The New York State Tax Appeals Tribunal has affirmed the decision of an Administrative Law Judge that an individual was liable for unpaid sales and use taxes and that he was collaterally estopped from relitigating the issue due to his entry of a guilty plea in a criminal proceeding in which he was charged with falsifying business records with fraudulent intent to avoid paying sales tax. Matter of Michael Silverstein, DTA Nos. 826824 & 826825 (N.Y.S. Tax App. Trib., Dec. 7, 2017).

Facts and Issues. The Department began an audit of one company engaged in the business of automobile sales, Crest Auto Leasing, Inc. ("Crest") for the period December 1, 1998, through November 30, 2007, having discovered that the last sales tax return filed by Crest was for the period ending August 31, 1998. During the course of the audit, a related entity, Metro Auto Leasing, Inc. ("Metro") was identified, and information was requested regarding Metro as well. After Metro and Crest failed to provide any information, the Department issued subpoenas for bank records and information from the Department of Motor Vehicles ("DMV"), including MV-50 forms, which are provided by the DMV to car dealers to record car sales; license plate data; registration data; and print-outs of information from DMV electronic records. Upon review of the third-party data, the Department determined that a number of MV-50 forms filed by Metro and Crest were incomplete and/or inconsistent, so it solicited information from other sources, including sending questionnaires to customers, and determined that Crest and Metro did not properly report their transactions to the DMV. Based on those preliminary findings, the matter was referred to the Revenue Crimes Bureau, which subsequently referred the matter to the Queens County District Attorney for potential criminal prosecution.

A criminal complaint and indictment were filed against Mr. Silverstein, Metro, and Crest. Pursuant to the investigation subsequently conducted, a search warrant was executed on Metro's and Crest's shared business premises, and records were obtained, including information about car sales, MV-50s, copies of checks, bank deposits, titles, and customers' insurance and driver's licenses.

To resolve the criminal matter, Mr. Silverstein entered into a plea agreement in October 2012 with the Queens County District Attorney's Office, which he signed individually and on behalf of Crest and Metro. Mr. Silverstein agreed to pay restitution for sales tax in the amount of $393,000 and signed an agreement acknowledging that the stated amount may not resolve all of the civil sales tax liability, which the Department remained free to seek to collect. Mr. Silverstein's plea agreement admitted, among other elements, that he acted "with the intent to defraud in order to avoid paying sales tax," and that he "knowingly and deliberately failed to cause Crest and Metro to report and remit sales tax" they had collected. During his court appearance to enter his guilty plea, Mr. Silverstein admitted that he was a responsible person for Crest and Metro.

Following the criminal proceeding, the Department again requested books and records from Metro and Crest, but received no response, so it conducted an audit based on the documentary evidence obtained from third parties and the records seized from the businesses in the execution of the search warrant. Two notices of determination were issued to Mr. Silverstein, seeking tax, interest, and penalties together totaling over $10.6 million. At the hearing held before an Administrative Law Judge, the auditor testified to the laborious reconstruction of 847 transactions and the audit method that was used, which reviewed and analyzed the DMV and customer information, matched third-party information to bank deposits and canceled checks in order to determine taxable sales, and excluded transactions where the auditor was unable to obtain documentation linking customer and vehicle information to a bank deposit.

ALJ Decision. The ALJ found that Mr. Silverstein's claim that he was not a responsible person was contradicted by his guilty plea in the criminal proceeding, and that under the doctrine of collateral estoppel he could not later argue the contrary. The ALJ also found that, even in the absence of collateral estoppel, the record supported a finding that

Mr. Silverstein was a person required to pay tax on behalf of the two businesses, and that he had failed to establish the contrary by clear and convincing evidence. She found that the audit method employed was reasonable, in the absence of both returns and the production of records despite written requests, and that the audit methodology was reasonably based on a variety of third-party records. In addition, she rejected a variety of other arguments, including that the assessments were time-barred, since no returns had been filed for the period; a challenge to the imposition of fraud penalties; and a claim that the amounts assessed were improper because they exceeded the amounts in the plea agreement, pointing to language in the plea agreement that specifically advised that the civil sales tax liabilities are not limited.

[T]he Tribunal agreed with the ALJ that Mr. Silverstein failed to meet his burden to show by clear and convincing evidence that he was not a person required to collect tax [and] that he was estopped from so claiming by his plea agreement . . . .

Tribunal Decision. The Tribunal affirmed the ALJ's decision in all respects. It recognized that the mere holding of corporate office does not per se impose liability for sales tax and that the law requires all surrounding circumstances to be considered, including status as an officer, knowledge and control over the financial affairs of the corporation, and whether the party had the requisite authority to ensure payment of the tax. However, the Tribunal agreed with the ALJ that Mr. Silverstein failed to meet his burden to show by clear and convincing evidence that he was not a person required to collect tax; that he was estopped from so claiming by his plea agreement, since the exact same issue was determined and resolved by his guilty plea; and that he had had a fair opportunity to litigate the issue during the criminal proceeding. The Tribunal also agreed with the ALJ that, even in the absence of estoppel, the record did not support an argument that Mr. Silverstein was not a responsible person, noting his status as a stockholder, officer and director, and authorized signatory for Crest, and his status as an officer and signatory to a banking agreement on behalf of Metro. The Tribunal also found that the audit method employed by the Department was reasonable and that Mr. Silverstein had failed to produce any testimony or business records in support of his contrary arguments.

were committed deliberately, knowingly, and with specific intent to violate the Tax Law, the Tribunal concluded that the Department met this burden by direct evidence, particularly Mr. Silverstein's admission to fraudulent conduct with the intent to defraud in order to avoid paying sales tax, as recited in his plea agreement. The Tribunal also agreed that, should the fraud penalty be successfully challenged on further appeal, the negligence penalty under Tax Law 1145(a)(1) would be proper, since, with regard to this penalty, the burden was on Mr. Silverstein to demonstrate failure to pay was due to reasonable cause and not willful neglect, and he offered no evidence in support of this position.

Finally, the Tribunal rejected the argument that the penalty violated the excessive fines clause (Art. I, 5) of the New York State Constitution. While lacking the power to hold that a statute is unconstitutional on its face, the Tribunal determined the penalty was not unconstitutional as applied, finding it was not grossly disproportionate to the seriousness of the offense, given the significant number of transactions for two corporate entities over many years, the amount of unreported tax, the effort expended in the audit, and the admission of an intent to commit fraud in the criminal proceeding.

ADDITIONAL INSIGHTS

Having admitted under oath that he committed fraud in an attempt to evade sales tax, and that he was a responsible party for the unpaid tax, the petitioner in this case obviously faced a heavy burden in avoiding the imposition of personal responsibility and civil penalties. While the amount of tax that was apparently at issue in the criminal proceeding, for which Mr. Silverstein agreed to pay restitution, was much more modest than that eventually assessed by the Department, the plea agreement clearly advised that the Department reserved the ability to pursue further collections, which was explicitly acknowledged by Mr. Silverstein in an exchange with the trial court during the plea proceedings.