Establishing responsible officer liability for failure to withhold or remit employee withholding taxes has generally received less administrative and judicial attention than responsible officer liability in the sales tax context. Whether and how business owners may be determined to be responsible officers for employee withholding taxes are the subjects of a recent Administrative Law Judge determination. The ALJ held that a business owner was a responsible person for the collection and payment of employee withholding taxes, despite facts in the record tending to demonstrate that the individual did not exert complete control over the company’s finances. Matter of Christopher Black, DTA No. 828015 (N.Y.S. Div. of Tax App., July 25, 2019).
Facts. Christopher Black was the president and majority owner of New England Construction Company, Inc. (“NECC”), a New York S corporation engaged in the construction business. Mr. Black began his career as an apprentice at a company called Nastasi White, which was engaged in the drywall and acoustical ceilings business. Several years after completing his apprenticeship, Mr. Black and his brother formed NECC, although Mr. Black still worked for Nastasi White, and Mr. Black’s brother was responsible for handling NECC’s finances.
Members of the Nastasi family later invested money in NECC in exchange for ownership interests. As a result of the investments, Mr. Black’s ownership interest in NECC was reduced to 51%, and four members of the Nastasi family owned the remaining 49%. Anthony Nastasi, one of the investors, later became involved in the financial management of NECC. According to Mr. Black, Anthony and the Nastasi family handled “[e]verything inside the office” related to the payment of taxes and other liabilities, while Mr. Black was responsible for the construction field work. Following some additional ownership changes, Anthony Nastasi held a 44% interest in NECC during the periods at issue, while Mr. Black continued to hold 51%. A third-party investor owned the remaining 5%.
As a result of over $4 million in debt owed by NECC to a Nastasi family business, Mr. Black signed an agreement with Mr. Nastasi that required Mr. Black to resign his position as president of NECC. After all of NECC’s outstanding debts were satisfied, Mr. Black would receive 25% of the company’s remaining assets and would be reinstated as president, with the remaining 75% of the assets going to Mr. Nastasi and the other third-party owner.
Both Mr. Black and Mr. Nastasi managed and exercised control over NECC. For example, NECC’s checkbook was kept in Mr. Nastasi’s office, which was not located in NECC’s offices. Mr. Nastasi maintained a stamp of Mr. Black’s signature at his office and would use it without consulting Mr. Black. NECC’s bank signature cards displayed both Mr. Black and Mr. Nastasi’s names, and one signature card stated explicitly that Mr. Black must approve withdrawals by Mr. Nastasi. Mr. Black also listed himself and Mr. Nastasi as responsible persons on NECC’s application to register as a New York State sales tax vendor. The Department’s internal records reflected that Mr. Black was NECC’s designated contact person for any issues relating to New York State corporation tax, sales tax, and withholding tax.
NECC’s combined withholding, wage reporting, and unemployment insurance returns for the periods at issue were signed either by Mr. Black or Mr. Nastasi. Although the returns reported amounts due, NECC only partially remitted some of the tax due for certain periods, and remitted no tax reported as due for other periods. Mr. Black claimed to have first become aware of NECC’s tax delinquencies two years before the periods at issue. In negotiations with the State for an “unspecified New York State tax debt,” Mr. Black completed a responsible person questionnaire indicating that he was responsible for managing the business, which he later claimed was inaccurate. The Department’s records showed multiple contacts with Mr. Black to discuss the outstanding amounts due.
The Internal Revenue Service (“IRS”) also sought to hold Mr. Black responsible for NECC’s withholding tax liabilities, but ultimately determined that Mr. Black was not a responsible person. An affidavit executed by Mr. Nastasi that was submitted in the IRS proceeding, and was also received into evidence before the ALJ in this case, stated that Mr. Black did not control corporate disbursements or financial responsibilities, or have authority over the payment of tax liabilities, and that Mr. Nastasi controlled the payment of NECC’s bills.
The Department issued three Notices of Deficiency to Mr. Black, asserting that he was a responsible person of NECC and therefore liable for the payment of approximately $380,000 in withholding taxes.
Determination. The ALJ found that Mr. Black was responsible for the collection and payment of employee withholding taxes on behalf of NECC. Pursuant to Tax Law § 685(g), a person required to collect and pay over withholding taxes who willfully fails to collect and pay over the tax is subject to a penalty equal to the sum of the amount of taxes that were not collected and paid over plus interest on that amount. Whether a person has a duty to collect and pay over withholding taxes is a factual inquiry that looks to “whether the individual had or could have had sufficient authority and control over the affairs of the corporation to be considered a responsible officer or employee.” Matter of Frank S. Constantino, DTA No. 802335 (N.Y.S. Tax App. Trib., Sept. 27, 1990) (emphasis added). Factors to be considered include: whether the person is an officer, director, or shareholder; whether the person has authority to write checks on behalf of the entity; the person’s knowledge of and control over the finances of the entity; the authorization to hire and fire employees; whether the individual signed tax returns for the company; and whether the person held himself out to third parties as a responsible person.
The ALJ first determined that Mr. Black was a responsible person due to his status as incorporator, president, CEO, director, and 51% shareholder of NECC. The ALJ reasoned that “absent compelling circumstances” demonstrating that he had no actual authority, Mr. Black was a responsible person pursuant to Tax Law § 685(g). The ALJ rejected the argument that Mr. Nastasi’s control over the company precluded Mr. Black from exercising his fiduciary responsibilities, reasoning that Mr. Black could not escape responsibility merely because he, as a corporate officer, yielded his responsibilities and duties to another person. This conclusion was supported by the fact that Mr. Black continued to hold himself out to the Department and other New York State agencies as a responsible person while experiencing a financial benefit from the arrangement.
The ALJ then moved on to conclude that Mr. Black “willfully” failed to collect and pay over withholding taxes, making him liable for NECC’s withholding taxes due pursuant to Tax Law § 685(g). Although the ALJ recognized that corporate officers may make a “reasonable delegation” of the responsibility to ensure the proper payment of taxes, the ALJ determined that Mr. Black’s delegation of such responsibility was not reasonable in this case. According to the ALJ, Mr. Black’s inaction in the face of multiple tax deficiency notices from both state and federal authorities amounted to a reckless disregard of his duties, not merely an “accidental nonpayment.” The only relief provided to Mr. Black was the ALJ’s conclusion that Mr. Black was not a responsible person for any periods after Mr. Nastasi exercised his rights to buy Mr. Black’s ownership interest, which terminated Mr. Black’s role as president of NECC.
The ALJ’s determination is notable because it finds the responsible person test to be satisfied despite evidence in the record tending to demonstrate that Mr. Black did not exert actual control over the corporation’s finances. Indeed, the IRS found that Mr. Black was not a responsible person under a similarly worded statute, and an affidavit from Mr. Nastasi supported Mr. Black’s claims that he exercised no actual control over the corporation’s finances or tax responsibilities. The ALJ’s decision is also significant because it bases the finding of “willfulness” on Mr. Black’s unreasonable delegation of responsibility for ensuring the timely payment of taxes. Although delegation of responsibility for tax matters is a common practice in corporations, the ALJ found that Mr. Black’s inaction after becoming aware of serious tax delinquencies was sufficiently reckless to be considered willful.