Bonedaddy's of Lee Branch, LLC v. City of Birmingham
Docket: 1131338
Court: Supreme Court of Alabama; September 4, 2015; Alabama; State Supreme Court
Bone-daddy’s of Lee Branch, LLC, along with John L. Cowan, Jr., appeals a Jefferson Circuit Court judgment favoring the City of Birmingham after a bench trial. The court affirms part of the judgment and reverses in part.
On June 11, 2007, James A. Taylor, Jr. filed articles of organization for the LLC, which initially operated as Bonedaddy’s, listing Cowan and Taylor as members and Cowan as the registered agent. The LLC was member-managed with its registered office at 1038 River Highlands Circle. On July 16, 2008, Cowan submitted a tax certificate application identifying the business as "Bonedaddy’s of Lee Branch LLC," with tax liabilities including sales, occupational, and business-license taxes checked. Cowan and Taylor were listed as partners, and Cowan was designated as the corporate resident agent.
Cowan testified to a change in ownership structure when the restaurant moved to the Summit under the name "Sweet Bones," where four investors acquired a 20% stake, reducing Cowan's interest to minority status. He maintained control over the restaurant's checking account and managed tax payments for several years. In February 2010, Taylor was added to the account; checks issued to the City for taxes were signed by Taylor but listed Cowan as the signatory.
Cowan became aware of unpaid business-license taxes in a meeting with a City auditor in late 2010, where he expressed intent to resolve the tax issues. Following his dismissal as general manager in February 2011, Cowan lost all operational control, including signing privileges, and no longer managed day-to-day restaurant activities. He was subsequently removed as a signatory on the checking account.
Cowan received a notice at his home indicating that business-license taxes were overdue and informing him that a partial payment check had bounced due to insufficient funds. On April 5, 2011, he sent a certified letter to the City’s finance department, stating he was no longer a manager or director of Bonedaddy’s of Lee Branch LLC and provided the current management details, including the managing partner, Jimmy Taylor Jr., and the business address. Following this, Cowan did not receive further communication from the City regarding the taxes. The defense presented a document from the City’s revenue division dated April 19, 2011, showing delinquencies for Bonedaddy’s with a handwritten note referencing a fax number, Jimmy Taylor, and an audit. An audit letter was sent on June 29, 2011, addressed to Bonedaddy’s at the Sweet Bones address, directed to Jimmy Taylor.
On October 24, 2011, Cowan filed a 'Registered Agent Resignation Notice' with the secretary of state, certifying that he had given written notice of his resignation as registered agent on October 10, 2011. Although he had previously sent a notice, the secretary of state’s office had no record of it, prompting him to refile. On January 6, 2012, a resolution was adopted by Bonedaddy’s members to remove James A. Taylor, Jr. and Brett Taylor from all management and authority roles within the company, effective immediately. This resolution was signed by Cowan and other members, following concerns that Jimmy and Brett were misusing the company’s funds. Cowan testified he had no involvement with the LLC after his termination until the members acted to address the misuse, although he remained a member of the LLC at the time of the trial.
Cowan testified that the articles of organization for Bonedaddy’s had not been amended to include additional LLC members at the time of a January 2012 resolution. The City issued three final assessments: one for $32,253.54 in business-license taxes for 2008 through December 2012, another for $4,931.72 in occupational taxes for July 2011 through December 2011, and a third for $169,241.55 in sales taxes for August 2009 through December 2011. Each notice was addressed to '245 Summit Blvd.' but sent to The Evans Law Firm, P.C. on Oxmoor Road. Bonedaddy’s and Cowan did not pay any of the assessments. On March 20, 2013, the City filed a complaint and motion for a preliminary injunction against Bonedaddy’s and several individuals, alleging failure to submit required business records and tax returns, and conducting business in violation of the City’s business-license code. The City sought an injunction to prevent the defendants from operating until all taxes and penalties were paid. Following a suggestion of bankruptcy from Taylor, claims against him were stayed, and other defendants were dismissed without prejudice. By August 9, 2013, the trial court noted that the business had been closed for over a year and that Taylor had filed for bankruptcy, rendering the injunction request moot. Bonedaddy’s and Cowan then moved for partial summary judgment regarding the City’s 2011-12 sales tax claim, which the trial court denied. A bench trial took place on June 23, 2014.
On July 7, 2014, the trial court issued an "Order Granting Permanent Injunction and Final Judgment" which included several key findings:
1. John L. Cowan, Jr. applied for a tax certificate on July 16, 2008, to operate Bonedaddy’s, agreeing to comply with Birmingham's Tax Code and state laws.
2. Cowan signed the application, acknowledging liabilities for sales tax, occupational tax, and business license tax.
3. The Plaintiff granted a business license to Bonedaddy’s, which operated for several years, during which various taxes became due but were paid intermittently.
4. At trial, the total tax liability was determined to be $203,426.81, comprising $32,253.54 in business license taxes, $4,931.72 in occupational taxes, and $169,241.55 in sales taxes.
5. The Plaintiff issued Final Assessments for the taxes on February 9, 2012, which were served to the Defendant's former law firm on February 10, 2012. No appeals were made against these assessments within the required 30-day period.
6. Despite notifying the Plaintiff of his resignation as a manager, Cowan continued to act as a member/manager, as confirmed by a resolution he signed on January 6, 2012, indicating he remained a member through the trial.
7. The court concluded it lacked subject-matter jurisdiction to address the Defendants' challenges to the Final Assessments due to their failure to appeal within the statutory timeframe and non-payment of the assessed amounts.
Consequently, the court ruled against Bonedaddy’s and Cowan, ordering them to pay $203,426.81 and permanently enjoining them from operating a business in the city until all tax liabilities were settled. The case is subject to an appeal, with the standard of review being ore tenus, meaning the trial court's factual findings are presumed correct unless clearly erroneous or unjust. The presumption does not apply to legal conclusions or misapplications of law.
Cowan and Bonedaddy’s contend that the trial court lacked subject-matter jurisdiction to issue a final judgment against Cowan because the City allegedly failed to adhere to the Alabama Taxpayers’ Bill of Rights (TBOR) regarding tax assessments. They argue that Cowan did not receive the required preliminary and final assessments, which also did not list his name. Instead, the City sent a letter to the LLC’s attorney concerning the assessments, which Cowan claims does not satisfy TBOR requirements. The TBOR mandates that the State Department of Revenue must notify taxpayers of audits, inform them of their rights, and provide a detailed preliminary assessment of taxes owed. The preliminary assessment must be delivered to the taxpayer’s last known address, either by mail or personal service, while the final assessment follows similar delivery requirements based on the amount assessed. Cowan and Bonedaddy’s raised the notice issue during the trial, although they only fully articulated the argument regarding the City's procedural noncompliance in their appeal.
Bonedaddy's and Cowan assert that the trial court's subject-matter jurisdiction to issue a judgment is at stake, allowing the issue to be raised for the first time on appeal, referencing the case City of Red Bay. In that case, the City and Franklin County filed a class action against GMAC for failing to collect and remit local sales or rental taxes. GMAC contended that the local authorities needed to comply with the Taxpayer Bill of Rights (TBOR) by providing necessary procedural notifications and descriptions before collecting taxes. The Court noted that the local authorities had not fulfilled these TBOR requirements and held that the Local Tax Simplification Act of 1998 made the TBOR applicable to local taxing entities.
The Court also rejected arguments from the City and County claiming that TBOR compliance was not jurisdictional and that they could bypass administrative remedies due to legal questions. In Patterson v. Gladwin Corp., the Court reinforced the necessity of exhausting administrative remedies per TBOR for tax refunds, stating TBOR compliance is jurisdictional. It further cited State v. Amerada Hess Corp., which dismissed a tax recovery action for failure to adhere to TBOR, concluding that the trial court lacked jurisdiction due to the City and County's noncompliance with TBOR. Consequently, the class-certification order is vacated, and the case is remanded for dismissal, rendering consideration of other issues unnecessary.
In Amerada Hess Corp., the State of Alabama and the State Department of Revenue filed a complaint against Amerada Hess Corporation and 35 other oil producers for allegedly underpaying severance taxes through deceptive practices. The Department sought recovery of overdue taxes, interest, penalties, and both declaratory and injunctive relief. The Court of Civil Appeals noted the absence of a tax assessment in the complaint, which led to the producers filing motions to dismiss that were granted by the trial court. The Department appealed, asserting its authority under Ala.Code 1975 § 40-2-11 to sue for tax collection. While the producers did not contest this authority, they argued the Department must adhere to the procedures outlined in the Taxpayers’ Bill of Rights (TBOR) when pursuing such claims. The Court examined various statutory provisions and concluded that the legislature intended for the Department to initiate legal action only after an assessment was made, stating that any other interpretation would undermine the TBOR. Consequently, the Court upheld the trial court's dismissal of the Department’s claims due to lack of subject-matter jurisdiction stemming from its failure to comply with the TBOR procedures.
In a subsequent case, Russell Petroleum, Inc. v. City of Wetumpka, the City sought recovery of unpaid taxes from Russell Petroleum, which argued against the city's authority to enforce tax collection based on invalid property annexation and procedural failures under the TBOR. The trial court rejected these defenses and ordered Russell Petroleum to pay the taxes. The appellate court affirmed the trial court's findings regarding annexation but ruled that Wetumpka’s failure to follow TBOR procedures invalidated its action to recover unpaid sales taxes, citing the precedent set in the City of Red Bay decision.
The circuit court lacked subject-matter jurisdiction over the sales-tax dispute because the City failed to utilize the administrative procedures mandated by the Local Tax Simplification Act of 1998 (LTSA) and the Taxpayer Bill of Rights (TBOR). This ruling specifically pertains to municipal sales taxes. While the City also neglected required administrative procedures for collecting unpaid business-license fees and gasoline taxes, the trial court retained jurisdiction for those disputes. A final sales-tax assessment was issued against Bonedaddy’s, but Cowan was not named as a taxpayer nor notified, and no evidence was presented showing a final assessment against him. The City’s noncompliance with TBOR regarding Cowan resulted in a lack of jurisdiction for the sales tax claim. However, the failure to follow TBOR procedures did not affect the trial court's jurisdiction over the business-license and occupational tax claims.
Cowan and Bonedaddy’s contested the judgment against Cowan personally based on Bonedaddy’s application for a business-tax certificate, asserting he did not collect the taxes, did not have access to the LLC’s bank account, and could not be held personally liable for the LLC's actions. Under Alabama law, LLC members are not personally liable for the debts of the LLC, with statutory protections ensuring that membership does not equate to liability for the LLC’s obligations. These protections are foundational to the structure of LLCs, as confirmed by relevant statutes and case law.
The City references the Alabama Department of Revenue's decision in *Nonna Rose Kingsley, LLC v. Alabama Department of Revenue*, which established that members of LLCs taxed as partnerships are not personally liable for the LLC's tax obligations under Alabama law. This aligns with IRS treatment of such members concerning federal taxes. The City counters Cowan and Bonedaddy’s claims by noting that while LLC members can be liable for trust fund taxes under Alabama’s 100 percent penalty statutes, the business-license and occupational taxes in question are not included in those provisions. Specifically, Section 40-29-73(a) outlines penalties for failure to collect certain taxes, none of which encompass the taxes at issue. The court erred by holding Cowan personally responsible for those taxes.
Additionally, Cowan and Bonedaddy contend that the trial court lacked subject-matter jurisdiction due to improper service of notice regarding tax assessments, as required by Alabama law. They assert that the City only provided notice to a law firm's secretary. However, no evidence was presented at trial regarding the preliminary assessments’ issuance or mailing. For the final assessments, evidence showed that notices were sent via certified mail to The Evans Law Firm, based on communication with the attorney, indicating proper service.
Final assessments were issued to The Evans Law Firm as instructed, and the City confirmed receipt of the certified mail. Franklin's testimony went unchallenged by Cowan and Bonedaddy’s. In the case Davidson v. State of Alabama Department of Revenue, the administrative-law division clarified that a final assessment over $500 must be mailed by certified mail to the taxpayer's last known address, consistent with federal law requirements for deficiency notices. Actual receipt of the assessment is not necessary; timely mailing suffices to trigger the 30-day appeal deadline. The Department must show reasonable diligence in ascertaining the last known address, focusing on the most current information it has. The City demonstrated it mailed the assessments to the correct address, as evidenced by Franklin's directions. Cowan and Bonedaddy’s claimed deprivation of appeal rights due to lack of notice but failed to prove non-receipt or untimely receipt of notices. Furthermore, they did not seek to appeal the assessments even after the City's complaint was filed. Consequently, Bonedaddy’s claims for relief were not substantiated.
The trial court's judgment is affirmed concerning Bonedaddy’s liability for sales tax, business license tax, and occupational tax assessments. However, the judgment regarding Cowan's responsibility for Bonedaddy’s outstanding sales taxes is reversed due to the City's noncompliance with the Taxpayer Bill of Rights (TBOR), which deprived the court of jurisdiction over that claim. The court also reverses Cowan's liability for outstanding business license and occupational taxes, ruling that these do not fall under the personal liability provisions of Alabama law for LLC members. The case is remanded for the trial court to vacate its judgment against Cowan on these tax assessments. The City had introduced a resolution asserting the correctness of the sales tax assessment against Bonedaddy’s, but failed to present evidence of the relevant assessment during the trial. Cowan argued that business license and occupational taxes are not trust-fund taxes and thus not subject to the 100 percent penalty statute, which the court affirmed. Other arguments from the parties were not addressed due to the court's disposition.
