Upholding a decision issued by an Administrative Law Judge, the New York State Tax Appeals Tribunal has held that an individual did not have personal responsibility for the unpaid sales and use taxes of a company for which he acted as an advisor and incorporator, as well as a landlord, but over which he had no actual authority or control. Matter of Tomonari Nomura, DTA No. 822181 (N.Y.S. Tax App. Trib, May. 12, 2011).
The alleged responsible party, Mr. Nomura, was president of Nomura Management, Inc., which held a lease on third-floor premises located on East 52nd Street in New York, NY, as well as other nearby premises on East 53rd Street which served as the company’s offices. In 2002, Nomura Management subleased the East 52nd Street premises, vacant at the time, to Masaaki Hirano, the manager of a restaurant located on the first floor of the same building, for use as a bar. Mr. Nomura also generally assisted Mr. Hirano, who did not speak English and initially lacked the proper immigrant status to obtain credentials to engage in business in the U.S. Mr. Nomura served as the initial incorporator of Mr. Hirano’s company, called Queen Group, Inc., opened a bank account for the business, and provided advice on tax filing obligations, including a recommendation of an accountant. He was listed on Queen Group’s initial federal income tax return as the owner of 100% of its stock, but the subsequent returns for 2002 through 2004, including federal and New York State and New York City returns, list Mr. Hirano as owning 100% of the stock.
Nomura Management was paid rent, and additional amounts for building maintenance and repairs, and wages were paid to Mr. Hirano, but no payments were made by Queen Group to Mr. Nomura individually, or to Nomura Management for anything other than rent or building maintenance and repairs. Mr. Nomura also assisted Mr. Hirano in opening another bar in 2001 at the East 53rd Street premises to which Nomura Management held the leasehold.
The Department conducted a field audit, and assessed sales and use tax against Queen Group, and personal liability for those taxes against Mr. Nomura. The Department relied in part on statements that Mr. Hirano’s attorney had told the auditor that all records were transferred to Mr. Nomura, who was “the business manager and partner in the business.” The Department also relied on a settlement agreement between Mr. Nomura and Mr. Hirano, giving Mr. Hirano exclusive use of the East 52nd Street premises in return for specified payments and waiver of any interest at the East 53rd Street premises.
After a hearing, an ALJ had held that Mr. Nomura was not a person under a duty to collect and remit sales and use tax for Queen Group, since there was no evidence he had any connection with the business beyond incorporating it, providing some advice, and signing the initial corporate tax return.
The Tribunal affirmed, finding it clear that Mr. Nomura had met his burden of proving he was not responsible. The Tribunal, like the ALJ, appeared to give substantial weight to Mr. Nomura’s “credible” testimony that he was not an officer or owner, that he incorporated the business as a favor, and that he thereafter transferred all the stock to Mr. Hirano. The Department established no check-signing authority, no benefits that inured to Mr. Nomura, and no evidence of any kind that he was a signatory on bank accounts or that he received any wage or salary or anything other than lease payments.
The Tribunal gave short shrift to the Department’s arguments based on its claim that Mr. Hirano had informed the auditor that Mr. Nomura had managed the business, noting that the argument was based not only on hearsay — out-of-court statements introduced for the facts contained therein — but on double hearsay: the auditor testified concerning statements that Mr. Hirano’s representative had made about what Mr. Hirano had said. The Tribunal also rejected the Department’s attempt to rely on the settlement agreement, despite broadly worded descriptions of Mr. Nomura and the capacity in which he was signing, finding that the agreement itself dealt only with cancellation of one lease and entry into another, and did not indicate that Mr. Nomura and Mr. Hirano were business partners.
Additional Insights. While it can be difficult to establish lack of personal responsibility for sales tax, this case demonstrates it is indeed possible and that sometimes the Department appears to reach too far in its attempt to find personal liability. At least as described in the Tribunal decision, the connection between Mr. Nomura and the business of Queen Group seems quite remote. He was not an officer, owner, or employee; he signed no checks; he received no income other than as landlord; and there seemed to be no evidence of any real connection. The attempt to rely on statements purportedly made by a representative for Mr. Hirano to the auditor — without any supporting documentary evidence — seems particularly weak. Although hearsay evidence can be admissible in administrative hearings — unlike formal court proceedings, where such evidence is generally barred — it can be of little value, and denies the opposing party the ability to cross-examine. Here, in the absence of any real documentary evidence of Mr. Nomura’s involvement, he was absolved of personal liability.