Morris v. New York State Dept. of Taxation and Finance

• Decision Date: 22 October 1992
• Citation: 588 N.Y.S.2d 927,183 A.D.2d 5
• Parties: In the Matter of Joseph MORRIS, Petitioner, v. NEW YORK STATE DEPARTMENT OF TAXATION AND FINANCE et al., Respondents.
• Court: New York Supreme Court — Appellate Division

Page 927

588 N.Y.S.2d 927

183 A.D.2d 5

In the Matter of Joseph MORRIS, Petitioner, v. NEW YORK STATE DEPARTMENT OF TAXATION AND FINANCE et al., Respondents.

Supreme Court, Appellate Division Third Department.

Oct. 22, 1992.

Simon, Uncyk & Borenkind (Eli Uncyk, of counsel), New York City, for petitioner.

Robert Abrams, Atty. Gen. (Lew A. Millenbach, of counsel), Albany, for respondent New York State Dept. of Taxation and Finance.

Before MIKOLL, J.P., and YESAWICH, MERCURE, CREW and CASEY, JJ.

CREW, Justice.

Proceeding pursuant to CPLR article 78 (initiated in this court pursuant to Tax Law § 2016) to review a determination of respondent Tax Appeals Tribunal which partially sustained a sales and use tax assessment imposed under Tax Law articles 28 and 29.

Petitioner is the president of Sunshine Developers Inc., a Delaware corporation formed to purchase, own and operate boats. Petitioner's brother, Robert Morris (hereinafter Morris), and Morris' son, Drew, are Sunshine's only shareholders and Morris acts as Sunshine's secretary-treasurer. Sunshine's corporate offices are located in New Jersey. In April 1985, respondent New York State Department of Taxation and Finance (hereinafter the Department) issued a notice of determination and demand for payment of sales and use taxes due in the amount of $76,390, plus interest and penalties, to petitioner, Morris and Sunshine. The tax assessed represented a compensating use tax imposed upon Sunshine's purchase of two boats, a 50-foot Hatteras Convertible purchased in June 1981 and a 60-foot Hatteras Convertible purchased in June 1984, from a dealer in New York.

Petitioner, Morris and Sunshine challenged this determination claiming that no tax was due because Sunshine was a nonresident corporation. The matter was placed before an Administrative Law Judge (hereinafter ALJ) who, following a hearing, determined that Sunshine was entitled to the nonresident exemption set forth in Tax Law § 1118(2) and, further, that the corporate veil should not be pierced to impose personal liability upon petitioner and/or Morris. The Department filed a notice of exception with respondent Tax Appeals Tribunal. Following oral argument, the Tribunal, inter alia, reversed the ALJ's determination, granted the Department's exception and granted the petition of Sunshine and Morris by finding them not liable for the tax imposed. Petitioner's petition was denied but the notice of determination issued to him was modified to reflect a credit in the amount of $19,470, representing sales and use tax paid on the 50-foot Hatteras Convertible in New Jersey. Petitioner thereafter commenced this CPLR article 78 proceeding seeking review of the Tribunal's determination.

Petitioner argues on review that the Tribunal erred in piercing the corporate veil and concluding that he was an equitable owner of the corporation, and, hence, personally liable for the tax due, denying him the nonresident exemption contained in Tax Law § 1118(2) and refusing to abate the penalty. These arguments will be addressed seriatim.

It is well settled that corporations are generally regarded as independent legal entities having an existence "separate and distinct from that of their shareholders" (Billy v. Consolidated Mach. Tool Corp., 51 N.Y.2d 152, 163, 432 N.Y.S.2d 879, 412 N.E.2d 934; see, Port Chester Elec. Constr. Corp. v. Atlas, 40 N.Y.2d 652, 656, 389 N.Y.S.2d 327, 357 N.E.2d 983) and, further, that one may lawfully incorporate a business for the very purpose of avoiding personal liability (see, Walkovszky v. Carlton, 18 N.Y.2d 414, 417, 276 N.Y.S.2d 585, 223 N.E.2d 6; Bowles v. Errico, 163 A.D.2d 771, 773, 558 N.Y.S.2d 734). Although generally reluctant to do so, New York courts are permitted to pierce the corporate veil in order "to prevent fraud or to achieve equity" (International Aircraft Trading Co. v. Manufacturers Trust Co., 297 N.Y. 285, 292, 79 N.E.2d 249), particularly in instances where the corporation is in reality a shell or dummy corporation controlled by an individual for his or her own purposes (see, Port Chester Elec. Constr. Corp. v. Atlas, supra, 40 N.Y.2d at 656-657, 389 N.Y.S.2d 327, 357 N.E.2d 983; 888 7th Ave. Assocs. Ltd. Partnership v. Arlen Corp., 172 A.D.2d 445, 569 N.Y.S.2d 16).

Here, Sunshine's corporate tax returns indicate that Sunshine was inactive and not engaged in any type of business from 1981 through 1983; although various deductions were taken on the 1984 return, no income was reported. Additionally, petitioner candidly testified that Sunshine was "just a shell corporation" and Morris stated that he did not believe that Sunshine had ever conducted any type of business. Morris also testified that there were very few board of directors' meetings and no meeting minutes were taken. Moreover, neither petitioner nor Morris could recall the details of Sunshine's incorporation, where the corporation had its bank account or the name of the carrier supplying the marine insurance on the boats. In view of the foregoing, we conclude that there is ample evidence to support the Tribunal's determination that Sunshine was nothing more than a "dummy" corporation.

As for the Tribunal's decision to pierce the corporate veil, impute equitable ownership to petitioner and hold him liable for the tax assessed, it is well established that a controlling shareholder may be held responsible for the corporation's obligations "where [the] corporation is being operated by [that] individual in such a manner as to render the corporate form a fiction" (Canario v. Lidelco, 782 F.Supp. 749, 759; see, Wm. Passalacqua Bldrs. v. Resnick Developers S., 933 F.2d 131, 138-139; Billy v. Consolidated Mach. Tool Corp., supra, 51 N.Y.2d at 162-163, 432 N.Y.S.2d 879, 412 N.E.2d 934; Chase Manhattan Bank ...