MacLean v. State Tax Commission

• Decision Date: 19 April 1979
• Citation: 415 N.Y.S.2d 492,69 A.D.2d 951
• Parties: In the Matter of James MacLEAN, Petitioner, v. STATE TAX COMMISSION, Respondent.
• Court: New York Supreme Court — Appellate Division

Page 492

415 N.Y.S.2d 492

69 A.D.2d 951

In the Matter of James MacLEAN, Petitioner, v. STATE TAX COMMISSION, Respondent.

Supreme Court, Appellate Division, Third Department.

April 19, 1979.

Rapport & Meyers, Hudson (Victor M. Meyers, Hudson, of counsel), for petitioner.

Robert Abrams, Atty. Gen. (Maurice K. Peaslee, Albany, of counsel), for respondent.

Before GREENBLOTT, J. P., and KANE, MAIN, MIKOLL and HERLIHY, JJ.

MEMORANDUM DECISION.

Proceeding pursuant to CPLR article 78 (transferred to this court by order of the Supreme Court at Special Term, entered in Albany County) to review a determination of the State Tax Commission, which denied petitioner's application for the redetermination of a deficiency assessment of personal income taxes for the years 1966 and 1967.

Petitioner, an expert in stone erection contracting, operated his own business, James MacLean Construction Corporation. In the early 1960's, he started phasing out his own business in order to devote more time to the operation of a farm that he owned in Columbia County. In 1962, petitioner's son Donald formed the MacLean Construction Corporation (hereinafter corporation). Petitioner was employed by the corporation during 1966 and 1967 as supervisor of the stone erection for the Ford Foundation Building in New York City, one of two projects in which the corporation was involved. Due to the fact that the corporation underbid this job, it soon ran into financial difficulties.

The corporation failed to pay to respondent the employee withholding taxes due for 1966 and 1967 as required by section 674 of the Tax Law. This resulted in the respondent taking action against petitioner individually under section 685 (subd. (g)) of the Tax Law to collect as a penalty the amount of the taxes unpaid, which exceeded $17,000. Following a hearing, the notice of deficiency against petitioner was sustained. This article 78 proceeding ensued and subsequently was transferred to this court.

Subdivision (g) of section 685 of the Tax Law provides that "(a)ny person required to collect, truthfully account for, and pay over the tax imposed * * * who willfully fails to collect such tax or truthfully account for and pay over such tax * * * shall * * * be liable to a penalty equal to the total amount of the tax evaded * * *." Subdivision (n) of the same section defines the term "person" to include "an officer or employee of any corporation * * * who * * * is under a duty to perform the act in respect of which the violation occurs." Petitioner in this proceeding maintains that he is not a "person" required to collect and pay over withholding taxes due from the corporation and, even if found to be such a "person", that he did not "willfully" fail to collect and pay over the taxes due.

This court recently held in Matter of Malkin v. Tully (65 A.D.2d 228, 412 N.Y.S.2d 186 (1978)) that the question of whether or not someone is a "person" required to collect and pay over withholding taxes is a factual one. Factors which should be considered are whether the petitioner signed the tax return, derived a substantial part of his income from the corporation, or had the right to hire and fire employees (Id.). In the instant case, the record discloses that, although petitioner did not own any stock in the corporation nor contribute any capital thereto, he did have authority to hire employees for the project he was supervising and derived the major portion of his taxable income for 1966 and 1967 from the corporation. Petitioner was also authorized to sign corporate checks and received a salary from the corporation during the years in question equal to that paid his son Donald, the president and sole stockholder.

A determination of the Tax Commission should not be disturbed unless shown to be erroneous, arbitrary or capricious (Matter of Liberman v. Gallman, 41 N.Y.2d 774, 777, 396 N.Y.S.2d 159, 160, 364 N.E.2d 823, 825; Matter of Grace v. New York State Tax Comm., 37 N.Y.2d 193, 195-196, 371 N.Y.S.2d 715, 717-718, 332 N.E.2d 886, 888-889), and we believe that the respondent was not unreasonable in finding that petitioner was a "person" within the meaning of section 685 of the Tax Law.

Turning to whether or not petitioner willfully failed to collect and pay over the withholding taxes due, the test to determine willfulness is " whether the act, default, or conduct is consciously and voluntarily done with knowledge that as a result, trust funds belonging to the Government will not be paid over but will be used for other purposes" (Matter of Levin v. Gallman 42 N.Y.2d 32, 33-34, 396 N.Y.S.2d 623, 624, 364 N.E.2d 1316, 1317). The term "willful" does not require an intent to deprive the Government of its money, but only something more than accidental nonpayment (Id.). Knowledge that withholding taxes have not been remitted and a failure to investigate or correct this mismanagement of corporate funds is enough to constitute willful conduct (Kalb v. United States, (2nd Cir.) 505 F.2d 506, 511, cert. den. 421 U.S. 979, 95 S.Ct. 1981, 44 L.Ed.2d 471; see Hartman v. United States, (8 Cir.) 538 F.2d 1336, 1341).

Respondent could reasonably infer that petitioner, who was supervisor of the underbid project with authority to write checks and hire personnel, was aware that the withholding taxes were not being paid. Since the burden of proof is on the taxpayer...