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 June 27, 2023
NY state flag and the word TAXES made out of money

I may be turning into a crabby old man.

I checked the DTA website every half hour Thursday the 15th. Then I checked it again on Friday the 16th just in case, maybe, someone in charge of posting the decisions had been sick on Thursday. I think I checked on Monday the 19th too. But the country was closed that Monday, so I wasn’t surprised to see there were no updates.

There were no determinations or decisions every time I checked.

I had a couple of seconds between calls last Wednesday the 21st, so I checked the website and was distressed to see that the DTA had sneaked one order and five determinations onto its site. I’d complain about the DTA’s not posting according to a schedule, but the timing of TiNY postings is just about as predictable as the landfall of hurricanes. And I despise hypocrisy in all forms (other than in satire and sarcasm). So, yeah, this is not a situation in which the black pot is introducing himself to the black kettle. 

Anyway, I started to write up the cases, and then was jammed-up when the DTA loaded a few more cases onto its website. So, I am a little late to the game. Mea culpa, loyal readers.

And speaking of loyal readers, after I finished giving a speech last week, one of the audience members asked why he couldn’t sign up to get TiNY (or a link) emailed to him whenever it posts. I didn’t have a great answer for him. And it sounds like we should be able to do that. So our marketing staff is working on having a “check box” that can be used to opt-in for automatic delivery. Ain’t technology grand?

ALJ Order from June 8, 2023:

Matter of Sakow, ALJ Maloney, June 8, 2023; Div’s Rep. Jennifer Hink-Brennan, Esq.; Pet’s Rep. Carol Luttati, Esq.; Article 22/Motion for Preclusion. 

The Division audited Petitioner and her husband and issued a Notice asserting additional income tax for 2015. Before the Notice was issued, Petitioner’s husband passed away. After the Notice was issued Petitioner requested a Conciliation Conference (“BCMS”) seeking, one expects, a reduction to/cancellation of the Notice on substantive grounds. That request was denied in a BCMS Order dated December 17, 2021. On a separate track, Petitioner sought innocent spouse protection from the Division. The Division denied said protection, because: (1) Petitioner failed to allege that payment of the liability would cause her economic hardship; (2) she failed to show the she was not aware of the income item that caused the income tax liability; and (3) she did not show that she did not benefit from the unpaid tax. 

Again, Petitioner challenged the denial of innocent spouse relief in a separate BCMS proceeding. BCMS issued an Order denying the requested innocent spouse relief on December 17, 2021. 

A timely petition was filed challenging both of the adverse Orders. The Division’s Answer to the petition contained eight separate affirmative statements. Petitioner then served the Division’s counsel with a Request for a Bill of Particulars, which the Division moved to be vacated alleging that the Request related to matters of law, was unduly burdensome, and sought improper discovery.

In an earlier proceeding Judge Maloney granted the Request for a Bill of Particulars to the extent of the first four paragraphs of the Petitioner’s Request. The Division filed its court-ordered response on January 11, 2023.  Thereafter, Petitioner filed a motion requesting that the Division be precluded from offering evidence on the issues covered in Petitioners first four paragraphs of its Request alleging the Division’s responses were defective and insufficient to amplify the pleadings.

The Judge ruled that the Division was conditionally precluded to offer evidence on two issues: (1) whether Petitioner was engaged in a fraudulent scheme to transfer assets; and (2) the facts surrounding a transfer of assets between Petitioner and her decedent-spouse to avoid payment of tax. Unless the Division files a satisfactory supplemental Bill of Particulars within 30 days of the Judge’s Order, the preclusion order will kick-in. On the issue of whether Petitioner had actual knowledge of the sale of a valuable real property asset by her decedent spouse, the Judge found the Division’s initial Bill of Particulars was a satisfactory response. 

The Order is an interesting read, the underlying theme of which may be that the Division just isn’t very comfortable when it has the burden of proof on an issue. The language of the Division’s initial Bill of Particulars seemed to me to be far broader than it needed to be. The Judge also appeared to have “called-out” the Division a little by noting that some of the Division’s responses were “admissions against interest.” But, in my humble view, the Division’s mission is to objectively enforce the laws imposing taxes in New York. And it should endeavor to accomplish this mission through processes that are fair and transparent. And should the Division decide that a factual matter is not in dispute, it is entirely consistent with its mission (and its interest) to admit that to both the adjudicating judge and to the petitioner. The Division serves its mission by helping DTA judges get to the legally-correct result even if the Division does not prevail in the particular matter in front of the DTA. So, unlike the Judge, I feel the Division’s admissions were consistent with their mission and interest. Tomato, tomahto. 

The take-away from the case for petitioners who normally bear the burden of proof is this: if served with a request for a Bill of Particulars by the Division, respond. But respond directly and in as few words as possible. 

Determinations dated June 8, 2023:

Matter of Bell, Acting Supervising ALJ (“ASALJ”) Gardiner, June 8, 2023; Div’s Rep. Christopher O’Brien, Esq.; Pet’s Rep. pro se; Article 22. The petition was served without a copy of the required statutory notice, and this formal deficiency was not cured even after the DTA requested a copy of the required notice. Accordingly, Judge Gardiner ordered that the case be dismissed with prejudice.

Matter of CPV Staten Island, Inc., et. al., Judge Law, June 8, 2023; Div’s Rep. Adam Roberts, Esq.; Pet’s Rep. Richard Gabor, Esq.; Articles 28 and 29. The Petitioners in this case were the owners and responsible officers of two Italian delicatessens on Staten Island. The delis sold both prepared foods (generally taxable) and unprepared foods (generally non-taxable). The delis also did some catering (generally taxable). The Division conducted an audit of the two delis and in connection with those audits requested the delis’ books and records. The delis provided some tax returns and not much else. Given that the delis sold both taxable and nontaxable goods, and there was no paper trail provided by the delis to confirm receipts, let alone taxable versus nontaxable receipts, the Division resorted to an external index to calculate total and taxable sales. The Division subpoenaed the delis’ leases from their landlords, and then applied a rent factor determined for limited restaurants by a standard industry guide: the National Restaurant Association’s Restaurant Industry Operations Report (the “RIOR”) to estimate total gross sales revenue. Then the auditor estimated that 80% of the delis’ gross sales were subject to sales tax. The Division’s calculations resulted in significant additional taxable sales, and Notices of Determination were issued asserting sales tax on those additional taxable sales.

At the hearing, Petitioners asserted that the delis were, in essence, more like butcher shops than they were like limited restaurants. So, Petitioners argued, the rent factor for butcher shops should have been used. 

Judge Law wasn’t buying Petitioners’ bologna. 

According to the Judge: “It is petitioners’ burden to prove, by clear and convincing evidence, that the audit method utilized by the Division was unreasonable or that the resulting assessment was erroneous.” And: “[t]he records [submitted by the Delis] were not only inadequate to perform a detailed audit, they were nonexistent.” Given the lack of documentary evidence provided to the court or the auditors, Judge Law found Petitioners  had not satisfied their burden of proving the methodology used by the auditors was unreasonable. 

It's hard to disagree with the Judge on this point. The failure to produce records makes it very difficult for a taxpayer to prevail when the taxpayer has the burden of proof. And, barring flood, fire, or EMP pulse, isn’t the failure to have records a little … I dunno … suspicious?

The case focused on whether the use of the rent factor to estimate sales was appropriate. Given the lack of records, the Judge found it was appropriate. But there was an aspect of the Division’s analysis that did not, in my opinion, get enough attention. No one challenged the use of—and foundation for—the taxability ratio of 80%. Where did that come from? The original auditor didn’t testify, so we don’t know if it was based on the auditor’s observation of the delis in operation, or another index, or a Ouija Board. From my perspective, the absence of a foundation for using a particular percentage for the taxability ratio is just as bad as the Petitioners’ failure to produce sales records, and therefore the Division’s calculations also lack credibility. But when the presumption of correctness attaches to the Division’s Notice and the burden of proof falls on the Petitioners, the Division may prevail even when there are evidentiary holes in both parties’ cases.

Matter of Membreno, ASALJ Gardiner, June 8, 2023; Div’s Rep. Mary Hurteau, Esq.; Pet’s Rep. pro se; Article 22. The petition was served without a copy of the required statutory notice, and this formal deficiency was not cured even after the DTA requested a copy of the required notice. Accordingly, Judge Gardiner ordered that the case be dismissed with prejudice.

Matter of Peregrine Enterprises, Inc., ASALJ Gardiner, June 8, 2023; Div’s Rep. Maria Matos, Esq.; Pet’s Rep. Jeanina Lindsay; Article 22(?). The petition was served without a copy of the required statutory notice, and this formal deficiency was not cured even after the DTA requested a copy of the required notice. Accordingly, Judge Gardiner ordered that the case be dismissed with prejudice. This is styled as an Article 22 case against an incorporated entity, so I assume the issue involved income tax withholding. But now we’ll never know.

Matter of Wright, ASALJ Gardiner, June 8, 2023; Div’s Rep. Amanda Alteri (Esq?); Pet’s Rep. pro se; Article 22. The petition was served without a copy of the required statutory notice and this formal deficiency was not cured even after the DTA requested a copy of the required notice. Accordingly, Judge Gardiner ordered that the case be dismissed with prejudice.

Determinations dated June 15, 2023:

Matter of Padilla, ALJ Gardiner, June 15, 2023; Div’s Rep. Christopher O’Brien; Pet’s Rep. pro se; Article 22. On her original return, Petitioner claimed an earned income tax credit and an Empire State child credit (for two dependents). A desk audit resulted in Petitioner’s credits being denied—that might have been because Petitioner did not provide proof of birth and relationship for both of the persons for which she claimed the child credit and because she did not prove her earned income for the year. At a BCMS conference related to the case, the conferee agreed to grant a $100 credit for the one dependent who seemed to be of qualifying age. Petitioner filed her timely petition.

Judge Gardiner sustained the BCMS Order finding that Petitioner failed to prove the amount of income she earned during the year at issue. The Judge found particularly interesting that Petitioner reported gross receipts from her house cleaning services on her Schedule C of $16,005, but made deposits into her bank account during the year of $24,175.44.

Is Petitioner going to get audited for sales taxes now? That would be nasty.

Matter of Ourian, ALJ Russo, June 15, 2023; Div’s Rep. Christopher O’Brien; Pet’s Rep. pro se; Article 22. On her 2019 New York return, Petitioner reported tax pre-payments through withholding of $1,164. That level of prepayment entitled her to a refund of $580.  But the Form W-2 and W-2 Statement attached to her return showed that New York taxes of only $582 had been withheld by her employer. Since the tax withheld did not exceed the tax she owed, the Division denied her claimed refund. 

At the hearing Petitioner did not offer any proof of additional New York income tax withheld. And even though the Judge gave Petitioner additional time after the hearing to provide such evidence, Petitioner did not do so. So this should be an easy case, right?

Right. Given that Petitioner did not sustain her burden of proving that more than $582 was withheld, Judge Russo denied her petition in a three-and one-half page “move-along-folks-nothing–to-see-here” determination. 

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