Osborne v. Comptroller of Treasury

WILNER, Judge. For nearly eight years, the Comptroller of the Treasury has been trying to recover retail sales taxes that he claims should have been paid by a now-defunct sole proprietorship that was owned and operated by appellant Winton B. Osborne. We shall declare his effort at an end; we believe that the Comptroller is barred by the four-year statute of limitations set forth in Md.Code Ann. art. 81, § 342(a) from maintaining any action against Mr. Osborne to collect the taxes. 1 Tax cases are seldom easy. This one has a long and somewhat tortured history and involves meshing a number of statutes.

We shall start with the statutes, all of which are part of the Retail Sales Tax Act—Md.Code Ann. art. 81, §§ 324-371. ⁵⁵⁷ Section 325 imposes what is essentially a 5% tax on the retail sale of tangible personal property and on the dispensing of certain services. The vendor is required to collect the tax from the vendee and to remit it, on a monthly basis, to the Comptroller. Sections 335 and 337 require the vendor to file a return on the 21st of each month showing the taxable sales made during the next preceding month and to remit, with the return, the tax due on those sales. Section 339 provides that: “The taxes for the period for which a return is required to be filed by § 335 of this subtitle shall be due by the vendor and payable to the Comptroller on the date limited for the filing of the return for such period, without regard to whether a return is filed or whether the return which is filed correctly shows the amount of receipts and the taxes due thereon.” Although the tax is to be paid, in the first instance, by the vendee, the vendor “and any officer of any corporate vendor” are personally liable for the taxes required to be collected, whether or not the vendor actually collects the tax. §§ 328, 331(a).

To protect the State’s interest in the event of a “bulk sale” by the vendor, § 353 requires a person who buys, in bulk, the merchandise or fixtures of a vendor to notify the Comptroller of the sale at least ten days before taking possession. If the purchaser fails to give that notice, he “shall be personally liable for the payment to the State of any taxes theretofore or thereafter determined to be due to the State from the vendor.” § 356. 2 In the Comptroller’s parlance, a purchaser against whom liability is asserted under § 356 is known as a “successor to vendor.” ⁵⁵⁸ Collection procedures are dealt with in a number of sections. For our purposes, §§ 324(q), 345(a), 351-52, and 342 are most relevant. Section 324(q) defines “taxpayer”— the term used in the other sections—as “any person required by this subtitle to make returns to the Comptroller or to pay or pay over to the Comptroller the tax imposed by this subtitle.” The Comptroller has general authority under § 358 to conduct audits and investigations.

Section 345(a) provides that if the Comptroller finds that a taxpayer “has filed an incorrect return and paid less than the amount of the tax due under this subtitle,” he shall “levy a deficiency assessment iagainst the taxpayer, which shall be prima facie correct.” Within 30 days after the mailing of a notice of such an assessment, the taxpayer may apply to the Comptroller for a “revision of the tax assessed.” § 351(a); see also COMAR 03.06.01.80. 3 If a timely application is not filed, however, “the assessment shall become final____” § 351(a). The Comptroller is required by § 351(a)(3) to act “promptly” upon an application for revision and to notify the taxpayer of his decision. If still dissatisfied, the taxpayer, within 30 days after the mailing of such notice, may request (and upon request is entitled to) a formal hearing before the Comptroller (actually, a hearing examiner employed by and representing the Comptroller). The decision of the hearing examiner following a formal hearing “constitutes a final determination of the Comptroller in the case.” COMAR 03.06.01.80C.(7).

From that final decision, the taxpayer may appeal to the Tax Court (§ 352), and ultimately to the circuit court and to this Court. Section 342(a) provides that the tax “shall become, from the time due and payable, a personal debt of the person liable to pay the same to the State of Maryland.” It states ⁵⁵⁹ further that “[a]n action may be brought at any time within four (4) years from the time the tax shall be due and payable by the Comptroller in the name of the State to recover [the amounts due]____” Subsection (b) provides that these amounts shall be a lien on the property of “any person liable to pay the same to the State” from and after the time that the Comptroller files a notice of the lien with the circuit court where the property is located. The lien, which the clerk is directed to index on the judgment docket, “shall have the full force and effect of a lien of judgment.” See Farmers & Merchants National Bank of Hagerstown v. Schlossberg, 306 Md. 48 , 507 A.2d 172, 180-181 (1986). With this background, we turn to the facts of this case, which concern retail sales taxes allegedly due for the period August 1, 1975—August 31, 1977.

The vendor during that period was Harford Excavating Company (Harford Company) which, as we said, was a sole proprietorship owned and operated by appellant Osborne. Effective September 1, 1977, Osborne incorporated Harford Excavating, Inc. (Harford, Inc.), of which he became president and a 96% stockholder, and dissolved Harford Company. Two other individuals—Messrs. Clarendon and Anzalone—also became officers of Harford, Inc. On July 12, 1978, following an audit, the Comptroller determined that $16,796 in taxes was due for the period noted.

Believing that Harford, Inc. was a “successor to vendor” and was therefore liable under § 356, he notified the corporation that an assessment in that amount had “been recorded against your account____” The notice informed Harford, Inc. of its right to seek a revision and warned that if a timely application was not filed, the assessment would become final “and a lien will be filed immediately____” Harford, Inc. apparently applied for a revision, but, after an informal conference, the Comptroller confirmed the assessment. No further action was taken by the corporation and so, on November 27, 1978, the assessment against it became final. ⁵⁶⁰ The finality of the assessment did not produce the money, in part, perhaps because at some point Harford, Inc. went into bankruptcy. On January 5, 1979, the Comptroller wrote to Osborne, with copies to Clarendon and Anzalone, warning that unless he contacted the Comptroller by January 15, a lien would be placed against the corporation “and all officers of the corporation will be assessed individually.” Osborne did not respond; Clarendon, however, as vice-president of Harford, Inc., wrote to the Comptroller denying liability for the assessment. He argued: “Messrs.

Clarendon and Anzalone joined Harford Excavating, Inc. on the date of incorporation, September 1, 1977 and had no prior knowledge or were in any way connected with the actions of Harford Excavating Co. prior to that time. Harford Excavating Co. was a sole proprietorship operated by Winton B. Osborne and any settlement due the state of Maryland should be borne by him. We ask that the state makes [sic] a definite distinction between the two companies and that Messrs. Clarendon and Anzalone are not held individually responsible for the acts of Harford Excavating Co. for the aforestated reasons.” The Comptroller decided not to make the distinction requested by Mr. Clarendon, at least as to Osborne.

Instead of proceeding against Osborne as the sole proprietor of the entity that actually (or allegedly) owed the tax, he elected to pursue him exclusively in his double-derivative status as an officer of the “successor to vendor.” On January 17, 1979, the Comptroller notified “Winton B. Osborn—Officer Harford Excavating, Inc.” that an assessment of $17,293 for the period August 1, 1975 through August 31, 1977 had been recorded against his account. Osborne finally reacted. He filed a timely request for revision, and, when that was denied, he sought a formal hearing, challenging both the assessment itself and the lack of timely notice to him. His argument as to the notice was that, since liability was being asserted against him as an officer, he was entitled to notice at the same time as the ⁵⁶¹ corporation, i.e., July, 1978.

Following a hearing, the Comptroller’s hearing examiner determined that (1) Osborne was precluded from contesting the underlying assessment against Harford, Inc., as that had become final in November, 1978, and (2) he was not entitled to notice of the assessment until the assessment against the corporation became final and personal liability was asserted against him as an officer. Dissatisfied with those conclusions, Osborne appealed to the Tax Court which, on May 21, 1981, remanded the matter to the Comptroller. The Tax Court agreed that the notice of January 17, 1979, was sufficient but concluded that, under due process principles, Osborne had to be given an opportunity to contest the merits of the assessment. The Comptroller disagreed; he appealed, first to the Circuit Court for Harford County and then to this Court.

In an unreported Opinion (Comptroller v. Osborne, S.T.1982, No. 777, Opinion filed January 21, 1983), we affirmed, concluding that “[d]ue process considerations require that the Comptroller permit a corporate officer whom he intends to hold liable for corporate tax under section 331(a) to attack the merits of the assessment against the corporation.” Eventually, the case returned to the Comptroller whose hearing examiner, on December 20, 1983, decided that Osborne was correct in his attack on the underlying assessment against Harford, Inc. 4 That corporation, he concluded, was not a “successor to vendor,” and thus no liability against it would accrue under § 356. That, of course, also disposed of any claim against Osborne as an officer of Harford, Inc. The collapse of that theory of liability did not dissuade the Comptroller from his pursuit of Mr. Osborne, however; the hearing examiner declared Osborne directly liable for the tax as the sole proprietor of the entity that initially should have paid it, an alternative theory that had ⁵⁶² always been available to the Comptroller but was not really pressed until after the remand from this Court. 5 In reaching that result, the hearing examiner rejected Osborne’s renewed complaint about the notice and his argument that the action was barred by the § 342(a) statute of limitations. Osborne then became the appellant, first to the Tax Court, then to the Circuit Court for Harford County, which concluded that the action was not barred by the statute of limitations and that Osborne was estopped from relitigating the issue of notice, and now to us, where he asks: “Is the Comptroller’s 'action' barred by the Statute of Limitations contained in Article 81, Section 342? Is Osborne estopped from litigating the issue of Notice?

Did the Comptroller give proper notice to Osborne of the alleged assessment?” The controversy as to § 342(a) concerns the word “action.” The section, as noted, provides that an “action” to recover the tax may be brought at any time within four years from the time the tax is due and payable. The tax is ⁵⁶³ due and payable with the monthly return—the 21st of the next succeeding month. As the assessment against Osborne is now based on his direct liability as the sole proprietor of the vendor/taxpayer, and not in any extended or derivative capacity, the four-year clock began to tick against him as each monthly return came due during the 25-month period at issue. Osborne construes the word