People v. Lyon

• Decision Date: 31 August 1981
• Docket Number: No. 1482-80,Nos. 1483-80,1482-80,s. 1483-80
• Citation: 442 N.Y.S.2d 538,82 A.D.2d 516
• Parties: The PEOPLE, etc., Appellant, v. Charles L. LYON, Respondent. (Ind.) (and 11 other titles under Ind.through 1493-80).
• Court: New York Supreme Court — Appellate Division

Page 538

442 N.Y.S.2d 538

82 A.D.2d 516

The PEOPLE, etc., Appellant, v. Charles L. LYON, Respondent. (Ind. No. 1482-80) (and 11 other titles under Ind. Nos. 1483-80 through 1493-80).

Supreme Court, Appellate Division,

Second Department.

Aug. 31, 1981.

Robert Abrams, Atty. Gen., New York City (Elliott S. Greenspan, Moses Weintraub and William F. Dowling, New York City, of counsel), for appellant.

Pascarella, Dehler, Illmensee & Carra, Garden City (Charles T. Theofan, Garden City, of counsel), for respondent.

Before DAMIANI, J. P., and MANGANO, RABIN and GULOTTA, JJ.

GULOTTA, Justice.

This case poses the question, inter alia, of whether a larceny indictment will lie against the named defendants for their alleged failure to remit sales taxes and/or employees' personal withholding taxes collected by them on behalf of the State of New York. We answer this question in the affirmative, and therefore reverse so much of the order of Criminal Term as granted, in part, the defendants' motions to dismiss.

On or about June 20, 1980, 12 indictments were returned against defendant-respondent Charles L. Lyon, individually and as a codefendant with 11 closely held corporations (the corporate defendants) of which he is an officer. Lyons, a Suffolk County entrepreneur, had apparently come under investigations for various tax offenses arising out of his multi-faceted business operations, and the State Department of Taxation and Finance had apparently compiled sufficient evidence against the several codefendants to warrant presentation of the case before a Grand Jury. After hearing the evidence (which included Lyons' testimony) the Suffolk County Grand Jury returned indictments against the various codefendants for (1) larceny (founded upon the defendants' intentional failure to pay over sales and withholding tax revenues belonging to the State), (2) the failure to file corporate franchise tax reports, and (3) the evasion of personal income taxes. On the defendants' motions to dismiss, Criminal Term dismissed each of the counts against the individual defendant on the ground that his voluntary appearance before the Grand Jury pursuant to a knowingly executed waiver of immunity rendered him immune from prosecution since "the transcript unequivocally shows that the waiver was not in fact sworn to before the Grand Jury, as is required by statute", while the remaining larceny counts were dismissed on the ground that the State was not the "owner" of the tax moneys collected by the corporate defendants, as the term "owner" is defined in article 155 of the Penal Law. However, so much of the remaining indictments as charged the corporate defendants with one count each of failing to file a New York State corporation franchise tax report were sustained by the motion court and were consolidated for purposes of trial. The People appeal from so much of this order as granted, in part, the respective motions to dismiss.

Defendants were indicted for varying degrees of larceny on the theory that they had collected withholding and sales tax revenues as trustees for the State of New York, and that their subsequent failure to remit said revenues constituted a theft of property within the meaning of section 155.05 of the Penal Law. This statute provides, in pertinent part:

"1. A person steals property and commits larceny when, with intent to deprive another of property or to appropriate the same to himself or to a third person, he wrongfully takes, obtains or withholds such property from an owner thereof.

"2. Larceny includes a wrongful taking, obtaining or withholding of another's property, with the intent prescribed in subdivision one of this section, committed in any of the following ways:

"(a) By conduct heretofore defined or known as common law larceny by trespassory taking, common law larceny by trick, embezzlement, or obtaining property by false pretenses".

The term "owner" is defined in section 155.00 (subd. 5) of the Penal Law as:

"any person who has a right to possession * * * superior to that of the taker, obtainer or withholder [thereof]".

Clearly, the State can qualify as an "owner" of property, as section 10.00 (subd. 7) of the Penal Law includes the "government" within its definition of "person". However, while the State may qualify as an "owner" of property in the general sense, the question to be determined is whether the defendants herein were trustees of the State for present purposes and whether the State was the owner of the sales and withholding tax revenues which had been collected by them, for while a trustee who withholds money held in trust commits a larceny by embezzlement (see People v. Yannett, 49 N.Y.2d 296, 425 N.Y.S.2d 300, 401 N.E.2d 410; see, also, People v. Chesler, 50 N.Y.2d 203, 428 N.Y.S.2d 639, 406 N.E.2d 455, affg. 71 A.D.2d 792, 418 N.Y.S.2d 962; People v. Robinson, 284 N.Y. 75, 29 N.E.2d 475), a mere debtor, who occupies no such relationship to his creditor, does not. Accordingly, if the only relationship which existed in the instant case was that of "debtor and creditor" or, for that matter, "constructive trust", there could be no larceny indictment (see People v. Yannett, supra; People v. Epstein, 245 N.Y. 234, 157 N.E. 121). The pertinent Tax Law provisions are instructive in this regard. Thus, section 675 (dealing with an employer's liability for withholding taxes) states:

"Every employer required to deduct and withhold tax under this article is hereby made liable for such tax. For purposes of assessment and collection, any amount required to be withheld and paid over to the tax commission, and any additions to tax, penalties and interest with respect thereto, shall be considered the tax of the employer. Any amount of tax actually deducted and withheld under this article shall be held to be a special fund in trust for the tax commission. No employee shall have any right of action against his employer in respect to any moneys deducted and withheld from his wages and paid over to the tax commission in compliance or in intended compliance with this article." (Emphasis supplied.)

Similarly, section 1132 (dealing with the collection of sales taxes) provides, inter alia:

"(a) Every person required to collect the tax shall collect the tax from the customer when collecting the price, amusement charge or rent to which it applies. If the customer is given any sales slip, invoice, receipt or other statement or memorandum of the price, amusement charge or rent paid or payable, the tax shall be stated, charged and shown separately on the first of such documents given to him. The tax shall be paid to the person required to collect it as trustee for and on account of the state." (Emphasis supplied.)

Importantly for present purposes, these are not the only two instances in which a statute speaks of the creation of a "trust". Thus, article 3-A of the Lien Law establishes a trust fund over moneys received by an owner, contractor, or subcontractor in connection with the improvement of real property, while section 7-103 (subd. 1) of the General Obligations Law (formerly Real Property Law, § 233), states that money deposited as security for the rental of real property "shall continue to be the money of the person making such deposit or advance and shall be held in trust by the person with whom such deposit or advance shall be made and shall not be mingled with the personal moneys or become an asset of the person receiving the same" (see, also, 22 NYCRR 603.7603.15, 691.201022.5). Notably, section 7-103 has been held to transform the debtor-creditor relationship between a landlord and tenant with regard to a security deposit into a trust relationship by operation of law (see Mallory Assoc. v. Barving Realty Co., 300 N.Y. 297, 90 N.E.2d 468, rearg. den. 300 N.Y. 680, 91 N.E.2d 331; People v. Klinger, 165 Misc.2d 634, 1 N.Y.S.2d 449), and the unlawful retention of such money has been held sufficient to sustain an indictment for larceny (see People v. Klinger, supra; cf. Lien Law, § 79-a). There is, however, little case law defining the precise nature of the statutory relationship spelled out in sections 675 and 1132 of the Tax Law.

In Canale v. New York Dept. of Taxation & Finance, 84 Misc.2d 786, 378 N.Y.S.2d 566, the plaintiff, the receiver of an inn during the pendency of a mortgage foreclosure action, sought to obtain a refund from the State Department of Taxation and Finance upon surrender of the inn's liquor license, but the State refused on the ground, inter alia, that since the inn still owed sales and franchise taxes to the State, the latter, by virtue of such indebtedness, had the undoubted right to offset the amount of that refund against the taxes which were owing to it. The Court of Claims ultimately agreed with the State, stating (pp. 789-790, 378 N.Y.S.2d 566):

"The court notes that sales taxes are collected by a vendor or retailer as a trustee (Tax Law, § 1132, subd. and as such, the moneys so collected do not become the vendor's property, but rather belong to the State as the legal beneficiary of the trust. Accordingly, by virtue of the trust character of the sales tax aspect here, the State's right to setoff is obviously superior to any rights of the lienors and creditors." (Emphasis supplied.)

More recently, the Court of Appeals has observed in another context that the right of the State Tax Commission to assess a civil penalty against an employer for his "willful" failure to remit personal withholding taxes (see Tax Law, § 685, subd. turns on whether the failure to remit was "consciously and voluntarily done with knowledge that as a result, trust funds belonging to the Government not be paid over", and that "money actually deducted was required to be held as a 'special fund in trust for the tax commission'," citing section 675 of the Tax Law (Matter of Levin v. Gallman, 42 N.Y.2d 32, 34, 396 N.Y.S.2d 623, 364 N.E.2d 1316, emphasis supplied; see, also, Matter of MacLean v. State Tax Comm.,...