unemployment and disability compensation funds are neither ‘obtain[ed]’ nor ‘retain[ed]’ funds as required by N.J.S. 2C:20-9, nor ‘entrusted’ funds… .” The Court responded that a portion of the unemployment and disability payments were “employee” as opposed to employer, contributions.” The vice president also contended that the corporation’s contributions were neither “entrusted” to him as a fiduciary, nor “belong[ed] to or required to be withheld for the benefit of the government.” In essence, his argument was that the law applied to “‘specific and discrete’ property that [had] been obtained or retained from a specific source, such as employee withholding, and not to property from an unspecified source, like employer contributions from the corporation’s general operating account.” The Court analyzed these arguments and had difficulty with the state’s response that the “amount of funds not paid to the State” were related to the amounts the vice president obtained and retained for personal expenses instead of making required payments to the state. Nonetheless, the Court did not find that the failure to make this connection was related to the actual jury conviction of the vice president. Instead, the Court was satisfied “that the jury could properly find that [the vice president] was a ‘person carrying on fiduciary functions on behalf of a corporation,’ ..., and responsible for the non-payment of the required contributions. He also could have been an accomplice of the corporation in its decision not to make the required payments.” As a consequence, the criminal convictions for failure to remit unemployment and workers compensation contributions and to remit withheld taxes were upheld by the Appellate Division.

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