Taxes in New York (TiNY) is a blog by the Hodgson Russ LLP State and Local Tax Practice Group members Chris Doyle, Peter Calleri, and Zoe Peppas. The weekly reports are intended to go out every Tuesday after the New York State Division of Tax Appeals (DTA) publishes new ALJ Determinations and Tribunal Decisions. In addition to the weekly reports, TiNY may provide analysis of and commentary on other developments in the world of New York tax law.

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TiNY Report for January 22, 2024
NY state flag and the word TAXES made out of money

There’s only one Determination to analyze from last week, and it involves earned income credits. I don’t have a great love for these types of cases since: (1) they are generally fact-based cases that rarely involve subtle legal issues that require parsing the Tax Law to determine the proper application of the statute, (2) the petitioners often represent themselves resulting in positions that are not properly-framed or argued, (3) most of these cases are resolved based on the burden of proof, and those types of cases either bore or frustrate me; (4) the cost/benefit analysis of litigating these cases is illogical; (5) and I despair for the people who need to rely on earned income credits. The whole area of law just makes me sad.

And then I read this case, and I got a little mad too. Or maybe my emotional state is a Buffalo Bills play-off loss hangover.

Matter of Eldbah and Abdelhalim (ALJ Gardiner, January 11, 2024); Div’s Rep. Christopher O’Brien, Esq.; Pet’s Rep. pro se; Article 22.

Petitioners filed their 2019 return reporting $26,580 of gross income, State and City of $231 due, and claiming payments and refundable credits of $2,869. The credits included the State Earned Income credit, the City School Tax credit, the City Earned Income credit, and an Empire State Child credit. The credits were calculated based on Petitioners’ claim of three or four dependents. The Division audited the return asking Petitioners to prove that the claimed dependents were qualified dependents under the applicable tests and that Petitioners’ gross income was large enough to merit the credits claimed.

The Division did not present any witnesses at the hearing and instead relied on an affidavit from a “Tax Technician 4” who stated her duties included doing personal income tax audits. She stated that Petitioners were able to establish to the satisfaction of the Division that they had three qualifying dependents, but that $2,513 of the credits had been disallowed because Petitioners’ reported business income could not be verified. The Division did not attach any of the responses Petitioners made to its inquiries. And, although it is impossible for me to discern based on the Judge’s description of the affidavit, I expect that the affidavit didn’t have any indication of what the Division did to verify Petitioners’ income other than send a letter to Petitioners requesting additional information.

The Division issued a Notice of Denial. Petitioners challenged the Notice in a Conciliation Conference, and the Conferee sustained the Notice. This ALJ Hearing was timely commenced.

Petitioner Abdelhalim testified credibly at the hearing that he worked selling food from a food truck in 2019 and was paid $600 per week. The company he worked for was Meals on the Go, Inc., which had since changed its name to Sunrise Delight LLC. And he identified the person he worked for as Sherif Emish. Petitioners also submitted two documents into evidence: (1) a notarized statement from Sunrise Delight LLC (and signed by Mr. Emish) stating that Mr. Abdelhalim worked for the predecessor company in 2019 at a gross weekly salary of $600, and (2) a two-page statement (also signed by Mr. Emish) on the letterhead of Meals on the Go, Inc., giving an itemized list of the days Mr. Abdelhalim worked in 2019: which included 42 full work weeks and one 2-day work week.

Judge Gardiner found that while the documentary evidence may not have reached the level of “clear and convincing,” the credible testimony of Mr. Abdelhalim combined with the documents sufficiently satisfied Petitioner’s burden of proof. A taxpayer win. Yay.

So why did this case get me mad?

The case was about $2,638. In a rational world, the auditor assigned to the case would have been encouraged and trained to assist Petitioners by indicating the types of documentation the Division would have found acceptable to prove Petitioners’ gross income. In a rational world, the auditor would have been authorized to contact Mr. Emish to find out how Petitioners’ gross income could be corroborated. Instead, I suspect (based on thirty-plus years of doing audits with the Division) the auditor was trained to merely ask the taxpayer for unspecified proof of income and then simply said, “you haven’t convinced me” when the proof offered was unconvincing. The Conciliation Conferee had another chance to get to the right result by either believing Petitioners or instructing the Division to dig deeper than a superficial written request for additional information sent to these unsophisticated Petitioners (I apologize, loyal readers, for making the assumption that a food truck guy is not sophisticated about taxes and financial matters; over-generalization is one of my many faults I am trying to remedy). Or the Conferee could have maneuvered the parties into a settlement. Instead, I suspect that the Conferee felt his/her hands were tied due to the relative lack of proof and reflexively sustained the Notice. So, Petitioners were required to participate in a full-blown ALJ hearing.

“So what?” you ask. “Isn’t this why we have a Division of Tax Appeals? Didn’t it achieve the right result?”

Yes, and probably. But at what cost?

Judge Gardiner and Lawyer O’Brien have their offices in Albany. They had to travel from Albany to Brooklyn for the hearing. One expects that they stayed in hotels the night before the hearing. One expects that the State reimbursed their travel expenses. A hearing room was required. Maintaining suitable hearing space requires money. A court reporter attended the hearing. There were probably post-hearing submissions. We know the Division’s lawyers needed to work with the Division’s personnel to develop an appropriate affidavit. With salaries and benefits and the rest of the direct and indirect expenses, the State spent a lot of money on this hearing.

My point? There were several opportunities for the Division to have worked a little harder to determine the validity (or invalidity) of the income Petitioner claimed to have earned in 2019. Yes, someone from the Division might have needed to better instruct Petitioners on how they might satisfy the burden of proof; but from the Division’s perspective, audits should be intended to obtain the right result, not the highest revenue for the State. And here, because the auditor and the Conferee didn’t feel empowered to help Petitioners prove their income, I expect the State of New York spent at least $30,000 trying to chase a $2,600 liability, and then lost!

To be clear: this is not an admonishment of New York auditors and conferees. It is an admonishment of a system that is biased toward obtaining revenue at the expense of getting to the right result.

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