The Alaska Supreme Court affirmed a lower court's decision that piercing the corporate veil of a Washington corporation was justified and the sole shareholder could be held personally liable for the corporation's unpaid Alaska income tax debt. Pister v. Alaska Dept. of Rev., Alaska, No. S-15332, July 24, 2015.
Pister, an Alaska radiologist, incorporated his business as a Washington corporation (Northwest Medical) in 1988. Washington administratively dissolved the corporation in 1990, although Pister was unaware of the dissolution until 1998. Pister wound up the affairs of the first corporation from late 1998 into early 2001, and set up a new Washington corporation (Skyrad) for his business in 2000.
The Alaska Department of Revenue assessed Northwest Medical for unpaid taxes, penalties and interest for improper deductions taken between 1992 and 1995. The ensuing litigation reached the Alaska Supreme Court, which held that, although administratively dissolved, Northwest Medical was responsible for unpaid corporate taxes because it had "continued to contract and provide services under its corporate name." Thus, the corporate veil could not be pierced to hold Pister personally accountable for liabilities that arose after the administrative dissolution of the corporation in 1990, because, under Washington law, imposing personal liability requires actual knowledge there was no incorporation. Nw. Med. Imaging, Inc. v. Alaska Dept. of Rev., 151 P.3d 434 (Alaska 2006).
Judgment was entered against Northwest Medical and Alaska filed suit in September 2008 to collect that judgment from Pister personally under theories of piercing the corporate veil and successor liability. After a bench trial, the lower court ordered, in part, that Northwest Medical's corporate veil could be pierced and Skyrad was liable as a successor corporation. The parties did not appeal the latter holding, and the Supreme Court affirmed the order to pierce the corporate veil, finding it justified under both Alaska and Washington law, because of the de facto continued existence of the corporation and the misconduct of its shareholder.
Under Alaska law, a misconduct standard applies that permits veil piercing if the corporate form is used for deceptive or manipulative conduct to avoid taxes. Northwest Medical rented two offices from a family partnership controlled by Pister and deducted the rent as a business expense. Uncontested findings by the lower court showed that:
It's no surprise the court affirmed the order to pierce the corporate veil.
Washington law contains a similar misconduct standard and a requirement that piercing the corporate veil is necessary to prevent loss to an innocent party. Pister argued that the second requirement was not satisfied because Skyrad is liable for Northwest Medical's tax debt and, therefore, it is not necessary to disregard Northwest Medical's corporate form. The Alaska court concluded, however, that Washington courts have not interpreted the law to require the pursuit of other remedies before piercing the corporate veil.
For comparison, a 2014 Louisiana Supreme Court decision distinguished tax avoidance from tax evasion when concluding an individual was not personally liable for sales and use tax due on the purchase of a recreational vehicle by his wholly-owned, out-of-state limited liability company. Thomas v. Bridges, 144 So.3d 1001 (La. 2014).
According to the decision, Thomas admitted that he formed a Montana LLC solely to avoid the Louisiana sales tax for the purchase of an RV. Montana does not impose a sales tax on its residents, including resident LLCs, for the purchase of vehicles, and the RV purchase was the only business conducted by the LLC in Louisiana. The RV was garaged and used outside Louisiana.
Under Louisiana law, the laws of the state where a foreign LLC is organized govern its internal affairs and the liability of members and managers. The court held, therefore, that Montana law applies to determine whether the LLC's veil could be pierced, and there was no legal basis under Montana law to find Thomas personally liable for the tax. Use of particular business entities to avoid taxes and other liabilities, the court noted, is not fraudulent, but a common and legal practice.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: under what circumstances may a tax agency ignore the separate existence of a corporation or LLC and hold shareholders or members personally liable for taxes?
Additional discussion of the doctrine of piercing the corporate veil can be found in the following Bloomberg BNA State Tax Portfolios: 1510-2nd T.M., State Taxation of S Corporations, and 1720-2nd T.M., State Tax Audit and Collection Procedures: General Principles.
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