Defense Barred by Tax Estoppel

On August 20, 2020, the Fourth Department issued a decision in Rizzo v. National Vacuum Corp., 2020 NY Slip Op. 04693, holding that defendants were prevented by the doctrine of tax estoppel from denying that the plaintiff owned the percentage of the company reflected in the tax returns the defendants prepared, explaining:

A party to litigation may not take a position contrary to a position taken in a tax return. Here, plaintiffs met their initial burden on the motion by submitting a copy of Form 2553: Election by a Small Business Corporation (election form) that Lehr—in his capacity as president of NMCC—signed under penalty of perjury. The document was also signed by Rizzo, Lehr, and defendant John G. Kozlowski in their capacity as shareholders. The column in the election form labeled "Number of shares or percentage of ownership," lists "60" beside Kozlowski's name and "20" beside both Rizzo's and Lehr's names. By filing that election form, Lehr—who admitted that it was his signature on the form—and NMCC swore that Rizzo owned 20% of the company and are thereby estopped from denying Rizzo's ownership interest.

Defendants failed to raise a triable issue of fact in opposition. We reject defendants' contention that, because the election form does not specify whether Rizzo owns 20 shares or 20% of the company, there is an issue of fact with respect to what percentage of NMCC Rizzo owns. Even if the numbers "60," "20," and "20" refer to the number of shares issued to the shareholders instead of their percentages of ownership, they demonstrate that NMCC issued a total of 100 shares to its shareholders and therefore that Rizzo, as owner of 20 of the 100 shares, owns 20% of NMCC.

(Internal quotations and citations omitted).

The results in a complex commercial litigation often turn on the facts more than the law (which is why it is complex). The rule of tax estoppel, discussed above, is one tool the courts use to force people to keep their stories straight when it comes to their finances. If you or a client have questions regarding the evidentiary relevance of tax returns, contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com.