By the spring of 1999--as Howard tells the story--with the company deep in its cash crunch, he was closing in on a deal to sell the company. Two roofing companies were interested. Then, in April, one would-be investor pulled out after signing a letter of intent, citing unexplained fluctuations in the financials. Within the hour the other nixed its deal too, saying it had seen Howard Roofing's name in a list of companies with federal tax liens.
As Howard tells the story, it was 4:15 p.m. when he went down the hall to his controller's office with a sinking feeling and closed the door. "I said, 'Can you tell me, did we pay our payroll taxes?" Howard recalls. "He looked down. I knew that was bad. He said, 'Well, we owe a little bit." Then, in Howard's telling, Beyer crumpled to the floor and started shaking uncontrollably. "As God strike me dead, the man completely fell out of his chair and curled up in a fetal position and started shaking," Howard says. "I was worried about him. But I was also like, 'Tell me what's going on here. Is it $40,000, or what?' He says, 'It's $250,000 to $300,000.' I'm on the floor with him. He's crying. This is the first that I knew of it."
When Howard went home that night, he says he knew he had no choice but to declare bankruptcy. By the time he saw Beyer the next morning, he says, his controller had hired a lawyer and refused to speak with him further. "He attorneyed up real quickly," says Howard. "I said, 'You need to pack your sorry ass and get out of here." Then, Howard says, he called the IRS to find out if there was anything he could do. "In hindsight," he says, "the red flags should have gone up, but I was extremely busy."
Beyer tells it differently. He declined to comment for this story, but in a September 2003 bankruptcy court hearing about who was responsible for $355,008.23 in unpaid taxes, he testified that Howard not only knew the payroll taxes were unpaid but that he had directed that they not be paid and had dictated how to adjust the financial statements to disguise the tax deficiency. Bankruptcy Judge A. Thomas Small ruled that the tax debt was Howard's responsibility because he either knew or should have known about the nonpayment. "It was simply not credible that he [Howard] did not know that the payroll taxes were not being paid," the judge ruled. "At the very least, he recklessly disregarded whether the taxes were being paid."
Howard says he has refused to read the judge's opinion. "I was honest and I was true with the judge," says Howard, "and I cried on the stand because it was very emotional for me to be on the stand for hours telling this story. [Beyer] was on the stand for 15 to 20 minutes and said, 'This is the way it went: Mr. Howard told me to do this.' He swore in front of God that this was the truth. I know the truth, and he knows the truth."
When Howard tells his story to audiences like the one at Wake Tech, he simplifies this part of the story, leaving out the litigation over who would be held responsible for the nonpayment. He says he understands the judge's reasoning but still feels wronged by the decision. He's also angry that, although he ended up being held personally responsible for the unpaid payroll taxes, the IRS never personally notified him of that growing debt while it might have been manageable, instead sending notices to the company that he says he never saw. "The government says that as the owner, you are the most responsible, but I'd been held in the dark," Howard says. "In my opinion, I still don't think I was the responsible party."
As in most cases of payroll tax delinquency, which the IRS terms nonpayment rather than fraud, no one appears to have gained personally from the deception; it merely postponed--and exacerbated--the company's failure. As the sole owner of the business, Howard had the most to lose from the nonpayment, especially since he was negotiating with investors who could have sued him for fraud had the deal gone through without disclosure of a six-figure tax liability. But Beyer doesn't appear to have had any motivation either, something the judge pointed out in his ruling.
Brian Hamilton, the financial consultant, believes Howard. "But Chuck didn't ask, 'Hey, Karl, are you paying the payroll taxes?" says Hamilton, now CEO of a financial information company where he has hired Howard as a consultant. "It would take a lot of guts to volunteer that, to give Chuck bad news." Bill Bilger, who still plays golf with Howard from time to time, calls his old boss "an excellent speaker, a salesman, and an honest man" but admits that finances weren't Howard's area and that he never had the time or inclination to figure out what was going on.
As word spread, employees began to focus on how to get out unscathed. Hamilton describes what happened like this: "When the s--- hit the fan, the rats started jumping off the ship. When you're winning you're popular, but when you're losing no one wants to be around you. What happened to Chuck really bothered me a lot." Adds Salvagni, who, with Howard's blessing, took a large portion of the operations team and moved to another company: "People didn't want to be in too deep in this any which way. They were more scared than anything else. There was no reviving the business--it was dead."
Through the spring of 1999, Howard tried to keep up appearances, continuing to work on projects and using incoming receivables to pay the IRS. That seemed like a logical plan for wrapping up a business and dealing with its debt, but as Howard learned the hard way, it also put him on the wrong end of the tax rules. The bankruptcy judge faulted him for ignoring his obligations to the bank and the bonding company, both of which had rights to those receivables, and for paying others (payroll, rent, etc.) before paying the IRS. "It's not intuitive," says GJ Stillson MacDonnell, a tax attorney in San Francisco.
As with many entrepreneurs, Howard's personal finances and those of his business were inextricably intertwined. Even with the company on the brink of folding, he continued to receive a salary, yet he also transferred $33,000 of his own money to cover payroll and personally paid the company's portion of the health insurance benefits for its (now dwindling) employees. Howard says he wanted to keep paying his employees as long as possible and to finish projects he had promised to do. He also hoped to keep money coming in for as long as possible to pay down the tax debt, and he sent the IRS $74,000 in the company's final days. "I did everything I could possibly do to minimize the loss to everybody," Howard says. "I did everything as legal as I possibly could."
