A wife who was the sole shareholder of a corporation, but who was not involved in any aspect of the management or operations of the company, was nonetheless held to be a responsible person under Tax Law § 1131(1) and was personally liable for the company’s sales tax liability. Matter of Jessie Luongo, DTA Nos. 822823 & 822517 (N.Y.S. Div. of Tax App., Apr. 28, 2011).
Tax Law § 1131(1) provides that persons required to collect sales and use tax shall include, among other persons, any officer, director, or employee of a corporation, or any member of a partnership or limited liability company. Tax Law § 1133(a) imposes personal liability on any individual required to collect tax under § 1131(1).
the question of responsibility hinged on whether the individual had or could have had sufficient authority and control over the affairs of the corporati on to be considered responsible for the ensuing ta x liabilities.
Mrs. Luongo was the sole shareholder of Fifth Avenue Corporation, a company formed to acquire the assets of a bankrupt holding company that had operated the Tuscan Grill restaurant in Manhattan, of which her husband had been the CEO. As a condition of the creditors’ approval of the acquisition of the assets of the bankrupt company by Fifth Avenue, the creditors required that Mrs. Luongo’s husband not be a shareholder in the acquiring company. Mrs. Luongo became the sole shareholder of Fifth Avenue, but upon its formation, she immediately appointed her husband as the sole board member, and he appointed himself as president, treasurer, and secretary of the company. As the sole officer and board member, Mrs. Luongo’s husband was the sole signatory on Fifth Avenue’s bank accounts, hired and fired all of the employees, and was in charge of the management and operations of the corporation. He was identified by the company in correspondence with the Department as a responsible person for sales tax purposes. Mrs. Luongo did not participate in the business or operations of Fifth Avenue.
On audit, the Department determined that the company had underreported gross sales on its sales tax returns, and issued assessment notices for sales tax to both the company and Mrs. Luongo. The Department claimed that as the sole owner of the Fifth Avenue Corporation, Mrs. Luongo was a responsible person, and was therefore personally liable for the company’s sales tax liability. Mrs. Luongo argued that she was not personally liable because she was not an officer or employee, and had no involvement in the company’s business operations.
The ALJ, citing Matter of Ianniello, DTA Nos. 805106 & 806698 (N.Y.S. Tax App. Trib., Nov. 25, 1992), held that the question of responsibility hinged on whether the individual had or could have had sufficient authority and control over the affairs of the corporation to be considered responsible for the ensuing tax liabilities. The ALJ agreed that the facts that Mrs. Luongo had no signatory authority over the company’s bank accounts, did not sign any tax returns for the company, and was never involved in the operations of the company, were important facts to consider. Nonetheless, the ALJ found that as the sole shareholder, Mrs. Luongo had a fiduciary duty to the corporation and the legal authority to act for it in complying with the sales tax laws.
(“[P]etitioner’s duty as the sole shareholder did not cease at the appointment of the board, and at all times, she had the authority and control, by mere virtue of her complete ownership, to oversee the decisions of [her husband] in the running of Fifth Avenue, or act to remove him if he was not acting in the best interest of the corporation.”) The ALJ also found Mrs. Luongo’s testimony lacked credibility, and noted that by designating her as the sole shareholder, she and her husband had managed to avoid the Bankruptcy Court’s ruling that it would not approve the sale if her husband was a shareholder. The ALJ held that Mrs. Luongo was personally liable for the company’s sales tax liability.
Additional Insights. Although not binding precedent, the ALJ’s decision illustrates the Department’s policy of creating a “per se” personal liability for the sole owner of a corporation, whether or not the individual chooses to participate in the business operations. As the ALJ noted, it is often the case that in closely held family businesses, a family member who is a sole shareholder may take a hands-off approach and appoint a spouse or other close family member to run the company, but that does not relieve the shareholder of his or her fiduciary duty to oversee the running of the company. Although the determination of whether an individual is responsible for a corporation’s tax collection obligations is inherently a factbased one, in cases where a corporation has only one owner, it is likely that sole ownership of a business gives the owner the requisite authority and control over the corporation’s affairs to be personally liable for the corporation’s sales tax liability.