State of New York OPINION Court of Appeals This opinion is uncorrected and subject to revision before publication in the New York Reports.
No. 86 In the Matter of Christopher Black, Appellant, v. New York State Tax Appeals Tribunal, et al., Respondents.
Henry M. Greenberg, for appellant. Owen Demuth, for respondents.
CANNATARO, J.:
On this appeal, we are asked whether the determination of the Tax Appeals Tribunal
challenged here was affected by an error of law. Specifically, petitioner and the dissenters
argue that the Tribunal employed an incorrect legal test in making its determination, under
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Tax Law § 685 (g), that petitioner was a person responsible for the collection and payment
of employee withholding taxes on behalf of New England Construction Company, Inc.
(NECC), a corporation of which petitioner was president and the majority shareholder, and
on behalf of which petitioner had repeatedly held himself out as being responsible for
payment of taxes. We conclude that the Tribunal committed no such error. Rather, in
resolving the question before it, the Tribunal properly considered whether petitioner had
the actual authority and effective power to pay the withholding taxes and, thus, was a
“responsible person” under section 685. Moreover, substantial evidence supports the
Tribunal’s determination that petitioner willfully failed to pay the withholding taxes.
I.
During the period at issue, petitioner was president and 51% shareholder of NECC,
which engaged in interior finish construction, including dry wall construction, acoustical
ceilings and mill work. Petitioner testified that he and his brother formed NECC in 1994
to have it certified as a minority-owned business enterprise (MBE). Petitioner and Frank
Nastasi, his former employer, agreed that petitioner could do “minority participation work”
for Nastasi’s corporation, Nastasi and Associates.
Petitioner’s brother left NECC after two years and petitioner acquired his shares. In
1995 or 1996, four individuals associated with Nastasi and Associates—including Anthony
Nastasi—invested in NECC, resulting in petitioner becoming a 51% shareholder and the
other four investors holding the remaining 49%. Anthony Nastasi ultimately became the
sole owner of Nastasi and Associates and bought out the interests of other investors in
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NECC, acquiring a 44% interest.1 In December 2005, petitioner entered into an agreement
with Nastasi and Associates acknowledging that NECC was indebted to the former for
more than $4 million. The parties agreed that, upon the written demand of Anthony
Nastasi, petitioner would resign as president of NECC and would be deemed to have sold
his shares to Anthony Nastasi for $26. All NECC assets remaining after satisfaction of its
debt were to be distributed to Anthony and his brother Tom Nastasi (70%), petitioner (25%)
and the remaining 5% to Lee. Petitioner would then acquire all outstanding shares for $75
and be immediately reinstated as president. Petitioner acknowledges that, by 2010, the
Nastasis had invested perhaps $6 million in NECC, while petitioner invested, at most,
$200,000 in the company.
Nevertheless, it was petitioner who represented NECC on tax matters before the
Department of Taxation and Finance (hereinafter “the Department”). In that capacity,
petitioner signed both the NYS-45 form (quarterly combined withholding, wage reporting
and unemployment insurance returns) for the quarter ending December 31, 2014, and a
check as payment for unemployment insurance amounts reported on that return. In
addition, petitioner signed NECC’s 2011 application to register for a sales tax certificate
of authority, on which he represented himself to the Department as the person who
“oversees all” of NECC’s “business activities.” Petitioner was also named as the sole
contact on the “business contact information” form submitted to the Department in August
1 The remaining 5% interest was owned by Richard Lee, another individual who was not involved in NECC’s management. -3- -4- No. 86
2014 with respect to corporation tax, sales tax and withholding tax. He also listed himself
as a “responsible person for [NECC]” in 2013 in connection with a sales and use tax audit
and the Department’s audit records show him as the “primary contact” during numerous
communications between NECC and the Department from February 2012 to February
2014. Similarly, in 2012, petitioner signed a “responsible person questionnaire” in
connection with a negotiated installment agreement to pay off outstanding tax debt. On that
form he averred that he (1) was responsible for the remittance of sales tax for NECC; (2)
participated in making significant business decisions; (3) was responsible for maintaining
and managing NECC; (4) managed NECC and had knowledge and control over its financial
affairs; (5) had the authority to pay or direct payment of NECC’s bills or other business
liabilities; (6) had the authority to act on behalf of the business with the Department; (7)
hired and fired employees; and (8) negotiated loans, borrowed money for the business and
guaranteed business loans. Petitioner also averred on the form that NECC checks were
signed by him in “all circumstances” and that he was involved in “all financial affairs
dealing with NEC[C’s] day to day business.”
Petitioner testified that, in February 2015, Anthony Nastasi requested that petitioner
complete a questionnaire provided by a carpenter’s union challenging NECC’s failure to
provide benefits to its unionized employees. Petitioner refused to fill out the form on the
advice of counsel, at which point Nastasi invoked the December 2005 agreement, acquired
petitioner’s shares and purported to fire petitioner. Anthony Nastasi submitted a letter to
the Department in April 2015 stating that petitioner had been relieved of his duties and
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petitioner signed an agreement of sale in May 2015 transferring his shares in NECC to
Nastasi and attached a letter of resignation.
Nonetheless, based on the documentation that petitioner had provided to the
Department holding himself out as having significant control over NECC’s financial affairs
and the authority to pay NECC’s tax obligations, the Department concluded that petitioner
was a “responsible person” of NECC within the meaning of Tax Law § 685 (g). The
Department issued notices of deficiency against petitioner, asserting withholding tax
penalties against him. Petitioner protested the notices of deficiency and the matter
proceeded to a hearing in August 2018 before the Division of Tax Appeals.
At the hearing, petitioner argued that his answers on the responsible person
questionnaire were inaccurate and designed solely to maintain NECC’s MBE certification.
Petitioner claimed that, when he repeatedly approached Nastasi about delinquent taxes,
Nastasi responded that the payment of taxes was Nastasi’s responsibility and that NECC
was Nastasi’s company. Petitioner further claimed that he had no actual authority to pay
the tax debts without Anthony Nastasi’s approval, and that he had no authority to issue
checks without Anthony Nastasi’s permission. In addition, petitioner stated that NECC’s
checkbook was kept in the office of Nastasi and Associates, and petitioner would travel to
that office once a week to sign checks prepared at Anthony Nastasi’s behest. Petitioner
further asserted that Nastasi kept a facsimile stamp of petitioner’s signature. This
testimony was corroborated by that of Mary Probst, NECC’s controller during the time
period at issue and an employee of petitioner at the time of the hearing, and Nastasi’s
attorney, Thomas Pillari. However, bank signature cards from 2012 indicated that
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petitioner could withdraw funds independently but that withdrawals by Nastasi required
petitioner’s approval.
In further support of his claims that he had misrepresented his role on the responsible
person questionnaire, petitioner presented evidence that, in 2014, the Port Authority of
New York and New Jersey had decertified NECC as an MBE based on proof that it was
“heavily dependent on another construction company, Nastasi & Associates, for financing,
staffing, management and daily operations,” as well as its conclusion that “Nastasi exerts
a substantial amount of control over the operations of [NECC].” The Port Authority
rejected as false petitioner’s claims that Nastasi was merely a silent partner.
Petitioner also pointed to the IRS’s determination that he was not personally liable
for unpaid withholding taxes assessed against NECC under federal law. In 2015, the IRS
issued petitioner a proposed assessment of penalties for NECC’s unpaid federal
withholding taxes. Petitioner protested that he lacked financial control over NECC. In
connection with petitioner’s protest, Nastasi submitted a declaration of trust fund
responsibility for NECC. Nastasi also submitted an affidavit asserting that petitioner
handled “the operating activities” of NECC but Nastasi alone controlled corporate financial
disbursements, including tax payments, and petitioner had no access to corporate checks
to make disbursements. Nastasi stated that petitioner “had signature authority on the
[corporate] bank account only to enable him to handle items related to running the
operations of [NECC]; his authority did not include payment of [NECC’s] accrued
liabilities, tax obligations or anything beyond the company’s general operations.” The IRS
accepted petitioner’s protest without elaboration.
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Notwithstanding these claims, an Administrative Law Judge for the Department
substantially upheld the state notices of deficiency, concluding that petitioner was a
“responsible person” under Tax Law § 685 (g) until his departure from NECC in February
2015 when Nastasi exercised his authority under the parties’ agreement. Upon appeal, the
Tax Appeals Tribunal affirmed. The Tribunal framed the issue as “whether petitioner
presented facts showing that [he] lacked control and authority over the affairs of NECC.”
It noted that the determination of whether an individual is a responsible person is factual,
turning on a variety of factors. The Tribunal concluded that petitioner was “under a duty
to collect and pay over withholding taxes” based upon the evidence that he was an officer
and majority shareholder of NECC, managed its field operations, had check signing
authority, filed tax returns on behalf of the company, had considerable economic interest
in NECC and held himself out as a responsible person to third parties, including the
Department. The Tribunal determined that petitioner’s testimony that his prior
representations were inaccurate failed to overcome this evidence. The Tribunal also found
that petitioner’s failure to pay withholding taxes was willful. Finally, although the Tribunal
agreed with petitioner that the relevant federal and state tax law provisions should be
construed in conformity with one another, it concluded that it was not required to give
deference to the IRS’s factual determinations regarding petitioner’s status as a responsible
person.
Petitioner then commenced this CPLR article 78 proceeding in the Appellate
Division, which confirmed the Tribunal’s determination (206 AD3d 1482 [3d Dept 2022]).
The Court rejected petitioner’s argument that the Tribunal’s determination was irrational
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in light of the IRS’s determination that petitioner was not a responsible person within the
meaning of the federal statute (see id. at 1483). In addition, the Court rejected the argument
that, “in finding petitioner had not demonstrated he lacked ‘authority and control’ rather
than ‘actual authority,’ the Tribunal employed a fallacious standard, and, as such,
substantial evidence analysis does not apply” (id. at 1484 n 3). The Court concluded that
substantial evidence supported the Tribunal’s determination that petitioner was a
responsible person who willfully failed to remit NECC’s withholding taxes, noting in
particular that “petitioner intentionally held himself out to third parties, as well as to the
Division of Taxation itself, as the contact person and responsible person for New York
taxes by signing state tax returns and checks accompanying the returns, executing a sales
tax certificate of authority listing himself as the corporation’s responsible person, filling
out the Division’s ‘Responsible Person Questionnaire,’ and maintaining communication
with the Department” (id. at 1485). Two dissenters would have annulled the Tribunal’s
determination on the ground that the Tribunal erred by purportedly focusing on whether
petitioner demonstrated that he “lacked control and authority over the affairs of [NECC],”
rather than whether petitioner had control over NECC’s finances (id. at 1488 [internal
quotation marks and citation omitted]).
Petitioner now appeals as of right under CPLR 5601 (a) based on the two-judge
dissent.
II.
Under Tax Law § 685 (g), a person may be held liable for the withholding taxes of
a corporation if the person is “required to collect, truthfully account for, and pay over the
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tax imposed” and “willfully fails to collect such tax or . . . willfully attempts in any manner
to evade or defeat the tax or the payment thereof.” As this Court has previously explained,
section 685 (g) essentially provides that “a person responsible for collecting and paying
taxes withheld from employees’ wages is liable for a 100% civil penalty if [that person]
willfully fails to collect and pay over the tax” (Matter of Levin v Gallman, 42 NY2d 32, 33
[1977]). Such a responsible person includes “an officer or employee of a corporation . . .
who . . . is under a duty to perform the act in respect of which the violation occurs” (Tax
Law § 685 [n]). Under the broad terms of this definition, more than one person can be a
responsible person under Tax Law § 685.2 Because section 685 (g) was modeled after 26
USC § 6672 (a) (see Matter of Levin, 42 NY2d at 33-34), the terms in the former are to be
interpreted in conformity with the latter unless a different meaning is clearly required (see
Tax Law § 607 [a]; Matter of Michaelsen v State Tax Commn., 67 NY2d 579, 583 [1986]).
Contrary to the assertions of petitioner and the dissent that the Appellate Division
and Tribunal violated the doctrine of federal conformity, review of the relevant case law
reveals that the standard employed below is the same in all relevant respects as that applied
by federal courts for determining whether an individual is a responsible person under 26
USC § 6672 (a). Thus, there was no compromise of the doctrine of federal conformity
here. Both the state and federal tests require that a person have, as the Tribunal put it, the
type of “control and authority over the affairs of” the corporation that would render the
2 We therefore reject any suggestion that evidence of Anthony Nastasi’s control over NECC’s finances alone is sufficient to absolve petitioner of liability under Tax Law § 685.
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person “under a duty to collect and pay over withholding taxes,” necessarily meaning that
the person had the actual authority and ability to pay the overdue taxes. The factors
considered by both state and federal courts in determining whether an individual is such a
responsible person clarify that the standard, even if not fully articulated in every case,
examines whether the individual had actual authority over the corporation’s financial
affairs such that the person had the ability or effective power to remit the overdue taxes.
The federal cases employ a non-exclusive list of factors in determining whether an
individual has significant control over a corporation’s finances. The factors tend to focus
on whether the individual
“(1) is an officer or member of the board of directors, (2) owns shares or possesses an entrepreneurial stake in the company, (3) is active in the management of day-to-day affairs of the company, (4) has the ability to hire and fire employees, (5) makes decisions regarding which, when and in what order outstanding debts or taxes will be paid, (6) exercises control over daily bank accounts and disbursement records, and (7) has check-signing authority”
(Vinick v United States, 205 F3d 1, 8 [1st Cir 2000], quoting Fiataruolo v United States, 8
F3d 930, 939 [2d Cir 1993]). Despite petitioner’s protestations to the contrary, holding
oneself out as a responsible person is a relevant factor under federal law (see Hochstein v
United States, 900 F2d 543, 548 n 1 [2d Cir 1990]). As in the state courts, no single factor
is determinative in the federal courts, and the totality of the circumstances must be
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considered (see Matter of Menik v Roth, 280 AD2d 702, 703 [3d Dept 2001]; Fiataruolo,
8 F3d at 939).3
Notably, the factors employed by the federal courts do not merely look to whether
the individual had authority over the finances of the corporation at issue but “divide into
the following three groups: (1) those that identify the [person’s] status within the
corporation, (2) those that identify [the person’s] involvement in the daily affairs of the
corporation, and (3) those that identify [the person’s] involvement in the financial affairs
3 The dissenters insist that all of the seven factors laid out in Vinick are “mandatory inquiries under federal law” and conclude that the Tribunal erred in failing to expressly consider each of those factors (dissenting op at 10). However, other federal courts also phrase the list differently and sometimes leave out certain factors, depending on their relevance to the particular case before the court (see e.g. Thosteson v United States, 331 F3d 1294, 1299 [11th Cir 2003], cert denied 540 US 1105 [2004] [“Indicia of responsibility include the holding of corporate office, control over financial affairs, the authority to disburse corporate funds, stock ownership, and the ability to hire and fire employees”]; Plett v United States, 185 F3d 216, 219 [4th Cir 1999] [listing the factors as “(1) served as an officer of the company or as a member of its board of directors; (2) controlled the company’s payroll; (3) determined which creditors to pay and when to pay them; (4) participated in the day-to-day management of the corporation; (5) possessed the power to write checks; and (6) had the ability to hire and fire employees”]; Barnett v IRS, 988 F2d 1449, 1455 [5th Cir 1993], cert denied 510 US 990 [1993] [looking to whether the individual “(i) is an officer or member of the board of directors; (ii) owns a substantial amount of stock in the company; (iii) manages the day-to-day operations of the business; (iv) has the authority to hire or fire employees; (v) makes decisions as to the disbursement of funds and payment of creditors; and (vi) possesses the authority to sign company checks”]; Hochstein, 900 F2d at 547 [“Courts consider several factors in determining whether an individual is responsible for collecting and paying withholding taxes, including the individual’s duties as outlined in the corporate bylaws, . . . ability to sign checks, . . . status as an officer or director, and whether (the individual) could hire and fire employees”]). In any event, because the dissenters go on to dismiss most of the factors set forth in Vinick as insufficient to assess whether a person has actual authority to pay taxes owing (dissenting op at 11-13), their insistence that all seven factors must be expressly considered by the Tribunal is puzzling at best. - 11 - - 12 - No. 86
of the corporation” (Vinick, 205 F3d at 8). Application of those factors is meant to resolve
the “crucial inquiry [of] whether the person had the ‘effective power’ to pay the taxes—
that is, whether [the person] had the actual authority or ability, in view of [the person’s]
status within the corporation, to pay the taxes owed” (id. [citation omitted]). Moreover,
the requisite “control may be shared by several people within a company, all of whom may
be found responsible for a tax delinquency,” and, while technical or titular authority is not
sufficient, “a person need not have the final word on which creditors are to be paid or how
funds are to be allocated” to be deemed a responsible person (Fiataruolo, 8 F3d at 939).
The factors applied by the Tribunal and appellate courts of this state serve the same
end and are derived from federal case law. Indeed, the case cited by the Appellate Division
for the list of factors relevant in this case, Matter of Malkin v Tully, compiled the list from
factors in federal cases (65 AD2d 228, 231 [1978]). Malkin described the relevant factors
as “whether the petitioner signed the tax return, derived a substantial part of his income
from the corporation, . . . had the right to hire and fire employees,” and “was authorized to
sign checks” (65 AD2d at 231 [citations omitted]). This Court endorsed the use of the
Malkin factors shortly after that case was decided (see Matter of MacLean v State Tax
Commn., 49 NY2d 920 [1980], affg on op below 69 AD2d 951, 951-952 [3d Dept 1979]).
Because “[t]he factual nature of the determination precludes an exhaustive list of factors”
(Matter of Basch v New York State Tax Commn., 134 AD2d 786, 787 [3d Dept 1987]), the
list of factors considered in the state courts has evolved over time, just as it has in the
federal courts. Additional relevant factors that have been considered include status as a
corporate officer, shareholder and signatory on corporate bank accounts (see Matter of
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Menik, 280 AD2d at 703; Matter of Hopper v Commissioner of Taxation & Fin., 224 AD2d
733, 737 [3d Dept 1996], lv denied 88 NY2d 808 [1996]), authority over the management
of the corporation’s affairs (see Matter of Menik, 280 AD2d at 703; Matter of Risoli v
Commissioner of Taxation & Fin., 237 AD2d 675, 676 [3d Dept 1997]), authority to direct
payment of corporate bills and to make payroll (see Matter of Fisher v State Tax Commn.,
90 AD2d 910, 911 [3d Dept 1982]; Matter of McHugh v State Tax Commn., 70 AD2d 987,
988 [3d Dept 1979]), and whether the individual has direct involvement in attempting to
resolve a corporation’s financial problems, including tax liabilities (see Matter of Risoli,
237 AD2d at 676; Matter of Martin v Commissioner of Taxation & Fin., 162 AD2d 890,
891 [3d Dept 1990]). As in the federal courts, holding oneself out as a responsible person
is also a relevant factor (see Matter of Martin, 162 AD2d at 891).
The list of factors that the state courts and the Tribunal consider may be more
extensive than that set forth in the federal cases on which petitioner relies and, certainly,
not every court mechanistically repeats and analyzes each of the factors in the same way
in every case, as the dissenters would require of the Tribunal. But, regardless of the
iteration, the essential question remains whether the person had the actual authority and
ability or effective power to pay the taxes owed. Or, as the Appellate Division has framed
the issue, consideration of the factors answers the question of whether the “petitioner had
the authority to act on behalf of the corporation . . . and was personally involved in the
financial affairs of the corporation during the audit period” (Risoli, 237 AD2d at 676).4
4 The dissenters do not dispute that our state appellate decisions pertaining to the responsible person test conform with federal law (dissenting op at 14), but they insist that - 13 - - 14 - No. 86
Here, as noted above, the Tribunal articulated the test as “whether petitioner
presented facts showing that [he] lacked control and authority over the affairs of NECC.”
While the phrase “control and authority over the affairs of NECC” is , perhaps, imprecise
because it could be interpreted to mean control over “daily field operations” without regard
to one’s effective control over financial affairs and ability to pay overdue taxes, the factors
the Tribunal considered make clear that it viewed the phrase as encompassing
consideration of both petitioner’s status in the corporation and whether petitioner had
control and authority over the finances of NECC such that he could have paid the taxes.
The Tribunal noted that “petitioner was an officer of NECC and its majority
shareholder, managed its field operations, had check signing authority, filed tax returns on
behalf of the company and had considerable economic interest in NECC,” as well as noting
that petitioner had held himself out to the Department as a responsible person and
negotiated a delay in the payment of overdue taxes because “he had to make payroll,” and
the Tribunal could not have applied the same test that is employed by the federal courts because the Tribunal did not cite federal case law (dissenting op at 8). Of course, there is no support for the dissenters’ novel requirement that an administrative agency must cite federal case law. Moreover, the Appellate Division decisions cited by the Tribunal reinforce the conclusion that the Tribunal understood the test to be whether petitioner had the actual authority and ability to pay the withholding taxes. In determining whether the petitioners were responsible persons within the meaning of Tax Law § 685, the cited cases look to whether the petitioner was involved in the financial management of the corporation and payment of employees, decided which outstanding bills were to be made and controlled the assets of the corporation (see Matter of Cohen v State Tax Commn., 128 AD2d 1022, 1023-1024 [3d Dept 1987]; Matter of Amengual v State Tax Commn., 95 AD2d 949, 950 [3d Dept 1983]; Matter of McHugh v State Tax Commn., 70 AD2d 987, 988 [3d Dept 1979]). Review of these cases alone is sufficient to resolve the dissenters’ criticism of the Tribunal that this Court has been forced to “guess as to the test that the Tribunal applied” (dissenting op at 8). - 14 - - 15 - No. 86
that bank signature cards reflected that petitioner could withdraw funds independently from
the corporate bank account, while Anthony Nastasi could not.
Although the dissenters state that there was “a paucity of factors applied by the
Tribunal that resemble factors applied by the federal courts” (dissenting op at 9), we note
that the Tribunal expressly considered four of the seven factors set forth in Vinick (205 F3d
at 8), as well as petitioner’s holding oneself out as a responsible person, which is also a
relevant factor under federal law (see Hochstein, 900 F2d at 548 n 1). The dissenters
further posit that the Tribunal failed to consider the two factors that they deem most
important, i.e., whether a person makes decisions regarding the repayment of outstanding
debts or taxes and exercises control over daily bank accounts and disbursements (dissenting
op at 11). However, the Tribunal noted that petitioner had informed the Department at one
point that he could not pay amounts due because he had to make payroll—demonstrating
that it considered petitioner’s previous claims to the Department that he was making
decisions regarding which, when and in what order NECC’s debts would be paid—and the
Tribunal’s determination that petitioner exercised control over daily bank accounts and
disbursements is readily inferable from its reference to the bank signature cards. Reading
the phrase “control and authority over the affairs of NECC” in the context of the factors
that the Tribunal considered indicates that it employed the proper legal standard, that is,
whether petitioner had authority and control that would enable him to actually pay the
overdue taxes.
III.
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As petitioner argues, the substantial evidence and rationality standards are not
relevant to determining the correct legal standard to be applied in determining whether an
individual is a responsible person within the meaning of the Tax Law (see Levin, 42 NY2d
at 34). However, having concluded that the proper legal standard was applied, we note
that, “[i]n the evidentiary hearing before the [Department] the petitioner has the burden of
proving the deficiency assessment improper, and if there are any facts or reasonable
inferences from the facts to support the . . . determination, the assessment should be
confirmed” (id. at 34 [citation omitted]). Stated differently, petitioner bore the burden at
the hearing and the determination must be upheld if “there is substantial evidence in the
record to support the determination of the Tax Appeals Tribunal imposing personal liability
on petitioner pursuant to Tax Law § 685 (g)” (Matter of Menik, 280 AD2d at 703).
Applying the substantial evidence standard, the “question . . . is not whether [the reviewing
court] find[s] the proof . . . convincing, but whether the [agency] could do so” (Matter of
Marine Holdings, LLC v New York City Commn. on Human Rights, 31 NY3d 1045, 1047
[2018] [internal quotation marks and citation omitted]).
Here, substantial evidence in the record supports the Tribunal’s determination that
petitioner did have actual authority over NECC’s finances and the ability to remit the
overdue withholding tax during the relevant time period. As set forth in the Tribunal’s
decision, it is undisputed that, during the audit period, petitioner was NECC’s majority
shareholder; derived significant income and tax benefits from NECC as its president; had
broad oversight authority over daily field operations; represented to the Department that
he was authorized to resolve NECC’s financial problems; was directly involved in
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negotiating a resolution of NECC’s tax liabilities with the Department as the latter’s
primary contact at NECC; signed the checks remitting full payment for other tax amounts
due; and held himself out to be the owner and principal officer of the corporation with
control over its financial affairs. This documented proof provides substantial evidence for
the Tribunal’s determination and, thus, the determination must be sustained “irrespective
of whether a similar quantum of evidence is available to support other varying conclusions”
(Matter of Haug v State Univ. of N.Y. at Potsdam, 32 NY3d 1044, 1046 [2018]).
To be sure, the testimony of petitioner, Probst and Pillari—some of which was self-
interested—and Nastasi’s affidavits submitted to the IRS may have called the veracity of
the documentary evidence into question if that testimony was credited. However, “it was
the province of the [Department] to resolve any conflicts in the evidence and make
credibility determinations” (Haug, 32 NY3d at 1046). Petitioner expressly placed his
credibility—along with that of Nastasi—into issue by insisting that their prior
representations of petitioner’s authority and control were intended only to create the false
impression that petitioner controlled NECC in order to obtain lucrative state contracts.
Petitioner, who admitted to lying to the Department when it suited him, did not disavow
the documents establishing that he had authority and control over NECC’s finances until
those representations no longer benefited him financially. The Tribunal was free to reject
petitioner’s testimony as lacking in credibility and insufficient to overcome the proof that
petitioner did have actual authority over NECC’s finances. To accept as true and
“undisputed” all of the testimony, as the dissenters do (dissenting op at 13), when the
administrative factfinder had rejected the same as lacking credibility would be to violate
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the fundamental tenet governing review of administrative determinations—“‘[c]ourts may
not weigh the evidence or reject [a] determination where the evidence is conflicting and
room for choice exists’” (Matter of Marine Holdings, 31 NY3d at 1047, quoting Matter of
State Div. of Human Rights [Granelle], 70 NY2d 100, 106 [1987].
Turning to willfulness, the test in New York is also consistent with that employed
under federal law; the question 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, 42 NY2d at
34). Petitioner was concededly aware that Nastasi was not paying withholding taxes and
testified that he repeatedly discussed the matter with Nastasi. Yet petitioner continued to
use his authority as president and majority shareholder to maintain MBE status and delay
the tax collection actions by informing the Department that he would pay the taxes despite
his awareness that Nastasi was using trust funds belonging to the government for other
purposes. While doing so, petitioner benefitted from Nastasi’s actions and the fraud that
they both perpetrated on the Department because petitioner’s representations were essential
to keeping the corporation afloat, enabling him to receive a salary, allocate business losses
and secure a job for his daughter. Thus, the finding of willfulness is supported by
substantial evidence as well.
Accordingly, the judgment of the Appellate Division should be affirmed, with costs.
- 18 - TROUTMAN, J. (dissenting):
In derogation of the doctrine of federal conformity, the Tax Appeals Tribunal failed
to apply the “actual authority” or “effective power” test used by federal courts when
determining whether petitioner could be held personally liable as a “responsible person”
for unpaid employee withholding taxes owed by New England Construction Company
(NECC). Because the majority does not recognize from the record below that the Tribunal
failed to apply the appropriate standard, I dissent.
It is undisputed that the doctrine of federal conformity governs the tax proceedings
that the Department of Taxation and Finance brought against this petitioner under Tax
Law § 685 (g). That doctrine has long been in existence, and it holds that, where there is
a provision of New York tax law that is modeled after a virtually identical provision in
the Internal Revenue Code (IRC), that provision of New York tax law should be
construed in conformity with the IRC (see Matter of Friedsam v State Tax Commn., 64
NY2d 76, 80-81 [1984]; Matter of Marx v Bragalini, 6 NY2d 322, 333 [1959]). The
doctrine of federal conformity is now enshrined by the legislature in Tax Law § 607 (a)
for the purpose of “provid[ing] a statutory mandate to assure conformity” (Friedsam, 64
NY2d at 80; see Tax Law § 607 [a] [“Any term used in this article shall have the same
meaning as when used in a comparable context in the laws of the United States relating to
federal income taxes, unless a different meaning is clearly required”]).
As is relevant here, Tax Law § 685 (g), under which petitioner was charged,
provides that where a person is responsible to pay withholding taxes and fails to pay them
willfully, they may be held personally liable. In other words, section 685 (g) allows the
State to pierce the corporate veil and hold someone personally liable if they are
responsible for paying taxes and fail to do so willfully. The language of section 685 (g)
is in all material respects the same as 26 USC § 6672 (a) of the IRC.
Despite this similarity, the Tribunal and the Internal Revenue Service (IRS)
reached different determinations about petitioner’s liability under those respective
statutes, with the Tribunal finding that petitioner was liable under Tax Law § 685 (g) and
the IRS finding that he was not liable under 26 USC § 6672 (a). The reason for this
discrepancy may well be explained by the differences in the evidence presented to the
two tribunals. But what we know for sure is that the Tribunal failed to apply the same
federal test for liability that the IRS is bound to apply. In doing that, the Tribunal
violated the doctrine of federal conformity.
I
One evident and uncontroverted fact in this case is that petitioner is not a
completely sympathetic person, as the dissenting justices at the Appellate Division aptly
pointed out:
“[P]etitioner, by his own account, engaged in a highly inappropriate scheme of falsely holding himself out as NECC's financial decisionmaker for purposes of retaining its status as a minority owned business enterprise (hereinafter MBE). Such behavior violated the MBE requirements. Nevertheless, there are regulatory provisions to address such a scenario, and the question before this Court is not the appropriateness of petitioner’s conduct, but the propriety of the Tribunal's determination that he should be held personally liable for the corporation’s tax liability” (206 AD3d 1482, 1486).
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It is through this lens that the facts of this case are best viewed.
Petitioner began his career in 1986 as an apprentice carpenter for Nastasi White,
going on to work for Nastasi & Associates after it splintered off from Nastasi White. In
1994, petitioner formed NECC, a drywall, acoustical ceilings, and millwork construction
company. Petitioner’s purpose in forming NECC included getting the corporation
certified as a minority business enterprise to gain access to state contracts with minority
access goals. Thereafter, petitioner and the owners of Nastasi & Associates arranged for
petitioner to take over Nastasi & Associates’ minority subcontracts. At all relevant times,
petitioner was president and a 51% shareholder of NECC, with the remaining shares
belonging to family members or owners of Nastasi & Associates.
In 2005, Anthony Nastasi took over the financial affairs and management of
NECC. That same year, petitioner entered into an agreement with Nastasi & Associates,
which recited that “[w]hereas [NECC] was indebted to [Nastasi & Associates] for more
than [$4,000,000], and the parties desire to order their relationship in the event of certain
contingencies,” the parties agree that, “upon the written demand of Anthony Nastasi,”
petitioner would resign his position as president of NECC and would be deemed to have
sold his 26 shares of NECC common stock to Nastasi for $26. Although the agreement
allowed for another outcome if NECC paid off its financial obligation to Nastasi &
Associates, that never happened.
Starting in 2012, NECC began to encounter tax liabilities, including issues
regarding employee withholding taxes. In 2015, Nastasi terminated petitioner pursuant to
the 2005 agreement, purchased petitioner’s shares of NECC, and became its sole owner.
Because NECC had been incurring federal and state liability for unpaid employee
withholding taxes since 2012, in early 2015 the IRS issued petitioner an assessment
holding him personally liable for NECC’s unpaid federal taxes. However, the IRS
subsequently canceled the assessment after petitioner challenged it, finding that he was
not a person responsible for paying NECC’s taxes under federal law. The IRS based its
decision, in part, on sworn affidavits in which Nastasi averred that he himself had sole
authority to pay NECC’s accrued liabilities, including tax obligations, and that
petitioner’s authority over NECC’s bank account was limited to paying the costs of its
field operations.
In December 2015, the State Division of Taxation issued petitioner notices of
deficiency for unpaid withholding taxes under New York’s parallel delinquent tax
statutes, asserting that he was a person responsible for paying NECC’s taxes. After a
hearing before an administrative law judge, the Tax Appeals Tribunal (Tribunal) rejected
petitioner’s challenge to the assessment, determining that it was not bound by the federal
determination and that petitioner was responsible for the tax and willfully failed to pay it.
The Appellate Division confirmed the Tribunal’s determination in a 3-2 decision.
The majority reasoned that “it is undisputed that petitioner was president, the majority
shareholder, had check signing authority, was involved in daily field operations and
derived a substantial part of his income from NECC” (206 AD3d at 1485). The Court
also relied on the fact that petitioner “held himself out” to tax officials as the “responsible
person for New York taxes” (id.). The majority further held that petitioner’s failure to
pay was willful (see id. at 1485-1486).
In my view, the two dissenting Justices at the Appellate Division homed in on the
key problem with the analysis of the majority below, which applies equally to this
Court’s majority opinion. The problem is the failure of the Tribunal to apply the federal
standard for determining whether petitioner is a person responsible, under the Tax Law §
685 (g), for paying the taxes owed to the State.
II
The majority acknowledges that the doctrine of federal conformity applies to Tax
Law § 685 (g), inasmuch as it is “modeled after 26 USC § 6672 (a)” of the IRC (majority
op at 9, citing Matter of Levin v Gallman, 42 NY2d 32, 33-34 [1977]). Consequently, the
test for who constitutes a responsible person liable for unpaid taxes is the same under
both statutes.
Federal courts view the responsible person test as being a “functional” test
(Gephart v United States, 818 F2d 469, 473 [6th Cir 1987]). “It is a test of substance, not
form” (Godfrey v United States, 748 F2d 1568, 1576 [Fed Cir 1984]). The critical
inquiry in determining whether someone is a “responsible person” is if they had the
“effective power” or “actual authority or ability” to pay the taxes owed by the corporation
(Erwin v United States, 591 F3d 313, 321 [4th Cir 2010]; Plett v United States, 185 F3d
216, 219 [4th Cir 1999]). In other words, under the federal test, “[w]hether one is
considered a person responsible for paying over such taxes to the government . . . is a
question ‘focusing upon the degree of influence and control which the person exercised
over the financial affairs of the corporation, and, specifically, disbursements of funds and
the priority of payments to creditors’ ” (Kinnie v United States, 994 F2d 279, 283 [6th Cir
1993], quoting Gephart, 818 F2d at 473).
In applying this federal test to an individual, federal courts examine seven, non-
exclusive, factors that inquire into whether the person
“(1) is an officer or member of the board of directors, (2) owns shares or possesses an entrepreneurial stake in the company, (3) is active in the management of day-to-day affairs of the company, (4) has the ability to hire and fire employees, (5) makes decisions regarding which, when and in what order outstanding debts or taxes will be paid, (6) exercises control over daily bank accounts and disbursement records, and (7) has check-signing authority” (Vinick v United States, 205 F3d 1, 7 [1st Cir 2000], quoting Fiataruolo v United States, 8 F3d 930, 939 [2d Cir 1993]).
“No single factor is determinative of responsibility” and the “totality of the
circumstances” must be considered (Vinick, 205 F3d at 8 [internal quotation marks
omitted]). The seven factors serve as a guide—not a mechanistic checklist—for
answering the “core question” of whether an “individual has significant control over the
enterprise’s finances” (Fiataruolo, 8 F3d at 939 [internal quotation marks omitted]). The
test “is meant to encompass all those connected closely enough with the business to
prevent the tax default from occurring,” but it “is not meant to ensnare those who have
merely technical authority or titular designation” (id. [internal quotation marks and
brackets omitted]).
III
Unfortunately, this federal test is not the test that the Tribunal applied. How do
we know? Well, one glaring indicator is that the federal test is never referenced in its
opinion. In fact, there is not one citation to federal case law in that regard.
But the problem runs far deeper than that.1 The majority’s best guess as to the test
that the Tribunal applied is “ ‘whether petitioner presented facts showing that [he] lacked
control and authority over the affairs of NECC’ ” (majority op at 7, 14). But that is not
the federal test, which looks instead to whether petitioner presented facts demonstrating
1 Regrettably, the majority opinion misapprehends the points raised in this dissent as “insist[ing] that the Tribunal could not have applied the same test that is employed by the federal courts because the Tribunal did not cite federal case law” or as “require[ing] that an administrative agency must cite federal case law” (majority op at 13-14 n 4). A simple reading of this dissent shows that those statements by the majority are inaccurate. What is true is that the Tribunal’s failure to cite federal case law is a symptom of the Tribunal’s failure to apply the doctrine of federal conformity. The majority is confusing a reference to a symptom of the Tribunal’s error with the diagnosis of the error infecting the Tribunal’s opinion, which is the true focus of this dissent.
that he did not have the “effective power” or “actual authority or ability” to pay the taxes
owed by NECC (Erwin, 591 F3d at 321; Plett, 185 F3d at 219).
The majority’s description of the Tribunal’s test as being “imprecise” is charitable,
but it misses the crucial discrepancy between that test and the federal test (majority op at
14). The Tribunal’s test fails to inquire into whether petitioner “could have paid the
taxes, but chose not to do so” (Vinick, 205 F3d at 9). Simply put, whether someone had
some “control and authority over the affairs of a corporation” does not necessitate a
determination that they had the effective power, actual authority, or actual ability to pay
the corporation’s taxes.
Attempting to rectify this incongruity, the majority points to the few factors that
the Tribunal did analyze that cross over with factors analyzed under the federal test.
However, that gesture fails to vindicate the majority’s position given the paucity of
factors applied by the Tribunal that resemble the factors applied by federals courts:
“The Tribunal concluded that petitioner was ‘under a duty to collect and pay over withholding taxes’ based upon the evidence that he was an officer and majority shareholder of NECC, managed its field operations, had check signing authority, filed tax returns on behalf of the company, had considerable economic interest in NECC and held himself out as a responsible person to third parties, including the Department” (majority op at 7; see id. at 14-15).
The fact that certain of these factors may engage in some of the same inquiries as
the federal test does not make up for the fact that they are being used for a completely
different purpose. Under the Tribunal’s test, these factors explore the issue of whether
petitioner lacked some ambiguous amount of control and authority over the affairs of
NECC. But the factors under the federal test are used to pinpoint whether the type of
control and authority over the affairs of NECC wielded by petitioner would give him
effective power or actual ability to pay delinquent taxes. No matter how similar some of
the Tribunal’s factors are to the federal factors, that similarity does not demonstrate that
the Tribunal and the federal courts are applying the same test, inasmuch as those factors
are being used in different ways to make different determinations.
This discussion of the factors used by the Tribunal brings up another problem.
The Tribunal also fails to apply all the factors applied under the federal test. Although it
is true that the factors are not exhaustive, the majority points to nothing that shows that
those factors are not mandatory inquiries under federal law. As the Appellate Division
warned in a case cited by the majority: “While no one factor is controlling, all must be
considered” (Matter of Malkin v Tully, 65 AD2d 228, 231 [3d Dept 1978]).2 The
Tribunal failed to do that.
2 However, to the extent that this decades-old state court decision cited by the majority considers only a small fraction of the factors now weighed by the U.S. Court of Appeals,
Compounding the Tribunal’s error, the subset of federal factors applied by the
Tribunal do not sufficiently assess whether a person has actual authority to pay taxes,
inasmuch as those factors fail to identify “most readily [a] person who could have paid
the taxes, but chose not to do so” (Vinick, 205 F3d at 9, citing Morgan v United States,
937 F2d 281, 284 [5th Cir 1991] [“The central question is whether an individual had the
effective power to pay taxes”]). But that is precisely what is done under the fifth and
sixth factors of the federal courts’ standard inquiry. Those factors delve into “whether
the individual . . . (5) makes decisions regarding which, when and in what order
outstanding debts or taxes will be paid, [and] (6) exercises control over daily bank
accounts and disbursement records” (Vinick, 205 F3d at 7). Factors five and six are two
of the three federal factors that go to “the heart of the matter,” and five is “the most
important” (id. at 9). Although arguments regarding those factors were raised by
petitioner before the Tribunal, there is no indication in the Tribunal’s opinion that it
analyzed either of those factors in reaching its conclusion.
Indeed, the factors considered by the Tribunal as part of its analysis do not
meaningfully point towards who “had or exercised control of the collection, accounting
for, and payment over of taxes” (Godfrey, 748 F2d at 1576). Petitioner’s having been an
officer of NECC and its majority shareholder is certainly some indication of his status
the decision applies an obsolete approach to the federal responsibility test (see majority at 12).
- 11 - - 12 - No. 86
within the corporate structure. However, “titular authority is insufficient to create
liability” (Vinick, 205 F3d at 8). “Like corporate title, share ownership is a factor, but not
all shareholders are responsible persons” (id., citing O'Connor v. United States, 956 F2d
48, 51-52 [4th Cir 1992] [“To ignore (the separation of ownership and authority) would
be to envelop within ‘responsible person’ all significant investors with titles in
corporations which fail to pay their withholding taxes”]). “Furthermore, share ownership
is not a predicate to finding responsibility” (id.).
Additionally, the fact that petitioner “managed [NECC’s] field operations” does
not implicate him in having “significant control over [NECC’s] finances” (Hochstein v
United States, 900 F2d 543, 547 [1990]), because, without more, the two functions are
significantly distinct. Nor do inquiries into petitioner’s authority to file tax returns on
behalf of NECC or his considerable economic interest in NECC, without more, lead to a
determination that petitioner “had or exercised control of the collection, accounting for,
and payment over of taxes” (Godfrey, 748 F2d at 1575 [holding that “(t)he mechanical
dut(y) of . . . preparing tax returns (is) not determinative of liability” (id. at 1575)]).
Furthermore, although a person’s “being held out as an officer of the corporation”
can be “relevant to [their] status as a responsible person,” it must still be accompanied by
“the authority to direct the payment of corporate funds” (Hochstein, 900 F2d at 546, 548
n 1).3 For example, the Second Circuit in Hochstein found a corporate controller to be a
responsible person where, in addition to being held out as an officer, he “also exercise[d]
significant control over [the corporation’s] finances,” including having authorization to
sign checks in any amount; having the authority to sign and file the corporation’s tax
returns; having dealt with the corporation’s financing partner on a daily basis during the
corporation’s financial troubles; having made the initial determination of the order in
which large bills were to be paid, subject to the approval of the corporations president;
having the discretion to pay smaller bills; and having overseen the corporation’s
bookkeeping (see id. at 547-548). In contrast, here, the Tribunal failed to analyze
petitioner’s actual authority to exercise significant control over the corporation’s
finances.
And although the majority also points to petitioner’s check signing authority as an
important factor, “case law discloses that authority to sign checks, without more, is a
weak pillar on which to rest a liability determination that a person is properly subject to a
. . . penalty” (Vinick, 205 F3d at 10 [internal quotation marks omitted]; see Godfrey, 748
F2d at 1575 [“The mechanical duties of signing checks and preparing tax returns are not
determinative of liability”]). Thus, merely looking to petitioner’s check signing authority
3 As counsel for the Tribunal conceded at oral argument, the Tribunal’s focus on petitioner’s holding himself out as a responsible person on a questionnaire was not raised for the purpose of invoking principles of estoppel, rather it was raised as one additional factor worth considering.
- 13 - - 14 - No. 86
provides an incomplete picture without considering “the context of financial control”
within NECC (Vinick, 205 F3d at 10). This is crucial given that it is undisputed that
petitioner did not have access to the corporation’s checkbook, because it was in Nastasi’s
closed safe approximately 40 miles away from petitioner’s office.
It is further undisputed that petitioner had nothing to do with hiring and firing
employees of NECC and that he had nothing to do with payroll. Moreover, petitioner’s
witnesses at the administrative hearing were unanimous in stating that NECC was
Nastasi’s company and that he exercised complete financial control.
Although the majority notes that there are several ways in which courts phrase the
factors that are examined under the responsible person test, that is not a reason to claim
that the Tribunal applied the federal test, when it clearly did not (see majority op at 11 n
3). Instead, that is a reason for this Court to give the Tribunal guidance as to which
factors it must apply under the doctrine of federal conformity. Beyond that, it is worth
noting that the federal cases cited by the majority all examine factors that, like factors
five and six of the standard seven-part test, are aimed at determining whether an
individual had the effective power to pay taxes (id.).
Furthermore, although the majority takes great length to demonstrate that the
Appellate Division’s decisions pertaining to the responsible person test conform with
- 14 - - 15 - No. 86
federal law, the concern here is not whether the Appellate Division applies the correct
test. The concern is that the Tribunal did not.4
Along those lines, it is noteworthy that there is minimal daylight between the
majority’s understanding of the test for a responsible person and the test that I have
explained is applied by the federal courts. Our disagreement is primarily over whether
the Tribunal applied the correct test, but it is not so much over the nature of that test. In
the end, we all agree that the test requires a determination that “the person had the actual
authority and ability or effective power to pay the taxes owed” (majority op at 13).
IV.
None of this is to say that this Court should find that the Tribunal’s decision was
not supported by substantial evidence. As the majority points out, petitioner held himself
out as a responsible person, most notably by completing a “responsible person
questionnaire” in 2012; such evidence could of course weigh heavily, so long as the
proper test is applied.
4 Tellingly, the Appellate Division’s decisions cited by the Tribunal fail to anchor their analysis of various factors to any overarching responsible person test (see Matter of Cohen v State Tax Commn., 128 AD2d 1022, 1023-1024 [3d Dept 1987]; Matter of Amengual v State Tax Commn., 95 AD2d 949, 950 [3d Dept 1983]; Matter of McHugh v State Tax Commn., 70 AD2d 987, 988 [3d Dept 1979]). Although this is problematic in a different way than the Tribunal’s reliance on the wrong test, it is still problematic (see supra at 8- 10).
My desired result would be simply for this Court to reverse on the law and remit to
the Appellate Division with instructions for that Court to remand the matter to the
Tribunal so that it can review this matter applying the correct federal standard for
determining if petitioner is a “responsible person” under Tax Law § 685 (g). Although
the majority has chosen not to take that path in this case, there is clearly a need for this
Court to provide the Tribunal and the Appellate Division with guidance to avoid them
going further afield.
Judgment affirmed, with costs. Opinion by Judge Cannataro. Chief Judge Wilson and Judges Rivera, Garcia and Singas concur. Judge Troutman dissents in an opinion, in which Judge Halligan concurs.
Decided November 20, 2023
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