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In an unusual finding that corporate officers are not liable for the prepayment of sales taxes on cigarettes, New York’s State Division of Tax Appeals has cancelled assessments of over $481,000 that had been imposed on former principles of a wholesale distributor in Utica. Normally, corporate officers are liable under Section 1145(e) of the Tax Law for a penalty equal to the amount of the prepaid tax, plus interest. But a quirky fact pattern led Administrative Law Judge Jean Corigliano to abandon the norm in Matter of the Petition of Michael D. Button and James F. Button, 817034. ALJ Corigliano noted that in most instances a corporate officer with an economic stake in a corporate entity has a duty to act for the corporation under Article 2 of the Tax Law. However, she said that exceptions are appropriate in cases, like this one, where the corporate officers are essentially prevented from acting on the corporation’s behalf concerning the payment of sales taxes. She said that since cigarette tax stamps were purchased on 30-day credit, liability stems from the date the payment was due, and not, as the Division of Taxation had maintained, from the day the stamps were purchased. The case involved Michael D. Button and James F. Button, the former president and vice president, respectively, of Herkimer Wholesale Company. As a cigarette agent licensed by the Division of Taxation, Herkimer was required under Tax Law Section 471 to pre-pay taxes. In 1996, the Division allowed Herkimer to purchase tax stamps on 30-day credit. Under the agreement, the Division would be allowed to debit a designated account that Herkimer maintained with Marine Midland Bank in Utica. However, when Herkimer experienced financial difficulties, Marine Midland in September 1996 altered its methodology for computing the company’s borrowing base. Marine Midland eliminated the value of tax stamps, cigarette coupon receivables and manufacturers’ receivables in calculating the amount of collateral Herkimer would need to maintain to cover its loans. As a condition of extending Herkimer’s loans, Marine Midland required the corporation to seek a buyer for the business. When negotiations with a potential buyer broke down in November 1997, Marine Midland demanded immediate repayment of all indebtedness. Marine subsequently froze all of Herkimer’s operating accounts. Consequently, a debit for cigarette taxes purchased 30 days earlier was returned by Marine for insufficient funds. OUSTED AS TAX WAS DUE Ultimately, Herkimer was forced into involuntary bankruptcy. On Feb. 28, 1998, Herkimer surrendered its inventory to Marine Midland as a secured creditor. The Division of Taxation then went after the Buttons for the cigarette sales taxes. In this appeal, the Buttons argued through their attorney, Thomas G. Jackson of Phillips Nizer Benjamin Krim & Ballon in Manhattan, that they could not be held personally liable. Jackson contended that once Marine Midland had frozen Herkimer’s operating accounts and secured court orders denying the Buttons’ control over the company’s financial affairs, his clients lacked any authority to pay the taxes. ALJ Corigliano agreed and overturned the Division. The administrative law judge found that on the date that payment came due, the Buttons simply lacked authority to pay the tax, and therefore were under no duty to act on behalf of Herkimer. “The facts and circumstances of this case are distinguishable from cases where a corporate officer has been held liable for sales taxes collected while the corporation was a debtor-in-possession,” ALJ Corigliano said. “Here, there is no evidence that any tax liabilities were incurred during any period of time when petitioners were in control of Herkimer’s finances.” Jackson explained that New York, like other states, generally imposes a personal liability on corporate officers when a business fails to remit trust fund taxes. The rationale for the statute, he said, is to increase the likelihood that tax monies are turned over to a taxing authority and not used to rescue a failing business. What makes the matter unusual, Jackson said, is that the Division had given Marine Midland, the secured creditor, the ability to dispose of inventory with affixed but not-yet-paid-for tax stamps, even though the secured creditor did not have a lien on the tax stamps. The Division of Taxation was represented by John E. Matthews.

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