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 31, 2024
NY state flag and the word TAXES made out of money

Your TiNY editor-in-chief took some time away over the long weekend and that led to the late posting of this week’s TiNY Report. The delay gave us some time to reflect on Hodgson Russ’s slick replacement website. When we commented favorably on the new site to our marketing personnel, we were told this interesting tidbit: When the old site was converted to the new site, spell check was automatically run. And 99% of the flagged words were found in the TiNY blog. Further investigation disclosed that sometimes the authors of TiNY make up words (The shock! The horror!). And I was reminded (not for the first time) that Hodgson Russ blogs are informational and need to accurately recount legal developments without the use of humor, sarcasm, or hyperbole. Hodgson Russ blogs are not to entertain, they are to inform. They are not a linguistic playground on which the authors might vent pent-up frustrations brought about by years of straight-jacketed legal writing. And they should never besmirch the language of Shakespeare by creating words.

Right. If you feel that way, perhaps you should read TiNY’s disclaimer.

This week we’re covering four determinations for your consideration. Two of them—Maragh and Somers—are worth a listen-to. The other two are songs that you liked a little when they first came out but now detest because they have been overplayed on your favorite radio station.


Matter of San Giacomo (Supervising ALJ Gardiner, May 16, 2024); Div’s Rep. Amy Seidenstock, Esq.; Pet’s Rep. pro se; Article?/Jurisdiction (Pete Calleri).

Petitioner filed a petition with DTA but failed to attach a statutory notice or conciliation order or to provide his social security number on the petition. DTA made a written request that Petitioner provide the missing documentation and information, but he did not respond. Pursuant to 20 NYCRR 3000.3(d)(2), the SALJ issued a notice of intent to dismiss the petitioner because Petitioner failed to correct his petition within the time prescribed. Again, Petitioner did not respond. As such, the SALJ held that the Division lacked jurisdiction over the subject matter, and the petition was dismissed with prejudice.

Matter of Massa (Supervising ALJ Gardiner, May 16, 2024); Div’s Rep. Stefan Armstrong, Esq.; Petitioners pro se; Article 22/Jurisdiction (Zoe Peppas).

Petitioners filed a petition with DTA, attaching a statement of proposed audit change they received. However, the petition did not include a statutory notice or conciliation order. The Division requested a copy of the statutory notice. Petitioners didn’t provide any such notice. The Division issued a notice of intent to dismiss the petition. Petitioners did not respond to that notice of intent to dismiss. “While the petition included a statement of proposed audit change, such document does not give rise to hearing rights at the Division of Tax Appeals.” The petition was thus properly dismissed with prejudice.

Matter of Maragh (Supervising ALJ Gardiner, May 16, 2024); Div’s Rep. Peter Ostwald, Esq.; Pets. Rep. pro se; Article 22/Gambling losses (Zoe Peppas).

Petitioners late-filed their New York State resident income tax returns for four years and argued they were entitled to a refund of income taxes paid for all such years. On their returns, Petitioners reported gambling losses each year as a New York subtraction and as part of the itemized deductions. The Division disallowed the New York subtractions on the grounds that gambling losses don’t qualify as a subtraction and are not an itemized deduction for taxpayers like Petitioners with more than $1 million of federal AGI. The Division also requested proof of such losses, and Petitioners provided some substantiation. Following the Division’s review of Petitioners’ returns, it issued Notices and Demands for the additional tax due based on a disallowance of the gambling losses.

Petitioner’s requests for a conciliation conference were denied. Then, Petitioners filed a petition at DTA in protest. At DTA, the Division did not present any witnesses, failed to provide any explanations, and failed to elaborate on its decisions. But Petitioners also did not provide any proof addressing the amount of gambling losses they claimed.

Of interest from a procedural perspective: The Division here didn’t issue any Notices of Deficiency to the Petitioners; instead, Notices and Demand were issued. A Notice and Demand generally does not confer hearing rights upon a petitioner. Yet, because the DTA proceeding here was a result of a protest of conciliation orders, the Judge ruled the Division had jurisdiction over the petition filed.

Judge Gardiner noted that petitioners generally bear the burden of proof by clear and convincing evidence that a proposed assessment is improper or erroneous. One of the Notices was issued after the three-year period in which to assess Petitioners. Thus, that Notice was found invalid. For the other three years, Petitioners were determined to have not borne their burden of proof to demonstrate entitlement to refunds. The documents submitted by Petitioners established their gambling winnings but did not substantiate their gambling losses. Therefore, Petitioners’ petition was granted in regard to the year in which the notice and demand was untimely but was otherwise denied.

Matter of Somers (ALJ Maloney, May 16, 2024); Div’s Rep. Christopher O’Brien, Esq.; Pets’ Rep. David Burch, Esq.; Article 22/Empire Zone Credits (Chris Doyle).

Let’s start here: One of the benefits provided under the Empire Zones Program was a tax reduction credit (TRC). The TRC was the product of four factors: the tax owed by the taxpayer on the QEZE’s income, an allocation factor, a benefit period factor, and an employment factor. Many of the program participants took the position that the allocation factor for taxpayers that were New York resident-owners of qualified empire zone enterprises (QEZEs) formed as S corporations was 100% since the resident-owners were required to include 100% of the QEZE’s income in their New York personal income tax base. I personally advised several clients that this was a reasonable position. The Division disagreed and litigated the issue arguing that the allocation percentage to be used for both resident and nonresident owners of S corporation QEZEs was the corporation’s business allocation percentage (BAP). Eventually, the case made its way to the Appellate Division, Third Department, which ruled in Matter of Purcell (3d Dept 2018) that the allocation factor to be used to determine the TRC by all shareholders was the corporation’s BAP. At least that is how I read the decision, and at that point I thought the issue was dead.

Kudos to the Somers for staying on the bull until the end of the rodeo because last year the Third Department issued Matter of Goldstein (3d Dept 2023) holding that resident owners of S corporation QEZEs could use an allocation factor of 100% if all of the employees and facilities of a QEZE were located in New York Empire Zones. 

In this case, Petitioners’ S corporation had all of its employees and facilities in New York Empire Zones, so the Judge found that Petitioners were entitled to use the approach permitted under Goldstein and could allocate 100% of their S corporation’s income to New York for purposes of calculating the TRC.

I was never a fan of Purcell, so any determination that narrows its applicability is a good one from my perspective.

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