In Matter of David Steinberg, DTA No. 822971 (N.Y.S. Div. of Tax App., Sept. 9, 2010), an Administrative Law Judge held the petitioner, a founder and Chief Executive Officer of a publicly traded company, to be personally liable for the company’s outstanding sales and use tax. While the legal principles may be unremarkable, the case stands as a reminder to senior executives that they remain personally liable for unpaid taxes, even in a large company with many employees, and the risks of responsible officer liability are not limited to those who operate small businesses.
New York law, like that of most other states, imposes personal liability for any sales tax that was or should have been collected. The class of persons who can be held personally liable “include[s] any officer, director or employee of a corporation or of a dissolved corporation, any employee of a partnership, any employee or manager of a limited liability company, or any employee of an individual proprietorship who as such officer, director, employee or manager is under a duty to act for such corporation, partnership, limited liability company or individual proprietorship . . . and any member of a partnership or limited liability company.” Tax Law § 1131(1). The many cases dealing with responsible officer liability provide that simply holding the title of corporate officer does not necessarily impose personal liability, and that each case must be determined based upon the particular facts and circumstances. The cases have considered such factors as whether an allegedly responsible person was authorized to sign the corporation’s tax return; was generally able to manage the corporation; was responsible for maintaining books and records, paying bills, hiring and firing; and could have ensured that the proper tax was collected and remitted, whether or not he or she actually did so. It is also well established under New York law that someone who has sufficient authority to be considered a person under a duty to collect and remit tax cannot delegate that responsibility.
In Steinberg, the petitioner was the founder of InPhonic, Inc., an online phone and service provider that sold devices and accessories, as well as service plans on behalf of the major telephone carriers. Before 2004, it had been a privately held company, and Steinberg had owned or controlled 25% or more of its stock. After an initial public offering in November 2004, Steinberg’s ownership decreased to approximately 15% and later to 10%. Steinberg served as the company’s chief executive officer and board chairman, and was a member of its mergers and acquisitions committee. He acknowledged responsibility for day-to-day management, had access to books and records and was authorized to make bank deposits, sign tax returns and checks, and hire and fire employees. Thousands of checks were issued during the two-year period at issue; those over $50,000, and later $100,000, required Steinberg’s signature in addition to that of another employee. The company had an in-house tax department and relied upon large outside accounting firms. The tax personnel reported to the CFO who in turn reported to Steinberg.
While conceding his ultimate authority over the company’s operations, Steinberg pointed out that, given the size of the company and the volume of transactions, he could not as a practical matter personally oversee all aspects of the company’s operations, and he relied upon those who reported to him. He also argued that, under the Sarbanes-Oxley Act of 2002, the company’s internal audit functions and tax firms were handled by different outside firms, and that his direct interaction with the operating finance employees was “discouraged if not prohibited.”
The ALJ gave short shrift to the argument that Steinberg was relying on others. He found that the petitioner clearly had a duty to act on behalf of the corporation to ensure that taxes were collected and remitted, and that “[h]is decision to rely on others and not be directly involved in tax matters does not relieve him of liability.” While the company was a large organization, the ALJ found no evidence that Steinberg lacked authority, that information was withheld from him or that he was misled, or that he was “thwarted or precluded” from exercising his responsibilities. He was therefore held personally liable for the unpaid tax.
No senior company executive – no matter how large or secure the company seems – should forget that the tax law imposes personal liability for unpaid sales and use taxes. While the decision does not provide any information on why the company failed to pay the underlying sales and use taxes, press reports indicate that InPhonic, which had been heralded as Number 1 on the 2004 Inc. 500 list of the nation’s fastest-growing private companies, filed for Chapter 11 protection in November 2007 after agreeing to sell its assets to a private equity firm. Jason Del Rey, Former Inc. 500 Standout InPhonic Files for Bankruptcy, Nov. 9, 2007. The fact that it was a large company, with many layers of staff and outside experts responsible for assuring compliance with the sales tax law, provided no protection against personal liability for the person in charge. It remains very difficult to establish that a senior executive not only did not but could not have ensured that the taxes were collected and remitted. The circumstances of one recent case where such a showing was successfully made involved a demonstration that organized crime had so dominated and controlled the company’s operations that the former owner literally had no ability to properly pay the taxes, Matter of Frank A. Marchello, DTA No. 821443 (N.Y.S. Div. of Tax App., Nov. 19, 2009) – a rare circumstance and a set of facts unlikely to provide much benefit to a corporate executive charged with personal responsibility for unpaid sales taxes. A request has been made for an extension of time to file an exception to the Steinberg decision, so there may be further developments.