Tax dispute may close business

Monday, March 8, 2004 | 11:24 a.m.

The party may soon be over for a Las Vegas company that has catered galas at Southern Nevada homes and businesses for a quarter of a century.

The owners of Rainbow Catering Inc. say that in their efforts to settle a tax debt with the Nevada Department of Taxation and Nevada Tax Commission they have encountered a system that seemingly won't budge.

An offer to settle the company's $220,000 tax debt for about 25 cents on the dollar -- in legal lingo an "offer in compromise" -- was rejected because Nevada, unlike the Internal Revenue Service, the District of Columbia and 18 states, has no rules in place to accept such negotiated solutions.

The Nevada Department of Taxation and Nevada Tax Commission say that while there have been talks to create such a means to settle state tax debts, there has not been a great demand for it. And, they say, their hands are tied because they cannot give preferential treatment to one taxpayer over others.

Rainbow now faces as early as this month a collections hearing where the aging assets of their business at 2013 S. Highland Drive -- estimated at $6,150 by the company -- may be seized for liquidation to help settle the debt.

Rainbow Catering owners Ed Baba, Sherry Burnett and Tom Gehringer say they are angry and disappointed over what they perceive as a lack of sensitivity on the state's part and an unwillingness to meet them part way to help retire the debt.

"My clients are being run out of business because the system is broken," said Las Vegas attorney Christian Gianni, who took the case in late 1999 following a state audit that determined that $100,000 in back state taxes were owed over a maximum eight years. Interest and penalties have more than doubled the debt.

"They cannot afford to pay the debt," Gianni said. "Interest alone is now $1,000 a month. And it is not as if my clients collected the tax and squandered it. They simply didn't collect the state sales tax from their customers because they didn't think they had to because of the nature of their business."

A plan for Rainbow to pay off the debt over time in installments was discussed, but never was worked out because the debt was too great, Gianni said. He also said signing off on an installment payment offer would have obligated each of the owners to personally guarantee the company's payment of the tax. Gianni said his job is to try to protect his clients' personal assets.

Between 1978 and 1999, Rainbow Catering paid taxes to the IRS but not to the state because Nevada does not require service-only businesses to collect the 7.5 percent sales tax. In 1999, the state discovered what happened and objected to Rainbow's practice.

"We didn't operate a restaurant -- we don't charge for a plate of food at parties," Baba said. "We are a low-margin business. A lot of our effort goes into the special look we bring to a party with ice sculptures, rentals (of chairs and tables) and other preparations. The food is part of our show."

The state, however, says the company's buffet-style food is prepared, and the sales tax applies to prepared food. Therefore the company should have charged customers sales tax on that part of the job.

Since 1999, Rainbow Catering says it has paid its current state sales taxes, which have amounted to $66,000. But the owners say they have not been able to make a dent in the debt.

Gianni said his clients don't dispute the state's finding that they owe the money. They just want to settle it for a reasonable amount and continue operating. He said they offered to borrow $50,000 to make a lump sum settlement.

Uncommon request

Tax Commission Chairwoman Barbara Smith Campbell said just "two or three" businesses have in the last two years asked about negotiated offers.

"It is not the commission's intent to put businesses out of business," said Campbell, who also is controller at Mandalay Development, a subsidiary of Mandalay Resort Group.

"We take these case by case and we have to treat all taxpayers with the same consistency. We cannot do (negotiated offers) for one and not for others, especially without the proper administrative rules in place."

Gianni, in documents filed with the Tax Commission in February 2003, argued, "there is no controlling statute or regulation that specifically prohibits the department from accepting (a) taxpayer's offer in compromise."

In his brief, Gianni noted that Nevada's neighbors Arizona and California are among the states that permit negotiated offers. Gianni, in documents filed with the state on Nov. 5, asked for regulations to be changed to allow such offers.

Charles Chinnock, executive director of the Nevada Department of Taxation, said the tax commission has had discussions in recent months to come up with a regulation addressing the issue, but no action is pending.

Rainbow last year lost a hearing before the taxation department and an appeal before the tax commission. The company now faces the collections hearing at a date to be determined.

Among the items the state could seize is a 1973 Ford Econoline catering van with 210,000 miles that an appraiser listed as worth $700, and two ovens worth about $600 apiece.

No way out

Chinnock said his agency is not the bad guy.

He said when his office finds something wrong in what amounts to a "voluntary compliance" system, it is obligated to collect unpaid taxes regardless of whether an offending company misinterpreted state law for a number of years and the state did not catch the error.

Chinnock said the state provides businesses with educational pamphlets on laws and has in place several options for those who do not agree with his office's decisions. Among them are appearances before a hearings officer and the Nevada Tax Commission followed by the use of the judicial system.

With the first two options down, Gianni said his clients will not take the matter to District Court because even if they prevail the state could make appeals that would tie up his clients for years and be so costly they would lose their business anyway.

"Our strategy instead is to lose the catering business and hope that the sale of the assets will satisfy the debt," he said. "My clients are saving their money in case they have to defend themselves against the state going after their personal assets."

Gianni said that in numerous discussions with the state they have made it clear to him they will go after his clients' individual assets.

Chinnock and Campbell declined to comment specifically on Rainbow Catering, citing confidentiality statutes.

Carole Vilardo, president of the Nevada Taxpayers Association and a longtime observer of both the state tax department and commission, says she has no doubt the state will go after the personal assets of Baba, Burnett and Gehringer.

"The law in Nevada is relatively specific that corporation officers have liability for the unpaid taxes of a business." Vilardo said. "I do not know how this business (Rainbow) is structured, but I believe they (the state) absolutely will go after each of the taxpayers."

Gianni said the law applies only to companies that "willfully fail to collect" the sales taxes, which he says the state will have to prove in court.

Vilardo said the state can forgive part of the interest and penalties under a law passed by the Legislature in the early 1990s. Gianni said in four years of negotiations he has received no offers to forgive any part of the debt.

Empty victory

Baba says he cannot get past the irony that the state turned down his $50,000 offer and may wind up settling for $6,150 worth of old business assets. The state, he said, also will lose out on thousands of dollars in future tax revenue, similar to what his business has generated in recent years.

Baba said he can make his settlement offer now because the business, to secure a loan, can use its good name and an impressive list of customers who have hired and rehired Rainbow over the years to cater their parties -- things that will become worthless if the state closes the business.

Baba says even if the state goes after his and the others' personal assets, the state probably will end up collecting what likely will be at liquidation far less than $50,000.

"We live very modestly," Baba said of him and his partners.

Clark County Tax Assessor records show the three friends own a three-bedroom, 1,600-square-foot home with a value for tax purposes of $84,000. At auction, it could go for far less. They have owned the property since 1976. Gianni said the homestead law does not protect a home from the state taking it for unpaid taxes.

Chinnock said the state has a fiduciary responsibility to try to collect a legitimate tax debt and cannot assume that those in default do not have resources just because they claim they don't have the means to pay.

How Rainbow Catering managed to fly under the radar for so long and not find out from someone -- a competitor, its accountant, anyone -- that the state sales tax applied to its business is another point of contention.

Chinnock says he knows of no other catering business in the state that misinterpreted that the sales tax should be collected from clients.

"Most businesses have attorneys, accountants or other experts who give them advice on how to run their businesses," Chinnock said.

Rainbow's owners said they have no idea where the accountant who helped set up their business is today. Also, because they are a small outfit comprised of 30 part-time employees, one of the owners, Burnett, oversaw the books. She said she paid all of the bills and taxes that she thought had to be paid.

"The state views that ignorance of the law is no excuse," Vilardo said. "While there may be a moral obligation to help these people, the law does not always see things that way."

Vilardo also said negotiated offers are not necessarily the answer to all situations because it also presents an opportunity for abuse of the system.

"The concern is that if you quickly discharge a liability some people will just go into business right away, build up a similar tax debt and get it discharged again and again," she said. "You could create a revolving door."

While offer in compromise is not the solution for everyone, it is "a viable program that can get a tax liability off the books," said Brenna Howard, acting manager for the IRS Offer in Compromise Office in Tempe, Ariz.

"Offer in compromise has been around for quite a long time and very actively used since the early 1990s to address tax liabilities," said Howard, who was a field agent for 13 of her 17 years with the agency.

Howard said about 15 percent of applications for such offers filed with the IRS result in settlements. She said a number of the applications that are rejected result in other avenues of payment being reached or are appealed to the IRS Internal Appeals Division.

"It is a very complicated process because we do not simply set standards such as 25 cents on the dollar," Howard said. "We look at many criteria including income and future ability to pay a debt. And we verify all of the information that is provided for accuracy. It takes about a year (for each application)."

And, Howard said, the taxpayer must agree to stay current with all federal taxes for five years -- a rule Nevada could add regarding state taxes to address concerns about people abusing the system with multiple settlements.

Campbell said if Nevada goes forward with efforts to allow negotiated offers, "we will look at how it works in other states and whether their methodology will work in Nevada."

While a law to allow negotiated offers might one day be a reality in Nevada, it is not likely to be instituted in time to save Rainbow Catering.

"Our business is over," Baba said. "Maybe by telling our story, something will be done to get the law changed so others won't have to suffer like we have.

"On the bright side," he added, "Maybe the state will give us food stamps."

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