Facing a fairly unusual set of facts, a New York State Administrative Law Judge held that a "very young man with no business background or education" who was the sole owner and shareholder of a company was not a responsible person liable for sales and use tax owed by such company. Matter of P.S.R.N., Inc., et al., DTA Nos. 826140 & 826413 (N.Y.S. Div. of Tax App., Nov. 3, 2016).
Facts. Ryan W. Nessing was an employee of H. Parkin Saunders, an interior design business. Mr. Nessing was also the president and sole shareholder of P.S.R.N., Inc. ("PSRN"), a purchasing company operated by H. Parkin Saunders.
Mr. Nessing "was under the direction and control of Mr. Saunders in all his dealings with PSRN." At the time that Mr. Nessing first became involved with PSRN, he was only 19 years old, had no business background or education, and was primarily working for H. Parkin Saunders by running errands, answering the telephone, and folding sample products. Mr. Nessing never received a salary or any remuneration or capital distribution from PSRN.
Testimony from another H. Parkin Saunders employee, supported by several documents in the record, established that both H. Parkin Saunders and PSRN were actually under the "complete control" of Mr. Parkin Saunders, and Mr. Saunders did not delegate duties to any of his employees (including Mr. Saunders' personal assistant and bookkeeper, who purportedly handled the business operations of PSRN). While Mr. Nessing signed checks, tax returns, and corporate documents for PSRN, he did so at the direction of Mr. Saunders. Further, Mr. Saunders directed Mr. Nessing to sign a shareholder resolution that elected Mr. Saunders as a director and chief executive officer of PSRN with responsibility over the corporate bank account, and Mr. Saunders transferred and withdrew money from the PSRN account.
PSRN filed various sales and use tax returns (many of which were signed by Mr. Nessing) without remitting tax. The Department subsequently issued PSRN several notice and demands related to such returns in 2010 and 2011 (the "PSRN Notices"), and also issued notices of determination to Mr. Nessing as a responsible person of PSRN on November 29, 2011 (the "Responsible Person Notices").
Thereafter, PSRN and Mr. Nessing apparently made partial payments related to the PSRN Notices and Responsible Person Notices and, on or about August 24, 2012, PSRN and Mr. Nessing filed an application for credit or refund of approximately $27,000 in sales and use tax (the "Refund Application"). The Refund Application provided no supporting documentation substantiating that the amount requested to be refunded was actually paid, but PSRN and Mr. Nessing nonetheless asserted that "moneys had been paid and that it was the [Department's] responsibility to know how much was paid."
The Refund Application included an explanation that Mr. Nessing "was young and naive when [PSRN] was put in his name" and "was being used without knowing or understanding what was being done in his name." The Department ultimately notified PSRN and Mr. Nessing that substantive consideration of the Refund Application would be deferred until the full amounts identified in the PSRN Notices and Responsible Person Notices were paid.
Separately, on or about February 14, 2014, PSRN and Mr. Nessing filed a petition seeking a redetermination or refund of the taxes set forth in the PSRN Notices; such petition was subsequently amended to also protest the Responsible Person Notices. Mr. Nessing contended that he was not a responsible person, and that despite his status as the sole shareholder of PSRN, he had no meaningful control over the business's affairs. Thereafter, through the research of a Department employee, it was determined that liabilities related to only one of the Responsible Person Notices issued to Mr. Nessing had been paid in full.
Tax Law. Tax Law 1133(a) imposes upon any "person required to collect" sales and use tax personal liability for the tax imposed, collected, or required to be collected by a corporation. Persons "required to collect" sales and use tax are commonly referred to as "responsible persons," and are defined to include corporate officers and employees who are under a duty to act for such corporation in complying with the sales and use tax laws. The determination of whether a person is a responsible person for a corporation depends "on the particular facts involved." 20 NYCRR 526.11(b)(2). This regulation specifically identifies factors to be considered when determining whether a person is a responsible person for a corporation, including whether such person was authorized to sign the corporate tax return, was responsible for managing or maintaining the corporate books, or was permitted to generally manage the corporation.
The Decision. The ALJ first determined that he lacked jurisdiction over the PSRN Notices and all but one of the Responsible Person Notices because: (1) no hearing rights attached to the PSRN Notices because such notices related to sales and use tax that was self-assessed on returns filed by PSRN; (2) the period during which the Responsible Person Notices could be challenged without paying such notices had closed; and (3) only a refund claim related to a Responsible Person Notice that was paid in full may be considered by the Division of Tax Appeals, and only one Responsible Person Notice had been paid in full.
With respect to the one Responsible Person Notice found to be under the ALJ's jurisdiction, however, the ALJ determined that Mr. Nessing was not liable as a responsible person for PSRN's sales and use tax. Applying the Department regulation and applicable case law, the ALJ framed the issue under consideration as whether Mr. Nessing "had or could have had sufficient authority and control over the affairs of" PSRN to be considered a responsible person. The ALJ concluded that Mr. Nessing lacked such authority and control over PSRN, based on the "very detailed description of the business operations" of PSRN provided by documentary and testimonial evidence showing that Mr. Nessing was "under the direction and control" of Mr. Saunders in all of his dealings with PSRN.
On initial consideration, it would seem unlikely that the president and sole shareholder of a corporation could be found not to be a responsible person of such corporation. However, based on the evidence presented in this case, the ALJ appears to have reached a fair conclusion in determining that Mr. Nessing was not a responsible person for PSRN. Through individual testimony and supporting documentary evidence, Mr. Nessing was able to show that the only meaningful connection he had to the business of PSRN was to sign legal documents at the direction of his boss (who actually controlled the activities of PSRN). While this case presents a unique set of facts, and still may be appealed by the Department, it illustrates that a responsible person assessment may be overcome with sufficient testimonial and documentary evidence.