"I couldn't understand why I kept paying money but the problems never seemed to go away," Sullivan says. "I wanted to get bottom-line documentation from the IRS about where my tax payments had gone and how much I still owed, and I couldn't even seem to get that." Finally, he decided to draw attention to his case by stopping his tax payments entirely. Although he may have thought of his gesture as an act of well-justified anger or frustration, he was breaking the law in a way guaranteed to eventually earn the wrath of both federal and state tax authorities.
Sullivan was surprised that the tax collectors ignored him, at least at first. Since the U.S. tax system relies initially on voluntary compliance and the information that companies themselves report, often it takes a fair amount of time for the authorities to catch on. In this case, that only made it easier for Sullivan to put his tax problems out of his mind, especially as sales kept dropping and his financial obligations to suppliers continued to mount. "I started calling my suppliers to tell them I needed more time to pay my bills. At first, most of them were pretty understanding," he recalls.
But Sullivan wound up just postponing his problems. "Eventually, I got to the point where some of my payments to suppliers were 90 days overdue. After that they'd turn me over to collection agencies. The agencies would be happy at first if I said I would pay them anything. But after a while, they turned me over to the collection lawyers." Meanwhile, some of his suppliers put him on a cash-only delivery basis. "That was the worst, since it meant I'd have to pay cash for items that were just building up in inventory, sometimes with seasons to go until they stood a chance of being sold."
As a supersalesman with unstinting confidence in the basic strength of his store and sales base, Sullivan was slow to realize that the situation with his suppliers was becoming as insoluble as his tax problems. But before long, he recalls simply, "I began to feel as if I were drowning."
* * *
By April 1990, with no bottom in sight for Michigan's economic downturn, Sullivan concluded that the only way out of his own financial troubles would be an infusion of new capital, either a bank loan or a private investment. So he contacted James Greenfield, a longtime customer of Sullivan's who is a consultant with The Wharton Resource Group Inc., based in Shaumburg, Ill., a nationwide firm that specializes in advising small, growing companies. "Danny approached me about the idea of raising capital so that he could refinance his business," Greenfield recalls. "But once I started analyzing his financial operations, I realized that his immediate problem wasn't the need to build sales. He had to take care of his payables problems and do it fast."
It was a crisis situation. Greenfield and Sullivan figured that Village Shoes' outstanding obligations amounted to nearly $130,000, and most were way overdue. It was time to set some priorities for payables.
"Danny Sullivan had made the same mistake that probably 70% of businesspeople with payables problems make," says Greenfield. "He had focused his attention on whichever suppliers called him and yelled 'pay me, pay me' the loudest -- while, at a dire risk to his company, he had ignored his tax obligations to the government. Of all the people a business owner can owe money to, the ones that are least likely to be willing to negotiate with you and most likely to step in there and shut down your business are the federal and state tax departments."
His top priority was to resolve Village Shoes' tax problems. But what he learned, as he began to research the case, was that the IRS had never approved the payment scheme. As a result, Greenfield explains, "the IRS didn't care if he had been making regular payments in good faith for a good part of the time that was in dispute. As far as the IRS was concerned, he hadn't paid the money he owed when he owed it, and he hadn't paid the interest and penalties that the IRS said he owed, either. And the IRS couldn't care less about the payment plan because it had never approved it." As for the problems with the state, Sullivan's own tax records were so confused, he possessed little evidence that could back up his claims.
Despite the tax fiasco, Greenfield was convinced that Village Shoes' overall business prospects would be quite strong if he and Sullivan could just straighten out the store's financial operations. So while attempting to resolve the tax problems, Greenfield began contacting every one of Village Shoes' creditors to try to informally negotiate extended payment plans. His goal was to help the company adjust and upgrade inventory whenever necessary to keep the 2,000-square-foot store and its product line contemporary and attractive to Sullivan's customers.
Although the store's financial difficulties were dragging into their 18th month, most of Sullivan's creditors were willing to negotiate. "Most of them had already stood behind me once before, during the recession of 1981, and they'd seen me come out of a sales slump with stronger growth than I'd ever had before. It was in their interest to help me work out my problems," says Sullivan.
Greenfield, too, was optimistic. "The only stumbling block seemed to be the IRS," he says. "But we finally succeeded, with some help from our senator, in scheduling a meeting with an IRS supervisor for the morning of June 5."
* * *
That meeting never took place. Instead, Danny Sullivan telephoned Greenfield from Village Shoes' back office to tell him the store had been seized by the state of Michigan. "We had no choice but to file for Chapter 11 protection," says Greenfield. For Sullivan it was "a bitter pill at first." When the court unraveled his tax problems, what it found was unbelievable to him. "Between the state and federal tax authorities, I had owed a total of $68,000 in taxes. But by the time I got through with all the interest charges and penalties, I had paid $137,000 and it still hadn't been enough," he says.
