                           ILLINOIS OFFICIAL REPORTS
                                        Appellate Court




                      Cerone v. State of Illinois, 2012 IL App (1st) 110214




Appellate Court            JACK P. CERONE, as Responsible Officer of Grand-Wood Enterprises,
Caption                    Inc., Taxpayer, Plaintiff-Appellant, v. THE STATE OF ILLINOIS; THE
                           DEPARTMENT OF REVENUE, and BRIAN HAMER, Director of
                           Revenue, Defendants-Appellees.


District & No.             First District, Second Division
                           Docket No. 1-11-0214


Rule 23 Order filed        February 28, 2012
Rule 23 Order
withdrawn                  June 15, 2012
Opinion filed              June 26, 2012


Held                       An administrative law judge’s finding that plaintiff was personally liable
(Note: This syllabus       for his restaurant’s sales tax obligation and acted willfully in failing to
constitutes no part of     pay the taxes was upheld, since he was a responsible officer and the fact
the opinion of the court   that he relied on the manager and his accountants to pay the taxes did not
but has been prepared      excuse that responsibility.
by the Reporter of
Decisions for the
convenience of the
reader.)


Decision Under             Appeal from the Circuit Court of Cook County, No. 09-L-51032; the
Review                     Hon. Elmer James Tolmaire III, Judge, presiding.


Judgment                   Affirmed.
Counsel on                 Law Office of Anthony Pinelli, of Chicago (Anthony Pinelli, of counsel),
Appeal                     for appellant.

                           Lisa Madigan, Attorney General, of Chicago (Michael A. Scodro,
                           Solicitor General, and Ann C. Maskaleris, Assistant Attorney General, of
                           counsel), for appellees.


Panel                      PRESIDING JUSTICE QUINN delivered the judgment of the court, with
                           opinion.
                           Justices Cunningham and Connors concurred in the judgment and
                           opinion.



                                             OPINION

¶1          The Illinois Department of Revenue (Department) issued a notice of penalty tax liability
        (NPL) for the period of January 2006 through September 2006, against plaintiff, Jack P.
        Cerone, the majority shareholder of Grand-Wood Enterprises, Inc. (Grand-Wood), in
        connection with Grand-Wood’s unpaid taxes, penalties, and interest under section 3-7(a) of
        the Uniform Penalty and Interest Act (35 ILCS 735/3-7(a) (West 2008)). The Department
        found that plaintiff was personally liable in the amount of $49,577.86 in penalties and
        interest for that nine-month period. Plaintiff protested the NPL, and an evidentiary hearing
        was held before an administrative law judge (ALJ) on March 12, 2009, with plaintiff
        appearing as the only witness. The ALJ subsequently prepared a recommendation for
        disposition, finding that plaintiff failed to rebut the Department’s presumption that he
        willfully failed to pay Grand-Wood’s sales taxes. The Department accepted the ALJ’s
        recommendation and issued a final assessment against plaintiff for $52,809.97. On
        administrative review, the circuit court entered a memorandum of decision and judgment
        affirming the decision of the ALJ. Plaintiff filed a timely appeal. For the reasons set forth
        below, we affirm.

¶2                                            I. Background
¶3          Grand-Wood was a corporation that owned and operated an Italian restaurant on West
        Grand Avenue in Chicago, Illinois. At the evidentiary hearing, plaintiff testified that in 1997
        he purchased a 25% stake in the restaurant, which at that time was named Colucci’s. About
        a year later, plaintiff purchased the remaining shares from the restaurant’s managing partner,
        George Colucci, and renamed the restaurant II Jack’s Restaurant. Plaintiff’s son, John
        Cerone, who had been the manager of Colucci’s, was retained in that position and became
        a shareholder and corporate officer of the restaurant. In 2004 or 2005, John Cerone resigned,
        and Jerry Villa, who had been an assistant manager, was promoted to manager and given a

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     25% ownership interest in the restaurant. Villa’s duties included hiring and firing,
     purchasing, paying bills and rent, selecting purveyors, and paying taxes. Plaintiff stated that
     his role at the restaurant was primarily to generate business by bringing clients in for meals
     and that he played no role in ordering products, paying vendors, or paying taxes for the
     restaurant.
¶4        Plaintiff testified that in September 2006, he went to the restaurant on a Sunday morning,
     when the restaurant was closed, to meet some friends. Plaintiff found the restaurant in
     disarray and could not locate Villa. He tried unsuccessfully to reach Villa by phone, and later
     that morning, a restaurant employee found Villa’s home abandoned. Plaintiff said that he
     never saw Villa again but had heard that Villa had moved to Texas. The plaintiff went into
     the restaurant’s office and found cardboard boxes full of unopened envelopes 6 to 12 months
     old from banks, purveyors, the Internal Revenue Service, and the State. He turned over the
     boxes to his accounting firm, Kolnicki, Peterson, and Wirth, whose services plaintiff had
     retained from 1997 through 2006.
¶5        Plaintiff testified that his lease on the property expired on September 30, 2006, and that
     although he had been negotiating a renewal of the lease, he decided instead to close the
     restaurant immediately because there were no funds available to keep it in operation. Plaintiff
     said that the Kolnicki accounting firm prepared and filed Grand-Wood’s final tax return for
     2006. He further stated that during the term of his ownership of the restaurant there were no
     corporate profits, he never took a paycheck, and he did not receive a distribution when the
     restaurant closed.
¶6        On cross-examination, the Department introduced into evidence an “ST-15, Business
     Information Update (Sales and Use Tax)” form for II Jack’s Italian Restaurant listing plaintiff
     as the person responsible for filing sales and use tax returns and paying taxes. Plaintiff’s
     signature appears under the following statement: “I accept personal responsibility for the
     filing of returns and the payment of taxes due.” The form is dated September 1, 2003, and
     includes plaintiff’s social security number. Plaintiff denied that the signature was his, though
     he acknowledged that it was his social security number, and stated that he had never seen the
     form before.
¶7        Plaintiff also stated on cross-examination that he was an authorized check signer for the
     restaurant and signed checks on occasion for payroll or other reasons. He said that he would
     go to the restaurant once a week for lunch and twice a week for dinner and frequently met
     clients there. He would sometimes talk “restaurant affairs” with Villa but not financial
     information about the restaurant. He said that he did not inspect business books or records
     while at the restaurant, but at the end of each year he received a schedule K-1 tax form for
     the restaurant, which contained “various financial information about the business.” Plaintiff
     acknowledged that he was aware that for the entire time he owned the restaurant it was losing
     money and that before Villa became the manager, plaintiff made capital contributions to buy
     new equipment and to change the decor. He stated that in 2006, some suppliers put the
     restaurant on a cash on delivery payment system, which he said happens when “you are not
     paying your bills in a timely fashion.” Plaintiff did not discuss this issue with Villa or get
     involved in any decisions about which vendors to pay but left it up to Villa’s discretion. He
     also never made specific inquiries of Villa as to whether the taxes were being paid.

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¶8         After the hearing, the ALJ entered a recommendation for a disposition finding that,
       pursuant to section 3-7 of the Uniform Penalty and Interest Act (35 ILCS 735/3-7 (West
       2008)), plaintiff was a responsible officer who knew or should have known whether returns
       were filed and taxes paid, and that he willfully failed to pay the tax by not taking action in
       light of the restaurant’s losses and cash flow problems. On administrative review, the circuit
       court entered a memorandum of decision and judgment affirming the ALJ’s decision.
       Plaintiff filed a timely appeal, arguing that the Department failed to prove that he was a
       responsible officer of Grand-Wood or that he acted willfully in failing to pay Grand-Wood’s
       sales tax.

¶9                                          II. ANALYSIS
¶ 10                                   A. Standard of Review
¶ 11       Before addressing the merits of plaintiff’s argument, we first address the applicable
       standard of review. Our supreme court has held that in administrative cases, such as this one,
       the appellate court reviews the decision of the administrative agency, not the determination
       of the circuit court. Exelon Corp. v. Department of Revenue, 234 Ill. 2d 266, 272 (2009). In
       reviewing the decision of the administrative agency, “ ‘[t]he applicable standard of review
       depends upon whether the question presented is one of fact, one of law, or a mixed question
       of fact and law.’ ” Cinkus v. Village of Stickney Municipal Officers Electoral Board, 228 Ill.
       2d 200, 210 (2008) (quoting American Federation of State, County & Municipal Employees,
       Council 31 v. Illinois State Labor Relations Board, State Panel, 216 Ill. 2d 569, 577 (2005)).
       An administrative agency’s findings on questions of fact are deemed to be prima facie true
       and correct. 735 ILCS 5/3-110 (West 2008). In examining an administrative agency’s factual
       findings, a reviewing court does not weigh the evidence or substitute its judgment for that
       of the agency. Cinkus, 228 Ill. 2d at 210. Rather, the reviewing court is limited to
       ascertaining whether the agency’s factual findings are contrary to the manifest weight of the
       evidence. See Cinkus, 228 Ill. 2d at 210; see also Illinois Fraternal Order of Police Labor
       Council v. Illinois Local Labor Relations Board, 319 Ill. App. 3d 729, 736 (2001) (“[T]he
       decision is against the manifest weight of the evidence only if the opposite conclusion is
       clearly evident.”). An agency’s conclusions of law, however, are not entitled to the same
       deference, and we review them de novo. Illinois Fraternal Order of Police Labor Council,
       319 Ill. App. 3d at 736.
¶ 12       If the question presented for review is one of mixed law and fact, then yet a third standard
       applies, and we review the agency’s decision to determine if it was clearly erroneous.
       American Federation of State, County & Municipal Employees, Council 31, 216 Ill. 2d at
       577. Mixed questions of fact and law “ ‘are “questions in which the historical facts are
       admitted or established, the rule of law is undisputed, and the issue is whether the facts
       satisfy the statutory standard, or to put it another way, whether the rule of law as applied to
       the established facts is or is not violated.” ’ ” Cinkus, 228 Ill. 2d at 211 (quoting American
       Federation of State, County & Municipal Employees, Council 31, 216 Ill. 2d at 577, quoting
       Pullman-Standard v. Swint, 456 U.S. 273, 289 n.19 (1982)). An administrative decision is
       clearly erroneous when the reviewing court is left with the definite and firm conviction that


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       a mistake has been committed. Exelon Corp., 234 Ill. 2d at 273.
¶ 13        In the present case, plaintiff and the Department agree that the Director’s determination
       that plaintiff was a responsible officer who willfully failed to pay taxes is a mixed question
       of law and fact and that therefore the clearly erroneous standard should apply. McLean v.
       Department of Revenue, 326 Ill. App. 3d 667, 675 (2001).
¶ 14        Turning to the merits, we begin our analysis by addressing the relevant statutory
       provisions. Pursuant to the Retailers’ Occupation Tax Act, Illinois retailers are required to
       remit to the State a percentage of the gross receipts of every retail sale of tangible personal
       property. 35 ILCS 120/2 (West 2008). When a corporation incurs tax liability under the
       Retailers’ Occupation Tax Act but fails to remit those funds to the Department, a responsible
       officer or employee of the corporation may be held liable for its unpaid tax liability, plus
       penalties, and interest. McLean v. Department of Revenue, 326 Ill. App. 3d at 673-74.
       Section 3-7(a) of the Uniform Penalty and Interest Act provides, in part, as follows:
            “Any officer or employee of any taxpayer subject to the provisions of a tax Act
            administered by the Department who has the control, supervision or responsibility of
            filing returns and making payment of the amount of any trust tax imposed in accordance
            with that Act and who wilfully fails to file the return or make the payment to the
            Department or wilfully attempts in any other manner to evade or defeat the tax shall be
            personally liable for a penalty equal to the total amount of tax unpaid by the taxpayer
            including interest and penalties thereon.” 35 ILCS 735/3-7(a) (West 2008).
¶ 15        Pursuant to the language of the statute, “[p]ersonal liability for a retail corporation’s
       unpaid retailers’ occupation taxes, which survives dissolution of the corporation, may be
       imposed only upon corporate officers or employees who are responsible for the filing of
       retailers’ occupation tax returns and payment of taxes due, and who have ‘willfully’ failed
       to file such returns or remit such taxes.” McLean, 326 Ill. App. 3d at 674 (citing Branson v.
       Department of Revenue, 168 Ill. 2d 247, 255 (1995)). “Persons who are required to collect,
       truthfully account for, and pay over any tax are referred to as ‘responsible persons.’ ”
       McLean, 326 Ill. App. 3d at 674 (quoting Aardema v. Fitch, 291 Ill. App. 3d 917, 920
       (1997)). After the Department presents a prima facie claim for tax penalty liability for
       nonpayment of retailers’ occupation tax, the burden shifts to the taxpayer to establish either
       that he was not a responsible officer or that his failure to pay the tax was not willful.
       McLean, 326 Ill. App. 3d at 674 (citing Branson, 168 Ill. 2d at 261).

¶ 16                             B. Plaintiff as a “Responsible Officer”
¶ 17        Plaintiff first contends that the ALJ’s finding that he was a responsible officer of Grand-
       Wood was clearly erroneous because he was the only witness to testify at the administrative
       hearing and no contradictory evidence or rebuttal was offered in opposition to his testimony
       that he did not control, supervise, or exercise responsible authority over the payment of taxes.
       For support, plaintiff relies on Sweilem v. Department of Revenue, 372 Ill. App. 3d 475
       (2007), wherein the appellate court stated that, “Our supreme court has clearly indicated that
       in Illinois a finder of fact may not simply reject unrebutted testimony. *** [A] fact finder
       may not discount witness testimony unless it was impeached, contradicted by positive

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       circumstances, or found to be inherently improbable.” Sweilem, 372 Ill. App. 3d at 485
       (citing Bucktown Partners v. Johnson, 119 Ill. App. 3d 346, 353-55 (1983)). Plaintiff
       contends that because there were no other witnesses to contradict his testimony and because
       he was not impeached, the ALJ erred in finding that he was a responsible officer and this
       court should reverse that finding. We disagree.
¶ 18        First, although plaintiff was the only witness to testify at the evidentiary hearing, that
       does not mean that the Department presented no evidence to rebut his testimony. During
       cross-examination, the Department entered into evidence an ST-15 form, with plaintiff’s
       signature and social security number, affirming that he was personally liable for filing the
       sales tax return and paying the sales tax. Plaintiff denied that the signature on the form was
       his or that he had ever seen it before, but he offered no evidence to corroborate this assertion,
       such as a handwriting sample or testimony as to who may have forged his signature. The
       credibility of witnesses and the weight to be accorded their testimony are typically
       considerations for the trier of fact. Sweilem, 372 Ill. App. 3d at 485. Here, the ALJ
       considered the evidence and the testimony and found that he was unable to conclude that the
       signature on the form was not plaintiff’s. This finding of fact was not contrary to the manifest
       weight of the evidence, since the opposite conclusion, that the signature was forged by
       someone else, is not clearly evident.
¶ 19        Further, the evidence presented at the hearing showed that plaintiff had significant
       control and authority over the restaurant’s business affairs and was aware of its financial
       difficulties, which further supports the ALJ’s finding that he was a responsible officer.
       Although plaintiff tried to minimize his involvement in the restaurant, his testimony showed
       that he held a 75% interest in Grand-Wood, visited the restaurant several times a week, and
       spoke with the manager, Villa, about restaurant affairs. He had authority to sign checks on
       behalf of the corporation and participated in several key decisions for the restaurant,
       including the hiring and retention of an accounting firm, the promotion of Villa to manager,
       and the negotiations for a new lease. Plaintiff testified that he was aware that in 2006 some
       suppliers put the restaurant on a cash on delivery payment system, which he said happens
       when “you are not paying your bills in a timely fashion.” Therefore, he was aware of the
       financial difficulties facing the restaurant and had the authority to allocate the corporation’s
       financial obligations. Although plaintiff asserts that he had no control over the payment of
       taxes, a person need not have participated in the preparation, signing, or filing of retailers’
       occupation tax returns in order to be deemed a “responsible person” under the statute.
       McLean, 326 Ill. App. 3d at 675. Here, the evidence presented at the hearing showed that
       plaintiff had significant control and authority over the restaurant’s business affairs and was
       aware of its financial difficulties. Based on this evidence, as well as plaintiff’s own
       affirmation on the ST-15 form of his personal responsibility to pay taxes due, we conclude
       that the ALJ’s finding that plaintiff was a responsible officer of Grand-Wood was not clearly
       erroneous.

¶ 20                              C. Willful Failure to Pay Taxes
¶ 21       Plaintiff also contends that the ALJ’s finding that he acted willfully in failing to pay the


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       retailers’s occupation taxes for Grand-Wood was clearly erroneous because the Department
       failed to present evidence to rebut his testimony that he did not know that taxes were owed.
       Further, plaintiff argues that the ALJ improperly extended the definition of willfulness
       beyond that permitted by the statute, by finding that plaintiff was liable because he “should”
       have known that they were owed and “could” have paid them. Plaintiff asserts that absent
       evidence that he voluntarily, consciously, and intentionally failed to pay the tax, this court
       should reverse the ALJ’s finding.
¶ 22       The Department may establish a prima facie case of “willfulness” by submitting a
       certified record of tax penalty. McLean, 326 Ill. App. 3d at 675. Once the prima facie case
       has been established, the burden rests on the taxpayer to establish through sufficient evidence
       that the nonpayment was not “willful.” Id. Willful conduct does not require bad purpose or
       intent to defraud the government. Branson, 168 Ill. 2d at 255 (quoting Department of
       Revenue v. Heartland Investments, Inc., 106 Ill. 2d 19, 29-30 (1985)). Nor does it require a
       showing of actual knowledge of nonpayment. McLean, 326 Ill. App. 3d at 675. “ ‘[W]illful
       failure to pay taxes has generally been defined as involving intentional, knowing and
       voluntary acts or, alternatively, reckless disregard for obvious or known risks.’ ” Branson,
       168 Ill. 2d at 255 (quoting Heartland Investments, Inc., 106 Ill. 2d at 29-30). “If a responsible
       person in a position to easily discover nonpayment clearly ought to have known of a grave
       risk of nonpayment but did nothing, a finding of willfulness is justified.” (Internal quotation
       marks omitted.) McLean, 326 Ill. App. 3d at 676. Further, “[a] corporate officer who is
       responsible for filing retailers’ occupation tax returns and remitting the collected taxes may
       not avoid personal liability for tax penalties for nonpayment of such taxes merely by
       delegating bookkeeping duties to third parties and failing to inspect corporate records or
       otherwise failing to keep informed of the status of retailers’ occupation tax returns and
       payments.” McLean, 326 Ill. App. 3d at 676.
¶ 23       In this case, the ALJ’s finding that plaintiff willfully failed to pay the retailers’
       occupation tax of Grand-Wood was not clearly erroneous. Plaintiff was a 75% shareholder
       and president of Grand-Wood. He was, therefore, in a position to inspect the corporation’s
       books and determine whether taxes had been paid. He also had check-writing authority and
       could have used it to ensure that the taxes were being paid. Alternatively, he could have
       inquired with Villa or his accountants to determine if the taxes were paid. Indeed, once he
       learned that the business was having problems paying its bills and was put on a cash on
       delivery payment system by some suppliers, he ought to have known of the risk that the taxes
       were not being paid. See Estate of Young v. Department of Revenue, 316 Ill. App. 3d 366,
       377 (2000) (though corporation had system for paying taxes, responsible officer should have
       known of grave risk that taxes were not being paid where he knew business was in serious
       financial difficulty and bills were going unpaid). Plaintiff was at the restaurant several times
       a week and knew that Grand-Wood’s corporate records were kept at the restaurant, yet
       despite his knowledge about the restaurant’s financial problems, he made no inquiry as to the
       status of the tax payments. As the ALJ noted, the testimony and documentary evidence do
       not show “any positive steps” to pay the taxes. His failure to take action despite his
       knowledge of the restaurant’s financial difficulties is sufficient to find that he recklessly
       disregarded obvious or known risks and, therefore, acted willfully in failing to pay the taxes.

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¶ 24       Plaintiff contends that he put into effect a system whereby the restaurant’s manager and
       his accountants ensured that the taxes were paid, that the system had worked for more than
       10 years, that he was entitled to rely on it, and therefore, cannot be deemed to have willfully
       failed to pay the taxes. While it may be reasonable to rely on such a system for paying taxes,
       once it becomes common knowledge that a corporation is in serious financial difficulty and
       that bills are going unpaid, a responsible party is on notice and has a duty at that time to
       ensure that retailers’ occupation taxes have been filed and the taxes paid. Estate of Young,
       316 Ill. App. 3d at 376-77. Here, as plaintiff acknowledged, he was aware that the restaurant
       was facing serious financial difficulties and could not pay some of its bills. At that point,
       plaintiff could no longer simply rely on a system that had worked in the past but had a duty
       to ensure that the taxes were being filed and paid. He did not do so, and therefore, failed to
       rebut the presumption of willfulness.
¶ 25       Lastly, we disagree with plaintiff’s contention that the ALJ’s decision in this case
       expands liability beyond that permitted by the statute by effectively imposing liability on
       every shareholder or majority owner of a corporation who “could” or “should” have known
       of a tax liability, merely based on that party’s status. Clearly, such liability is not
       contemplated by the statute or Illinois’ courts interpretations of it and such liability was not
       imposed in this case. Plaintiff, as a responsible corporate officer, knew of Grand-Wood’s
       financial problems, which put him on notice that the taxes might not have been paid.
       However, he failed to take any steps to determine whether the taxes were being paid by
       asking Villa or his accountants or by checking the corporate records. It was his failure to take
       any of these steps, and not his status as majority shareholder, alone, that made him personally
       liable for Grand-Wood’s tax deficiency.

¶ 26                                     III. CONCLUSION
¶ 27       Therefore, because we conclude that the ALJ’s finding that plaintiff was personally liable
       for Grand-Wood’s unpaid retailers’ occupation tax obligation and acted willfully in failing
       to pay it, we affirm the circuit court.

¶ 28      Affirmed.




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