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Paul Millus Authors, “What You Say On Your Tax Return Can And Will Be Used Against You In A Court of Law in a BCL Dissolution Proceeding”

You may be saying, after reading the title of this piece, that how can that not be true.  Indeed, it appears axiomatic.  Not so fast.  Yes, one would think that their signature on a government document warrants the truth of the contents therein, and, thus, the signatory would be bound by that confirmed fact if it were somehow relevant in a court proceeding.  However, it might not be as clear as one would think, or at least was not so clear in the First Department until May 21, 2020.

In its decision in the case of PH-105 Realty Corp. v. Elayaan, 2020 WL 2562558 (1st Dep’t 2020), the First Department ordered the unanimous reversal on the law of the lower court’s order granting defendants a motion for summary judgment and dismissing declaratory and unjust enrichment claims alleged by plaintiff in connection with its assertion that the plaintiff had a 75% ownership interest in 181 Edgewater LLC (“Edgewater”).

I will return to that decision in a moment, but the confusion lied in the First Department’s decision in the matter of Bhangi v. Baluch, 99 A.D.3d 587 (1st Dep’t 2012).  In Bhangi the trial court denied a petition for dissolution of a company where the petitioner alleged that she had a 50% ownership interest in Flag Time as required by Business Corporation Law § 1104.  The basis for her contention was that Flag Time’s federal tax return for the year 2000 indicated that she was a 50% owner of the corporation.  However, the lower court held and the First Department agreed that “without more, to satisfy petitioner’s burden, since corporate and personal tax returns, even when filed with government agencies are ‘not in and of [themselves] determinative’” citing Matter of Heisler v. Gingras, 90 N.Y.2d 682, 688 (1997).  To be sure, in the Bhangi case there was evidence which contravened petitioner’s contention, but the tax return was the tax return and, indeed, it was not enough.

Yet, in PH-105 Realty Corp., the First Department made it clear that to the extent its decision in Bhangi had been “interpreted as making the doctrine generally inapplicable with respect to factual statements of ownership and tax returns, we clarify that the doctrine [known as the ‘Tax Estoppel Doctrine’] applies where, as here, the party seeking to contradict the factual statements as to ownership in the tax returns signed the tax returns, and has failed to assert any basis for not crediting the statements.”

In so holding, the court ruled that the defendants were estopped to deny the 75% ownership interest in Edgewater that was asserted, it did not follow that plaintiff was entitled to summary judgment on its claim for a declaration that the individual remained a 75% owner of Edgewater or in the alternative unjust enrichment claim alleging an unlawful deprivation of that ownership right.  The court simply determined that, for the period 2010 through 2014, the signature by the defendant on the federal tax return was enough to counter an argument that, for that period, the plaintiff was not a 75% owner of the LLC.

The takeaway seems rather straightforward, which is something we all would have thought was rather straightforward from the outset.  If the party seeking to contradict factual statements as to ownership in tax returns sign the tax returns and could not discredit (which you generally would not), his assertion in those returns, it is, indeed, axiomatic that, for that particular period, he could not deny that which he confirmed on the returns—period.

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