People v. Lyon

Citations: 82 A.D.2d 516; 442 N.Y.S.2d 538; 1981 N.Y. App. Div. LEXIS 11385

Court: Appellate Division of the Supreme Court of the State of New York; August 31, 1981; New York; State Appellate Court

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The court, led by Judge Gulotta, addresses whether a larceny indictment is valid against the defendants for not remitting sales and employees’ withholding taxes collected on behalf of New York State. The court concludes that such an indictment can be upheld, reversing parts of the lower court's order that had partially granted motions to dismiss. 

On June 20, 1980, twelve indictments were issued against Charles L. Lyon and eleven corporations he manages, following an investigation into tax offenses. The Grand Jury indicted the defendants for larceny based on their intentional failure to pay over tax revenues, failure to file corporate franchise tax reports, and personal income tax evasion. 

The lower court dismissed charges against Lyon, asserting that his voluntary appearance before the Grand Jury, despite a non-sworn waiver of immunity, rendered him immune from prosecution. Additionally, it dismissed the larceny counts on the grounds that the State was not the "owner" of the collected tax revenues as defined in the Penal Law. However, the court upheld the indictments against the corporate defendants for failing to file tax reports.

The basis for the larceny charges is that the defendants acted as trustees for the State, and their failure to remit the collected taxes constitutes theft under Penal Law section 155.05. The court clarifies that while the State can be considered an “owner” of property, the critical issue is whether the defendants were functioning as trustees of the State regarding the collected taxes.

A trustee who withholds trust funds can be charged with larceny by embezzlement, while a debtor without a trust relationship to a creditor cannot. In cases limited to a debtor-creditor relationship or constructive trust, larceny charges are not applicable. Relevant Tax Law provisions indicate that employers are liable for withholding taxes, which are treated as a special fund in trust for the tax commission, and employees cannot sue employers for taxes deducted from their wages. Similar principles apply to sales tax collection, where the tax is held in trust for the state. Additional statutes, such as Article 3-A of the Lien Law and General Obligations Law § 7-103, establish trust relationships over certain funds, including security deposits, transforming the landlord-tenant relationship into a trust relationship by operation of law, allowing for larceny charges in cases of unlawful retention of such deposits. However, there is limited case law on the nature of trustee relationships under the Tax Law. In the case of Canale v New York State Dept. of Taxation, a receiver sought a tax refund, which was denied due to outstanding tax obligations, illustrating the state’s right to offset refunds against existing debts.

The Court of Claims affirmed that sales taxes collected by vendors serve as a trust for the State, indicating that such funds do not belong to the vendor but to the State as the beneficiary of the trust. This establishes that the State's right to setoff is superior to that of lienors and creditors. The Court of Appeals highlighted that the State Tax Commission can impose civil penalties for an employer's willful failure to remit personal withholding taxes, which must be treated as trust funds for the government. This aligns with earlier cases affirming that collectors of sales and withholding taxes hold these revenues in trust for the State. The Appellate Division echoed this sentiment, confirming that the State has a superior claim over these tax revenues. Despite the argument that the State is merely a creditor, the law does not necessitate the segregation of withheld taxes unless specified by the State Tax Commission, thus reinforcing the trust relationship. Vendors must clearly indicate sales tax on receipts, maintain accurate transaction records, and remit taxes to the government within designated timelines, further solidifying the notion that these funds are the property of the State.

Section 675 and subdivision (a) of section 1132 of the Tax Law establish that taxes collected must be held in trust for the State, analogous to section 7501 of the U.S. Code, which mandates that income taxes withheld are a special fund for the federal government. The case of Kalb v. United States illustrates that withholding taxes are not merely debts but are wages held in trust by the employer for the government, reinforcing that the government has a more significant legal status than a mere creditor in these situations. 

Conversely, in People v. Keeffe, the Court of Appeals determined that an attorney's predecessor only possessed a contractual claim to settlement proceeds and did not own the money held in a special account. The court reversed a larceny conviction, emphasizing that the funds were held in trust for the client, not for the predecessor attorney, and noted that the Surrogate’s Court’s order did not establish a specific payment obligation. Unlike Keeffe, the Tax Law explicitly requires that tax collections be treated as trust funds for the State, detailing the timing and method of payment.

A statutory trust relationship has been established under the Tax Law, allowing for a larceny indictment to address the alleged wrongful acquisition or retention of personal income and sales tax revenues owed to the State. The defendants' claim that the Tax Law's criminal provisions prevent prosecution is rejected, as section 695(c) explicitly states that individuals or corporations failing to collect or pay withholding taxes can be guilty of a misdemeanor, with penalties in addition to other legal repercussions. Although some argue that this provision only pertains to civil penalties, it actually allows for civil actions alongside criminal penalties under related sections. The prosecution's case hinges on larceny by embezzlement, necessitating proof of conversion of property entrusted to the defendant. The elements of the charged offenses differ from violations of section 695, and similar reasoning applies to section 1145(b), which addresses sales tax violations without requiring intent to defraud. The presence of overlapping criminal statutes does not preclude prosecution under either, unless there is explicit legislative intent to bar it. Lastly, the Criminal Term's ruling that the individual defendant gained immunity from his Grand Jury testimony is deemed incorrect, as CPL 190.40(2) stipulates that immunity is granted unless explicitly waived.

CPL 190.45 outlines the conditions for a waiver of immunity, requiring a written instrument signed by a witness in a grand jury proceeding, which relinquishes the right against self-incrimination and potential immunity under CPL 190.40. Such a waiver must be sworn before the grand jury to be effective. In the case of Charles L. Lyon, he requested to appear before the grand jury and was informed of the requirement to sign a waiver of immunity. During the proceedings, Assistant District Attorney Moses Weintraub confirmed Lyon's understanding of the waiver's implications, including that his testimony could be used against him and that he could not claim self-incrimination. Lyon acknowledged he understood these consequences and consulted with his attorney, Thomas Watson. After their consultation, Lyon signed the waiver of immunity, which was marked as Grand Jury Exhibit Number 53. Following the signing, he was sworn in by the foreman of the grand jury, affirming he would provide truthful testimony.

The individual defendant voluntarily signed a waiver of immunity before the Grand Jury with legal counsel present and after being informed of his rights. The waiver document included a printed jurat indicating it was 'subscribed and sworn to' on June 20, 1980, although the defendant did not formally raise his hand to affirm the oath in the Grand Jury chamber. This situation meets the requirements of CPL 190.45 (subd 2), which does not mandate a specific procedure for swearing the waiver. The Court of Appeals' decision in Bookman v City of New York emphasizes that the oath must be taken in front of an authorized officer and must demonstrate a conscious acceptance of the obligation, both of which were satisfied by the defendant's actions. His signature on the waiver, coupled with its jurat, reflects an intention for it to serve as a sworn statement, and it is understood that he expected to waive immunity to testify before the Grand Jury. Considering all circumstances, the court concludes there was adequate compliance with CPL 190.45 (subd 2), validating the waiver of immunity. The Supreme Court's order from October 20, 1980, is reversed regarding the affected counts of the indictments, which are reinstated, and the cases are sent back to Criminal Term for further proceedings.