New York Law Review

Tag: Non-resident Exemption

  • Morris v. New York State Dept. of Taxation & Fin., 82 N.Y.2d 135 (1993): Piercing the Corporate Veil Requires Wrongful Conduct

    Morris v. New York State Dept. of Taxation & Fin., 82 N.Y.2d 135 (1993)

    To pierce the corporate veil and hold an individual liable for a corporation’s obligations, there must be a showing that the individual exercised complete domination of the corporation and used that domination to commit a fraud or wrong against the plaintiff.

    Summary

    The New York State Department of Taxation and Finance assessed a use tax against Joseph Morris, the president of Sunshine Developers, Inc., for cabin cruisers purchased by the corporation. The Department sought to pierce the corporate veil, arguing that Morris controlled Sunshine and used it to avoid taxes. The New York Court of Appeals reversed the lower court’s decision to hold Morris personally liable, holding that while Morris may have dominated the corporation, the Department failed to demonstrate that Morris used his control to commit a fraud or wrong against the state. The Court emphasized that the corporation itself was entitled to a nonresident exemption, negating any corporate tax liability that could be imputed to Morris.

    Facts

    Joseph Morris was the president of Sunshine Developers, Inc., a corporation owned by his brother and nephew. Sunshine purchased two boats outside of New York and moored them in Montauk, New York during the summer. The Department assessed use taxes against Morris, claiming he controlled the corporation and used it to avoid New York taxes. Morris rented an apartment in New York City, which the Department argued disqualified him from claiming a nonresident exemption.

    Procedural History

    The Department initially assessed taxes against Sunshine, Joseph Morris, and Robert Morris. An Administrative Law Judge (ALJ) determined that Sunshine was entitled to a nonresident exemption and that the corporate veil should not be pierced. The Tax Appeals Tribunal reversed the ALJ’s decision regarding Joseph Morris, holding him personally liable. The Appellate Division sustained the Tribunal’s conclusions. The New York Court of Appeals granted leave to appeal and reversed the Appellate Division’s judgment.

    Issue(s)

    Whether the Tax Appeals Tribunal and Appellate Division properly sustained the assessment against Joseph Morris by piercing the corporate veil, thereby holding him personally liable for the corporation’s use tax obligations.

    Holding

    No, because while Morris may have dominated the corporation, the Department failed to demonstrate that Morris used his control to commit a fraud or wrong against the taxing authorities of New York State.

    Court’s Reasoning

    The Court of Appeals emphasized that piercing the corporate veil requires a showing of both complete domination of the corporation and that such domination was used to commit a fraud or wrong against the plaintiff. The Court acknowledged that Morris likely controlled Sunshine, even though he was not a shareholder. However, the Court found no evidence of fraud or wrongdoing. The Court noted the ALJ’s finding of no fraud or wrongdoing was not disturbed on review. “While complete domination of the corporation is the key to piercing the corporate veil, especially when the owners use the corporation as a mere device to further their personal rather than the corporate business (see, Walkovszky, supra, at 417), such domination, standing alone, is not enough; some showing of a wrongful or unjust act toward plaintiff is required.” The Court distinguished this case from typical veil-piercing scenarios where a third party seeks to hold owners liable for corporate obligations. Here, the corporation was determined to be exempt from the use tax, meaning there was no underlying corporate obligation to transfer to Morris. Imposing liability on Morris when the corporation owed nothing would be inconsistent with the doctrine’s essential theory. The Court also rejected arguments based on federal tax law, stating that Sunshine had a legitimate business purpose. The Court concluded, to pierce the corporate veil, there must be evidence the corporation was used to pervert the benefits of incorporation and commit a wrong against the party seeking to pierce the veil. Here, the corporation’s non-resident status eliminated its debt, therefore there was nothing to transfer to the owner personally.