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 May 16, 2023
NY state flag and the word TAXES made out of money

I missed posting the May 4 edition of TiNY. I summarize the three timies that hit the DTA’s website on “Star Wars Day,” below.  I couldn’t cover those cases that week because I was too busy helping the Hodgson Russ  team get out our Alert on the revenue portions of the 2023-24 State Budget enacted during the first few days of May. And since TiNY is all about the Division of Tax Appeals, let me offer this slice of that Budget Alert:

“The Department of Taxation and Finance now has the Right to Appeal Certain Tax Appeals Tribunal Decisions: Taxpayers have always had the right to appeal adverse Tribunal decisions; but until now, the Tax Department was not permitted appeal rights. The Budget, under Part V, allows the Tax Department to appeal Tax Appeals Tribunal decisions by petitioning the Appellate Division of the Supreme Court, Third Department. For the Department to appeal a decision, however, the judicial review must be ‘premised on interpretation of the state or federal constitution, international law, federal law, the law of other states, or other legal matters that are beyond the purview of the state legislature.’ When the Department petitions for judicial review, however, the accrual of any interest and penalty that would otherwise continue to accrue shall be paused until 15 days after the issuance of a judicial decision that is not appealable. Some have opposed giving the Tax Department appeal rights since it tends to raise the potential cost of a tax controversy to a level beyond that which most taxpayers can afford. It will be interesting to see how the appellate courts deal with the standard of review, since the appeals will technically be between two administrative agencies and the normal standard of review in administrative law cases results in the agency determination being sustained unless it is arbitrary and capricious or not supported by substantial evidence. But what happens when the appeal is agency versus agency?

The new law provides that both the Tribunal and the Petitioner are named respondents when the Tax Department appeals a decision. Does that mean that the Tribunal is required to pay half of the respondent’s legal fees for the appeal?”

That last little jab was a bit of tongue-in-cheek since the law provides that the Tribunal shall not participate in the judicial review of its proceedings. Still, the legislation does not seem to address all of the issues raised by the new law.

There are one decision and two determinations to summarize from May 4, and all three are timies. But worry ye not, loyal readers, last week’s DTA production includes four determinations, three(!!!) of which are pretty meaty. One of the more interesting determinations, Matter of Verizon, was leaked early last week to other media outlets (is it self-aggrandizement to imply that TiNY is a “media outlet”?). But even though other commentators may have already written about Verizon, I know our readers will want TiNY’s (Uncensored? Irreverent? Totally off-the-wall?) take on the ruling. 

Determinations from April 27

Matter of Gonzalez, Acting Supervising Administrative Law Judge Gardiner, April 27, 2023, Div’s Rep. Daniel Schneider, Esq.; Pet’s Rep. pro se, Article 22. Typical timy with a typical result: petition dismissed on the DTA’s Notice of Intent to Dismiss. Petitioner did not file his petition with a statutory notice or a Conciliation Order attached. And then he did not cure that insufficiency.

We take note that this case is decided by Acting Supervising ALJ Gardiner, so I assume Supervising ALJ Friedman has moved on to greener pastures. Good luck to you wherever you land Judge Friedman. You treated me fairly the few times we crossed paths, so thank you for that.  

Matter of Brooks, ASALJ Gardiner, April 27, 2023, Div’s Rep. Daniel Schneider, Esq.; Pet‘s Rep. pro se, Article 22. Typical timy with a typical result: petition dismissed on the DTA’s Notice of Intent to Dismiss. Petitioner did not file his petition with a statutory notice or a Conciliation Order attached. And then he did not cure that insufficiency. Change the Petitioner’s name. Suds, rinse, repeat. 

Determinations from May 4

Matter of Garg and Nigalaye, ALJ DiFiore, May 4, 2023, Div’s Rep. Stephanie Lane, Esq., Pet’s Rep. Ramesh Sarva, CPA, Article 22. Before getting into the substance, let’s make a few observations: TiNY’s “Portraits in Courage” award goes to Judge DiFiore for issuing two lengthy substantive determinations in one week: this one and Matter of Garg (above). Both determinations involve juicy substantive issues for TiNY to muse about. This honor has not been bestowed by TiNY since we awarded it to Judge Gardiner in August 2018 for writing up three timies in one week. And now she is Acting Supervising Administrative Law Judge Gardiner. Coincidence?

The two issues here were: (1)  when did Petitioners move from New York City to Jersey City, and (2) when did a sale of partnership interests by one of the Petitioners “accrue” under Tax Law § 639’s accrual rule. 

Judge DiFiore found that Petitioners failed to satisfy their burden to prove they moved out of New York on May 15, 2016, rather than on June 13, 2016, as asserted by the Division. Even though Petitioners rented an apartment in Jersey City on May 12, their cell phone records indicated that in every day in May in which there was texting or calling activity the last call or text every night and the first call or text every morning was from New York City until June 8, 2016. The first call or text of the day didn’t start to regularly originate from New Jersey until June 13. Although Petitioners testified that they moved on May 15, their New York landlord provided the Division with documents indicating the move out of the NYC apartment did not occur until June 13. Given the conflicting evidence, the Judge determined that Petitioner’s had not proven with clear and convincing evidence that they had moved out of New York prior to June 13.

Identifying a later domicile-change date may have all been for naught, since Judge DiFiore also found that Petitioners would have needed to move out of New York before May 12 to avoid New York tax on the gain from the sale of the partnership interests. When taxpayers change status from resident to nonresident, they are required to include in their income from the resident period any income that “accrued” prior to the move. To determine when income accrues, the Division follows the federal “all events test.” Even though the partnership interest sale agreement had several contingencies that could have affected the sale of the interests, according to the Judge the documents submitted into evidence demonstrated that all of the contingencies were satisfied on or before May 12. And even though the sale was not closed and Petitioners did not receive the sale proceeds until May 24, under these circumstances the Judge determined that the gain from the sale “accrued” on the date all the contingencies were satisfied: May 12. Since the earliest Petitioners claimed to have moved was May 15, the entire sale gain could be included in their fully-New-York-taxable pre-move income under Tax Law § 639’s accrual rule.

Matter of Willie, ALJ Law, May 4, 2023, Div’s Rep. Aliza Chase, Esq., Pet’s Rep. Shamsey Oloko, Esq., Article 22. Typical timy with a typical result: Judge Law found that the Division proved its Notice was properly mailed to Petitioner on March 7, 2019. Petitioner filed a Conciliation Conference Request on May 12, 2019, challenging certain other notices, but not the one at issue in this case. The Judge found that there was no evidence that a Conciliation Conference Request for the Notice at issue was filed before March 19, 2021. Accordingly, Judge Law granted the Division’s motion for summary determination. 

Matter of Sunoco, Inc. (R&M) et al., ALJ DiFiore, May 4, 2023, Div’s Reps. James Passineau, Esq. and Bruce Lennard, Esq., Pet’s Reps. Jennifer White, Esq. and George Tsoflias, Esq., Article 9-A (pre-reform). Although this case involves tax years before 2015’s corporate tax reform, it highlights a point we have been making in our speeches: most of the contentious Article 9-A tax controversies in the future will involve apportionment. Indeed, one of our recent programs was called “It’s All About Apportionment.” Ain’t it the truth. Ain’t it the truth.

At issue in this case was the computation of the receipts factor of Petitioner’s business allocation percentage. In addition to having run-of-the-mill sales activity involving sales of petroleum products to distributors, Petitioner engaged in buy/sell transactions through which Petitioner would swap gallons of petroleum products with certain chemical properties and at certain locations with other petroleum producers that had petroleum products with (sometimes) other properties and at other locations. This was done to save on transportation costs as it allowed Petitioner to sell petroleum products to its customers/distributors without needing to ship conforming product all over the country. Even though each buy/sell transaction was separately booked in Petitioner’s records, Petitioner and its buy/sell counter-parties would settle accounts periodically using net figures. So if Petitioner and Producer A entered into ten buy/sell transactions in a month, and separate accounting for those transaction would have led to Petitioner paying Producer A $115 million and Producer A paying Petitioner $117.3 million, the transactions were netted and Producer A would simply pay Petitioner $2.3 million.

The buy/sells are practical from a business perspective, but they raise accounting and tax issues. On the accounting side, booking the buy/sell as a separate sales transaction and then the sale to the distributor as another sales transaction seems to double-count revenues. And, it seems that GAAP rules (acknowledged by Judge DiFiore) contemplate this by treating the net result of Petitioner’s buy/sell transactions as an adjustment to Petitioner’s cost of inventory instead of separately recognizing as revenue the gross receipts from each of the buy/sell transactions. 

And on the tax side, even though the gain or loss from buy/sell transactions would be included in calculating taxable income, the apportionment of income using a receipts factor affected by the buy/sell transactions might lead to unanticipated results. Or worse, taxpayers could intentionally use multiple buy/sell transactions having little economic consequence to manufacture receipts factors with huge denominators, thereby lowering the receipts factor in the states in which the buy/sell transactions did not occur. I note that there is no suggestion in the determination that Petitioner was trying to manipulate its receipts factor using dubious buy/sell transactions. 

The Judge concluded that the revenue from the buy/sell transactions should not be reflected in the receipts factor of Petitioner’s business allocation percentage. That may be the correct answer. But, with respect, the Judge’s legal analysis left me wanting more. And what was the analysis? Here it is in the Judge’s own words:

“Black’s Law Dictionary defines a sale as ‘[t]he transfer of property or title for a price’ (see Sale, Black’s Law Dictionary 1337 [8th ed. 2004]). Here, inventory was transferred, and other inventory was provided in return. The transaction at issue was not a sale for purposes of Tax Law former § 210 (3) (a) (2) (B). Oil would not have been provided in a buy/sell transaction if oil was not also being acquired in return. Accordingly, petitioner’s sale side of the buy/sale transactions were not sales of tangible personal property constituting business receipts.”

So, what’s my problem? It’s this: I can hear my Tax II professor, Ken Joyce, shouting from the well of the lecture hall at a wall of vacant-eyed second year law students, that “This is Philadelphia Park Amusement! It’s a barter transaction! Barter transactions are sales or exchanges within the meaning of the Code. The basis of the inventory received is the fair market value of the inventory given up! The implication that basis is adjusted indicates that there is an income realization event in the barter sale!” For me, the conclusion that the buy/sells were not “sales” does not sit easily; it seems like the buy/sells were a transfer of title and possession for a consideration. That the consideration was of like kind does not seem relevant.

I’d certainly understand ignoring the sales if there was not an income consequence to them and they seemed motivated by tax savings. But that doesn’t seem to have been the case here, where the buy/sells have the appearance of ordinary-course-of-business transactions. In addition, New York’s current (post-reform) Article 9-A tax has a specific prohibition against the inclusion in the receipts factor of gross revenue from sales of commodities, and instead uses a calculation that  includes only net income from commodity sales in the factor (see Tax Law § 210-A(a)(2)(I)).  And if the pre-reform Article 9-A had the same rule, one might conclude an exclusion should apply to Petitioner’s buy/sell transactions. 

I’d like to see how the Tribunal wrestles with this issue, so I hope the petition continues up on exception.

Matter of Verizon New York Inc., ALJ Law, May 4, 2023, Div’s Rep. David Markey, Esq., Pet’s Reps. Eric Tresh, Esq. and Chelsea Marmor, Esq., Article 9. This is the third substantial determination from last week. Petitioner sold legacy telephone service, the gross receipts from which were subject to tax under Tax Law § 184. Back in the day, the Legislature thought a great way to stealth-tax consumers was to subject publicly-regulated utilities to tax on their gross earnings and then allow the utilities to recover the tax paid through the Public Service Commission’s rate-regulation process. Back then the Legislature prohibited the utilities from showing this tax on the invoices sent to consumers. Jaded? You betcha.

Anyway, since the legacy telephone companies already had wires going into our houses, they were well-positioned when the Internet required data connectivity. But since Internet service was relatively novel, its taxation under Tax Law § 184 as part of a transmission business lacked clarity. In addition, Congress adopted federal prohibitions against taxing Internet connectivity in the form of the Internet Tax Freedom Act (ITFA), and the ITFA was in effect during the years at issue.

When Petitioner filed its tax returns, it included as taxable gross receipts its gross earnings from local telephone service. Petitioner did not, however, include fees paid to it by internet service providers (ISPs) for copper-wire or fiber-optic broadband access services. New York audited and asserted that Petitioner needed to include fees for broadband access services in its taxable gross receipts. This case followed.

Petitioner argued that its charges to ISPs for broadband access service ought to be excluded from the tax base since they constituted interstate telecommunications services excluded under Tax Law § 184(l). Judge Law disagreed, finding that exclusion for interstate telecommunications services applies only to sales to consumers, and since the ISPs were not consumers—the ISPs were  middle-men selling broadband access to consumers—the exclusion should not apply.    

Petitioner next argued that ITFA preempted the inclusion of broadband access charges in the Tax Law § 184 tax base. In response, the Division argued that only internet access charges paid by consumers should be excluded from taxation under ITFA. The Division reasoned that ITFA’s definition of Internet access as “a service that enables users to access content, information, electronic mail, or other services offered over the Internet” implied that only those fees received from “users” should be excluded. But Judge Law, perhaps relying on the testimony of Richard Pomp (admitted as an expert on ITFA), found that Congress intended ITFA’s exclusion from taxation for internet access to be a broad one, fully applicable as technologies changed, in order to allow the development of the internet without the friction that might be caused by state taxation.  

Decision from April 27

Matter of Harel, April 27, 2023, Div’s Rep. Linda Farrington, Esq., Pet’s Rep. David Faust, Esq., Article 22. The Tribunal, on its own motion, dismissed Petitioner’s Exception on timeliness grounds, but this one has a few interesting facets. The Tribunal held that service of ALJ determinations require that they be sent to the Petitioner’s last known address. For determinations, that is the address in the records of the DTA, and not the address on Petitioner’s last filed tax return. The Tribunal’s analysis: Even though the Tax Law requires statutory notices be sent to the taxpayer’s last known address, and under Tax Law § 691 the last known address is the one on the taxpayer’s last-filed return, the Legislature gave the DTA discretion to promulgate its own procedural rules. And right there in 20 NYCRR 3000.23(a) it says “send the petition to the address of the Petitioner indicated in the DTA’s records.” Since the DTA sent Petitioner his May 5, 2022, determination by mailing it to the address for Petitioner in the DTA’s records and not the address on Petitioner’s last-filed return, service was proper and receipt was deemed to have occurred. The exception mailed on December 5, 2022, was therefore filed well after the 30-day time limit.

The Tribunal also held that mailing the decision to the representative listed on the Power of Attorney instead of the representative who presented Petitioner’s case at the hearing was likewise proper. Not all timies are yawners.

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