Corporation Commission Candidate Being Sued For $200K IRS Bill

By Kristena Hansen
Published: Friday, October 31, 2014 - 5:05am
Updated: Friday, February 27, 2015 - 1:22pm
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(Courtesy photo)
Sandra Kennedy

Last month, the federal government filed a lawsuit against Arizona Corporation Commission candidate Sandra Kennedy and her husband for almost $200,000 in unpaid taxes to the Internal Revenue Service that date back several years.

The debt is tied to Kennedy and her husband’s former Denny’s franchise restaurant in Glendale and is owed for tax periods starting in early 2007 and ending in late 2009. The information comes from records in the U.S. District Court, District of Arizona and federal tax liens in the Arizona Secretary of State’s Office and the Maricopa County Recorder’s Office obtained by KJZZ.

Kennedy — who has been slammed with $1.32 million worth of election attack ads by ‘dark money’ groups this month — said she was totally unaware of the lawsuit until KJZZ contacted her this week.

“I have taken great pride over the years in trying to do what’s right, trying to make sure the public could always trust in me, and to see these documents, to be honest, it’s blown me away,” Kennedy said.

Records show about half of those back taxes were racked up during Kennedy’s 2008 campaign for the Corporation Commission and during her first year in office.

Kennedy said she sold the restaurant in early 2010 after settling a nearly year-long federal lawsuit with the Denny’s franchise company out of court. The business entity that controlled the Glendale restaurant, Kennedy Restaurants LLC, was terminated in May 2010 following the case settlement, according to corporate filings in the Corporation Commission.

By the end of 2010, the IRS began filing tax liens against the business. Kennedy said she was aware of the liens and initially told IRS officials that her husband, Memie Burton, was responsible.

“I got the notice, and I went down, and that’s when I had a conversation with [the IRS],” she said. “And again, after that, there was never any other conversation with them. And I just said to [my husband], ‘This is your mess, clean it up.’”

Kennedy asserts she is not responsible for the taxes because she owned only 5 percent of the business, while Burton owned the rest and also handled all aspects of finances.

In corporate filings, Kennedy is listed as the sole manager and statutory agent; Burton is listed a member. Both Kennedy and Burton signed the franchise agreement and sublease contract with the Denny’s parent company in 1995, according to court records.

“I was the manager. I handled the day-to-day operations. But that was it,” she said.

Burton, however, has stated he isn’t responsible for the taxes either.

Records show Burton filed for Chapter 13 bankruptcy in October 2010. The IRS tried to recoup the back taxes through the bankruptcy court, but Burton claimed he was completely detached from the business.

“Memie Burton Jr. did not take care of, nor participate in, the day-to-day operations of Kennedy Restaurants, which was operated exclusively by his wife,” Dean O’Connor, Burton’s attorney, wrote in a February 2012 court filing in response to the IRS’s claim.

O’Connor also stated that Burton didn’t have any authority over matters such as tax returns, tax withholdings, daily operations nor operating funds.

Kennedy told KJZZ that Burton told her he had been taking care of the taxes all along.

“I thought he was in the process of paying,” Kennedy said.

She also said that she had no idea Burton’s attorney was making such claims in his bankruptcy proceedings.

“I guess I put my trust in my husband, and that trust has been broken,” Kennedy said. 

Because Burton’s bankruptcy case did not involve Kennedy, and the IRS believes both are responsible for the taxes, the IRS withdrew its claim in the bankruptcy court and filed a separate district court case last month against both individuals, records show.

Kennedy, on the other hand, maintains her position that she is not responsible for the taxes, and said she plans to fight to get the case against her dropped.

As for the former restaurant, records show the Denny’s franchise company allegedly terminated its contracts with Kennedy Restaurants in March 2009 — during Kennedy’s third month as corporation commissioner — for purportedly failing to pay more than $39,000 in royalties and rent.

But the restaurant stayed opened, so the franchise company sued Kennedy Restaurants in the district court that next month for trademark infringement, unfair competition and breach of contract, records show.

Eleven months later, the parties settled out of court. Kennedy said they sold the restaurant to Denny’s thereafter and paid off their debt.

“The economy had gone bad and we were just trying to stay afloat, you know, trying to keep people employed,” she said.

Kennedy’s term on the commission ended in 2012 after losing re-election that year, and she’s giving it another try this year. Jim Holway is the other Democratic candidate.

The current race for the two open commission seats has been centered around GOP candidates Tom Forese and Doug Little and how they’ve benefited from more than $3 million in dark money spending. Dark money groups don’t have to disclose their donors because of their 501(c)4 nonprofit statuses, but it’s widely believed that Arizona Public Service Co., the state’s largest utility, is the primary source of funding. APS has neither confirmed nor denied the rumors.

It’s unprecedented for a utility such as APS to back the campaigns of the same people who could be its regulators and do so with ratepayer money, said former Commissioner Renz Jennings.

“To let the utility pick everybody who’s running for office and be the screen and to do this secretly with captive customer ratepayers is just way beyond everything we’ve ever known,” Jennings said.

Kennedy has taken the brunt of the dark money spending this month. Roughly $1.32 million worth of attack ads mention a 2010 Maricopa County Superior Court lawsuit between the restaurant and the Denny’s parent company that was dismissed in about a month.

Jennings said Kennedy’s personal financial troubles are disappointing, but he thinks APS’s secret backing of Forese and Little is “really dangerous for democracy.”

But on Tuesday, voters will ultimately make that decision.

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