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Lo v. Commissioner of Revenue

Supreme Court of Minnesota

April 12, 2017

Yik C. Lo, Respondent,
Commissioner of Revenue, Relator.

         Tax Court Office of Appellate Courts

          Mark A. Pridgeon, Edina, Minnesota, for respondent.

          Lori Swanson, Attorney General, Michael Goodwin, Assistant Attorney General, Saint Paul, Minnesota, for relator.


         Based on the plain language of Minnesota Statutes § 270C.56, subd. 1 (2016), a corporate president and 50 percent shareholder who was active in the corporation's restaurant business, including sometimes signing the corporation's tax returns, is personally liable for the unpaid sales tax liability of the corporation.

         Considered and decided by the court without oral argument.


          McKEIG, Justice.

         This appeal from the tax court requires us to determine whether a corporate officer who funds and controls a corporation is personally liable for unpaid sales taxes when the corporation is managed by someone else. The tax court held that respondent Yik Lo was not personally liable for the unpaid sales taxes, reasoning that he did not have sufficient functional control over the corporation's operations notwithstanding his formal authority over the business. We reverse.


         Yik Lo emigrated from China to the United States in 1974 and was joined by his wife, Yau Lo, and their son, Kee Lo, in 1980.[1] In 1990, Yik and Yau created H.K.D. Lo, Inc. Yik and Yau each owned a 50 percent share in H.K.D. and were directors of the corporation. In addition, Yik was the chief executive officer, president, and secretary of H.K.D., and Yau was the vice president and treasurer.[2] Starting in 1990, Yik and Yau operated several restaurants through H.K.D., the last of which they sold in 2005.

         In 2002, Yik and Yau Lo (not H.K.D.) purchased a building with a restaurant on the ground floor. Yik and Yau did not operate the restaurant but instead leased the space to the restaurant's owner. When the restaurant closed in 2004, they decided to either sell the building or open a new business there. Around the same time, Kee decided to open a restaurant called Jun Bo. Jun Bo was Kee's idea, and he initially considered creating a new corporation through which to operate the restaurant. But Yik planned to retire, so he was interested in renting out the space vacated by the previous tenant rather than operating a restaurant himself. Yik advised Kee that operating Jun Bo through H.K.D. would allow Jun Bo to benefit from H.K.D.'s established credit history and supplier relationships. Kee agreed to do so on the condition that he would be "in charge with everything." Yik assented, and Kee therefore decided to operate Jun Bo through H.K.D. Before Jun Bo began operations, Yik secured bank loans for H.K.D., totaling $600, 000, to remodel the space and purchase equipment for Jun Bo's operations. Yik, as an officer of H.K.D., also secured Jun Bo's liquor license.

         Jun Bo opened for business in June 2006. Yik argues that Kee controlled Jun Bo from the beginning and was "in charge of the entire business." Yik and his other son, Danny Lo, both characterized Kee as the "president" of Jun Bo. Danny believed Kee could have fired him because Kee "was owner and president of Jun Bo." Kee and Danny had the authority to hire and fire any of Jun Bo's employees. Kee also signed most of H.K.D.'s checks, including payroll checks. And Kee decided which bank to use and generally determined when and to whom checks would be issued. Kee also served as H.K.D.'s primary contact with the Minnesota Department of Revenue. When the Commissioner audited H.K.D. in 2008, Kee notified his parents immediately, and Yik told Kee to "take care of it."

         Yik Lo, however, remained an H.K.D. director and officer throughout Jun Bo's existence. As president, H.K.D.'s bylaws gave Yik "general active management of the business of the corporation" and he remained the chief executive officer. Yik signed tax returns for H.K.D. in 2005, 2006, 2007, and 2010. He also signed a power of attorney on H.K.D.'s behalf in 2008.

         Yik was also involved in Jun Bo's operations. For example, he received Jun Bo's early bank statements at his home, and drew a salary of around $1, 000 per month for occasional work at the restaurant, including cooking, food preparation, and clean up. Yik was an authorized signer on H.K.D.'s accounts at two separate banks (along with Yau, Kee, and Danny), and regularly signed checks on Jun Bo's behalf. For example, Jun Bo paid around $140, 000 per year in rent to Yik and Yau Lo in exchange for the leased space in the Los' building. Yik often signed these rent checks, which transferred funds from Jun Bo to himself.[3] Yik also drafted and signed checks from Jun Bo to himself to cover payments to his personal creditors. In fact, Yik signed checks during almost every month of Jun Bo's existence. Checks signed by Yik on Jun Bo's behalf during the tax periods at issue amounted to over $2 million-the largest cumulative amount by any authorized Jun Bo check-signer. Kee often requested that Yik sign Jun Bo's checks when Kee or Danny was busy.

         Kee decided to close Jun Bo in 2011 because it was not generating enough business. After Jun Bo closed, Yik and Yau Lo sold the building that previously housed it. In 2012, Yik and Yau, exercising their authority as officers of H.K.D., formally dissolved the corporation.

         This case arises out of orders by the Commissioner of Revenue assessing Yik personally liable for sales taxes owed by H.K.D.[4] In 2008, the Commissioner issued an order assessing H.K.D. $260, 631.97 in additional sales tax, penalties, and interest for the periods between December 1, 2004, and November 30, 2007. H.K.D. failed to pay the amounts owed. In 2011, the Commissioner issued an order assessing Yik personally liable for H.K.D.'s sales tax liability in the reduced amount of $222, 584.08. Also in 2011, the Commissioner issued an order assessing H.K.D. with $82, 267.24 in sales tax liability for the periods between April 1, 2008, and May 31, 2011. H.K.D. again failed to pay the amounts owed. In 2012, the Commissioner issued an order ...

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