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.

Subscribe Here to Never Miss a TiNY Blog

Blog Disclaimer

TiNY Report for May 14, 2024
NY state flag and the word TAXES made out of money

Wow, wow, WOW! Some meaty, substantive tax law issues are addressed in this week’s DTA output of two Tribunal decisions, two ALJ determinations, and one ALJ order. PALs, and successors, and SaaS, oh my. And ALJ Law establishes (chronological) order in his court. Enjoy.


Matter of Kirkpatrick (May 2, 2024); Div’s Rep. Mario Matos, Esq.; Pet’s Rep. pro se; Article 22/Passive loss limits (Pete Calleri).

Under IRC § 469, an individual may claim losses from passive activities only up to the amount of passive income on that individual’s return. However, if an individual meets all the IRS requirements to be considered a real estate professional, rental real estate losses are considered nonpassive and are not limited. The issue here was whether Petitioners established that Petitioner Steven Kirkpatrick (“Petitioner”) qualified as a real estate professional.

Petitioners filed a joint 2015 return claiming a deduction of $72,480 from rental real estate activities but failed to include a required federal schedule E and were consequently audited by the Division. Petitioners responded to auditor inquiries with a completed schedule E with the question “Did you meet the real estate professional qualifications, as set forth in Internal Revenue Code section 469(c)(7)?” marked “yes.” Petitioners included a brief description of the properties that Petitioner claimed to manage, and his hours worked, but failed to provide any substantiating documentation.

At a hearing, Petitioner testified that he did not keep time logs of his rental real estate activities. He estimated his time spent managing each property and offered examples of activities performed (e.g., cutting grass, managing tenants, removing snow, etc.). He also claimed that he “lived for the most part” at one of his claimed rental properties (the “Fulton Street property”), even though he listed a different property (the “Edgecombe Avenue property”), which he also claimed as rental real estate, as his permanent address on his return.

The ALJ determined that Petitioners did not establish that the nature of activities, the number of hours, or the qualification of specific properties supported a finding that Petitioner qualified as a real estate professional for income tax purposes.

The Tribunal agreed with the ALJ. First, it concluded that Petitioners had failed to establish both key points of IRC § 469(c)(7)(B)(i)—that more than half of Petitioner’s time was spent as a real estate professional and that each of the properties in question qualified as rental properties. Regarding the first prong, Petitioners cited no authority supporting their argument that mere testimony together with documents prepared for audit or litigation are sufficient to prove hours worked. Additionally, Petitioners made contradictory and inconsistent claims on their returns and at various stages of the dispute and provided information insufficient to reasonably determine that more than half of Petitioner’s time was devoted to being a real estate professional. Regarding the second prong, by listing the Edgecombe Avenue property as Petitioners’ personal address on their tax return, and by testifying that Petitioners lived there, Petitioners showed that this was their personal residence and not rental real estate.

Second, the Tribunal similarly agreed with the ALJ that, even if the evidence of Petitioner’s real estate activities was substantiated, the hours associated with the Edgecombe Avenue property could not be considered in determining whether Petitioner was a real estate professional because, again, that property was not rental real estate as defined by IRC § 469(c)(7)(B). Without those hours, Petitioner’s total hours fell short of the required amount.

Third, the Tribunal agreed with the ALJ that the evidence presented by Petitioners did not distinguish between the amount of time Petitioner’s husband worked on the Edgecombe Avenue personal residence and the amount of time he alleged to have worked on the same property as rental property. As such, Petitioners failed to prove Petitioner had worked on rental real estate as required by Treasury Reg. § 1.469-9(b)(3).

Finally, the Tribunal agreed with Petitioners that, because the Division presented no evidence to counter Petitioners’ claim of working 2,000 hours at a law firm, this finding of fact should remain undisturbed. This, however, was ultimately inconsequential.

The Tribunal found that Petitioners failed to meet their burden of presenting clear and convincing evidence to establish that the notice of deficiency was erroneous or that the determination of the ALJ was incorrect. Accordingly, the Tribunal dismissed Petitioners’ petition.

Of interest (to TiNY, anyway), Petitioners’ two representatives were Florida lawyers from a law office in Tampa. The Division of Tax Appeals’ rules allow petitioners to be represented by lawyers not licensed in New York with the permission of the Tribunal. Given that the substantive legal issue concerned the US Internal Revenue Code and not New York’s internal tax laws, there would be no reason for the Tribunal to withhold permission in this instance. Similarly, Hodgson Russ attorneys sometimes appear in tax matters in other states (with or without local counsel) when permitted if we think it is in our client’s best interest.

Matter of, Inc. (May 2, 2024); Div’s Rep. Elizabeth Lyons, Esq.; Pet’s Reps. Peter Larson, Esq. and Raye Elliott, Esq.; Articles 28 and 29/SaaS as a sale of software (Chris Doyle).

This was a close case. The issue involved whether an on-line service provided by Petitioner that matched prospective employers looking for temporary employees with suppliers who provide contingent (temporary) employees was a taxable sale of software or a nontaxable provision of an unenumerated service.

Petitioner provided an integrated service of matching large national and global customers that desired to purchase the services of temporary workers with suppliers of temporary contingent labor. Petitioner provided this service by obtaining large amounts of information from a prospective customer regarding its needs and processes during a customer’s on-boarding process and then used that information to match the customer with a vendor that had an available and appropriate supply of labor. Petitioner spent hundreds or thousands of hours gathering information from prospective customers because Petitioner tailored its services based on each individual customer and therefore needed to understand the scope of the services required by the customer. Customers accessed Petitioner’s services using Petitioner’s proprietary vendor management system (VMS) which utilized pre-written software accessible through the internet with a username and password. According to Petitioner’s website:

“VMS is the software that automates the hiring process of contract workers. It is often a web-based application that helps to manage and procure staffing services from requisition through billing. Most VMS tools are delivered through a software-as-a-service model. VMS tools provide significant improvements in reporting analytics capabilities that far outperform manual system and processes. * * * Suppliers see all relevant job orders, and [customers] can accurately assess labor services spend [sic] and performance, leading to significant cost reduction.”

The VMS was in essence a software application that allowed Petitioner’s customers to access a large universe of potential workers to determine which ones might be suitable for the customers’ needs and then provide analytics to help the customer manage those temporary employees. 

At the hearing, Petitioner entered into evidence several contracts for VMS services, and each of them included a license to use Petitioner’s software. 

The Tribunal affirmed the ALJ’s determination that Petitioner’s sales of VMS were sales of pre-written computer software and thus sales of tangible personal property subject to New York sales tax. In doing so, the Tribunal disagreed with Petitioner that the “true object” or “primary function” analyses should be applied to determine the taxability of VMS. Under those tests, the taxability of receipts for the provision of a bundle of services is determined by looking at the transaction globally and determining from the purchaser’s perspective what was being purchased. The Tribunal ruled that these tests were not applicable to determine the taxability of a bundled sale in which one part of the bundle was services and the other part of the bundle was the sale of tangible personal property (i.e., the pre-written software). 

While the Tribunal agreed that Petitioner provided, in part, services, it found that “VMS software technology was the central element of those contracts and that customers were not just purchasing petitioner’s services, they were purchasing pre-written software that they used to facilitate the sourcing, hiring and management of contract labor.”  As such, the Tribunal found that Petitioner’s sales of VMS were subject to sales tax.


Matter of De Los Santos (ALJ Russo, May 2, 2024); Div’s Rep. Daniel Schneider, Esq.; Pet’s Rep. pro se; Article 22 (Zoe Peppas).

Petitioners filed a petition at BCMS. A conciliation conference was scheduled, but Petitioners failed to appear. A conciliation default order was issued. Petitioners requested the conciliation default order be vacated. Their request to vacate the default order was granted and BCMS informed them they would be advised of the date and location of their scheduled conference. In the meantime, Petitioners filed a petition with the Division of Tax Appeals protesting the same notice that was the subject of the pending BCMS proceeding.

The DTA’s regulations require that “where a requester fails to appear at a conciliation conference and a conciliation default order is issued, the taxpayer may either make a written request to vacate the default order or may file a petition with the Division of Tax Appeals. . . . A taxpayer may not do both concurrently.” Since the petition was filed while the BCMS proceedings were pending, the petition was premature. So, the Division’s motion to dismiss the petition was granted.

Matter of Beaver Street Pizza, LLC (ALJ Behuniak, May 2, 2024); Div’s Rep. Elizabeth Lyons, Esq.; Pet’s Rep. John Weinberg, Esq.; Articles 28 and 29/Bulk sales (Chris Doyle).

Petitioner operated a pizza restaurant on Beaver Street (go figure). A prior vendor, Manhattan’s Best Pizza, Inc. (“MBP”) previously operated at the same location. MBP assigned its lease for the premises to Petitioner. The terms and conditions of that assignment included that Petitioner pay MBP $10 for which Petitioner received both the lease of the premises for the remaining lease term, and an undivided interest in a $65,907.80 security deposit. MBP (and not Petitioner) was required to pay its landlord roughly $165,000 for past-due rent, legal fees related to the assignment, and an “assignment fee.” And Petitioner assumed responsibility for payments under the lease “as if it were the original tenant.” 

The Division took the position that Petitioner was a purchaser of “business assets” of MBP outside of the ordinary course of MBP’s business and as such was liable for the sales taxes owed by MBP. If a business purchaser fails to withhold funds from the seller and fails to file a proper and timely notice of bulk sale with the Division, then such purchaser becomes personally liable for the sales and use taxes determined to be due from the seller under Tax Law § 1141(c), up to the fair market value of the assets acquired. A bulk sale includes the transfer of business assets outside of the ordinary course of business.

At the hearing Petitioner argued it didn’t purchase any of MBP’s business assets, but merely assumed the lease under the assignment agreement.

Judge Behuniak found that Petitioner acquired business assets from MBP in a bulk sale transaction. The Judge found that the lease was one of the primary assets of the business since it included not only the premises, but also the pizza ovens, tables, and chairs. As a bulk sale purchaser, the Judge found that Petitioner was liable for MBP’s pre-sale sales tax liabilities limited by the higher of the purchase price or the fair market value of the assets transferred. The Judge found that “the purchase price appear[ed] to be zero.” But since Petitioner did not prove that the fair market value of the assets received was less than the tax liability asserted, the Judge sustained the assessment against Petitioner. 

I agree with the Judge that there was a bulk sale. But, with respect, I’m not sure I agree with the Judge that Petitioner did not prove the fair market value of the assets transferred was nil. The purchase price was found by the Judge to have been zero. It appeared to me from the facts found that MBP and Petitioner were unrelated parties acting at “arm’s length.” Given those facts alone the Judge could have determined that the value of assets acquired was what was paid for the assets. But the required standard of proof is “clear and convincing evidence,” and the Judge, who was privy to all of the facts, was clearly not convinced.


Matter of Volman (ALJ Law, May 2, 2024); Div’s Rep. Aliza Chase, Esq.; Pet’s Rep. Michael Tremonte, Esq.; Articles 28 and 29/Timy (Zoe Peppas).

Per usual, the question of whether the taxpayer filed a timely request for a conciliation conference at BCMS hinges on whether the Division met its burden of demonstrating proper mailing of the notices to Petitioner. Here, notices of estimated determination were dated as sent to Petitioner on April 14, 2022. Petitioner filed a request for BCMS conciliation conference on January 13, 2023. BCMS dismissed the request as untimely.

“To meet its burden, the Division must show proof of a standard mailing procedure and that such procedure was followed in the particular instance in question.” In this matter, the Division offered a CMR that was properly completed, along with two affidavits attempting to show the proper mailing procedure was followed. However, one affidavit “unequivocally reference[d] and relie[d] upon” the other, even though it was dated and signed after the affidavit on which it claimed to rely. This is like one of those Marvel-movie time-travel paradoxes: if a grandson affidavit goes back in time and kills its grandfather affidavit, how could the grandson affidavit ever be born to go back in time to kill the grandfather affidavit? “Given the discrepancy in dates,” the Judge found (without any reference to time-travel paradoxes) the affidavits could be accorded no weight. Since the Division failed to offer sufficient proof establishing the statutory notices were mailed to Petitioner on April 14, 2022, the Division’s motion for summary determination was denied and a hearing was to be scheduled.

Jump to Page

Necessary Cookies

Necessary cookies enable core functionality such as security, network management, and accessibility. You may disable these by changing your browser settings, but this may affect how the website functions.

Analytical Cookies

Analytical cookies help us improve our website by collecting and reporting information on its usage. We access and process information from these cookies at an aggregate level.