Morris v. New York State Department of Taxation and Finance

New York Court of Appeals · Corporations

CorporationsPiercing the corporate veilUse taxcorporate separatenessveil piercingdominationfraud or wrongequitable ownership

Facts

Petitioner, a New Jersey resident who rented a New York apartment, was president and sole board member of Sunshine Developers, Inc., a Delaware corporation with New Jersey offices formed to purchase, own, operate, and lease boats. Although petitioner owned no stock, he made all corporate decisions, while the corporation's shares were owned by his brother and nephew. Sunshine purchased boats outside New York that were moored in Montauk during summers, and the Department assessed taxes connected with those boats. In this proceeding, the Tribunal determined that Sunshine itself was a nonresident corporation not doing business in New York and thus not liable for the tax, but held petitioner personally liable by piercing the corporate veil.

Issue

May New York tax authorities pierce the corporate veil to impose personal use-tax liability on a nonshareholder corporate officer who dominated the corporation where the corporation itself was found exempt from the tax and there was no showing that the corporate form was used to commit fraud or another wrong against the State?

Rule

Piercing the corporate veil is an equitable doctrine ordinarily used to impose a corporation's obligation on those who control it. Generally, veil piercing requires a showing that the owners exercised complete domination of the corporation with respect to the challenged transaction and used that domination to commit a fraud or wrong against the party seeking relief, causing that party's injury. Domination alone is insufficient, and the doctrine presupposes that the corporation itself is liable for the obligation sought to be imposed.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Lakefront Marine Leasing, Inc., a Nevada corporation with offices in Arizona, bought a houseboat in California and later kept it each summer in Erie, Pennsylvania. The Pennsylvania Revenue Bureau determined that the corporation qualified for a statutory nonresident exemption and owed no use tax, but then sought to collect the tax from Dana Reeve, the corporation's president, because Dana maintained an apartment in Pittsburgh and personally would not qualify for the exemption.

If the Bureau relies only on veil-piercing principles, which is the strongest argument against imposing liability on Dana?

Explanation. The majority explained that veil piercing is not an independent cause of action; it is a means of imposing a corporation's obligation on those who control it. Where the corporation itself owes nothing because it is exempt, there is no underlying corporate obligation to pass through the corporate form. That makes veil piercing inconsistent with the doctrine's essential theory.