CEO of Embattled Tax Service Ducks Liability

(CN) - After TaxMasters was left bankrupt by a public enforcement action, its founder should not face a $46 million judgment, a Texas Appeals Court ruled.

TaxMasters began advertising its tax-resolution services nationwide in 2005. Patrick Cox was its spokesman, CEO, chairman of the board and majority shareholder.

Texas filed a Deceptive Trade Practices Act claim against TaxMasters in 2010, and the company went bankrupt in 2012.

It is undisputed that TaxMasters routinely deceived its customers about its services, the Amarillo-based 7th District Court of Appeals noted last week.

This deception included the imposition of administrative fees and accepting payments without telling customers that the payments were nonrefundable.

A trial court found that Cox and his companies, TaxMasters and TMIRS Enterprises Ltd., had violated the DTPA more than 15,000 times.

The court socked the defendants with $31.25 million in penalties and ordered them to pay $14.6 million in restitution.

Cox appealed, arguing that he did not personally violate the DTPA, and that the trial court did not make a finding to justify piercing the corporate veil.

The state argued that Cox had been the company's "guiding spirit," and that he created and approved the practices that violated the DTPA.

Siding with Cox on July 1, a three-judge appellate panel reversed.

"No Texas court has applied the federal 'guiding spirit' doctrine to hold an individual liable under the DTPA for actions taken by a corporation," Justice Mackey Hancock wrote for the court. "Further, the Texas courts that have addressed 'guiding spirit' in the context of Texas' exercise of jurisdiction have required some direct personal action on the part of the person alleged to be the 'guiding spirit of the corporation.'

Texas failed to show that Cox performed such actions that would expose him to personal liability, according to the ruling.

"There is no evidence that Cox ever accepted, directly or indirectly, payment from any customers," Hancock wrote. "All of the evidence reflects that the payments were made directly to TaxMasters. Further, there is no evidence that Cox failed to make any disclosures. Rather, the evidence establishes that only TaxMasters failed to make these disclosures."

Evidence is also lacking to show that Cox deceived customers by advertising that TaxMasters would "solve your tax problems" for "pennies on the dollar," the court found.

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