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Taxes in New York (TiNY) is a blog by the Hodgson Russ LLP State and Local Tax Practice Group. The weekly reports are intended to go out within 24 hours of the Division of Tax Appeals’ (DTA) publication of 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.  

TiNY Report for April 11, 2019 (covering DTA cases issued April 4)

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We have a Rugen-Handful of ALJ determinations on which to report today.

A Rugen what’s-that-now?

Let us digress.  One of TiNY’s more memorable postings coined the phrase “hard-hearted Humperdink”. . . a reference comparing New York’s Audit Division to the Prince Humperdink character in The Princess Bride (1987).  Anyway, Prince Humperdink’s consiglieri was Count Tyrone Rugen (played with delicious comedic malevolence by Christopher Guest) who had years earlier killed Inigo Montoya’s father in Montoya’s presence rather than pay the father for a custom sword the father had made for Rugen.  This propelled Montoya on a twenty-year revenge-quest for Rugen so Montoya could utter “My name is Inigo Montoya.  You killed my father.  Prepare to die.” Right before he killed Rugen.

Why did Rugen need a custom-made sword?  And how, after twenty years, did Montoya identify Rugen?  The answer to both questions is the same: Count Rugen had six fingers on his right hand.

Which is just our long-winded way of saying there were six determinations this week.  There are no orders and there’s nothing from the Tribunal.

And if you can’t get the image of Mandy Patinkin intoning “My name is Inigo Montoya.  You killed my father.  Prepare to die.” out of your head for the rest of the day, you’re welcome.


Matter of Zim; Judge: Gardiner; Division’s Rep: Lori P. Antolick; Petitioner’s Rep: pro se; Article 28 and 29. 

Petitioner assumed the lease of a 2015 Lexus and paid sales tax of $698.63 to New York when he registered the car with the DMV.  The prior lessee had paid $1,116.57 in sales tax when he originally leased the car.  Petitioner submitted an Application for Refund or Credit of Sales or Use Tax Paid on a Casual Sale of Motor Vehicle for the sales tax that he paid on the assumption of the lease, and argued that the sales tax on the entire lease of the car was paid when the prior lessee originally leased the car.

According to the Judge, Petitioner didn’t have it quite right.  Petitioner alleged that he was being taxed twice, but according to the ALJ, in essence, he was seeking a credit for a portion of the tax paid by the prior lessee.  The ALJ agreed that the prior lessee had paid the entire sales tax when he originally leased the car.  But, because the prior lessee cannot claim a refund or credit for tax paid because of the early termination of the lease, as stated in the sales tax regulation 20 NYCRR 527.15 (e), neither can Petitioner, thus the ALJ denied his refund claim.

With respect (and acknowledging that one of us got burned on this when he assumed the lease for his Toyota Corolla), we disagree with the Judge.  The theory behind the sale taxation of leases is that they are a series of periodic sales.  That is why lessees pay the tax periodically when they pay the rent on items of taxable tangible personal property.  Cars are a little different because statutorily “all receipts due…to be given for such property under and for the entire period of the lease…shall be deemed to have been paid…as of the first date of the lease… .”  This accelerates (pun!) the tax so it is due with the first lease payment.  But there is nothing in the law providing that the “deemed payment” is negated by an assumption of the lease by a third party.  And since it is the same lease, all the consideration has, by law already been paid for the lease, and there is no consideration to tax even if the Judge is correct that there is a subsequent sale.  At least that is how we see it.

Matter of Walsh; Judge: Russo; Division’s Rep: Christopher O’Brien; Petitioner’s Rep: Edward F. Thaney; Article 22 and 30-A.

Petitioners owned 16.2753% and 18.2% of Refractron Technologies Corp. (“Refractron”), an S corporation, in 2012 and 2013, respectively. Petitioners claimed an investment tax credit (“ITC”) on their 2012 and 2013 returns. Both Petitioners and Refractron were audited by the Division which reviewed the assets for which the ITC was claimed. According to the auditor, Refractron claimed both an IRC Section 179 expense and an ITC on both of its New York returns, but failed to reduce its cost basis of the ITC property by the amount expensed under Section 179.  It also claimed an ITC for properties with a useful life of less than four years, which the auditor disallowed. The auditor made the relative adjustments, which resulted in a reduction of the ITC claimed and thus tax due of $13,916 for 2012 and $ 5,644 for 2013. Petitioners filed a petition, but did not submit any evidence into the record or timely file a brief or reply brief.

The Division argued that when a taxpayer expenses the cost of an asset under Section 179, then the cost is not eligible for the ITC, and where the property is wholly expensed and the basis is zero, then no ITC is allowed.  IRC Section 179 allows an entity to treat the purchase of qualifying property as an expense, but the taxpayer must reduce the depreciable basis by the amount of the expense.  And the ALJ noted that, here, Refractron had, in fact, reduced its tax basis on certain assets to zero as a result of the IRC Section 179 deduction, and thus those assets were no longer “depreciable property” for which an ITC might be claimed. So, the ALJ found that the ITCs claimed with respect to those assets were properly denied.

Next, the Division argued that it properly disallowed the claimed ITC for certain properties determined on audit to have a useful life of less than four years. The ALJ noted that the statute states that for an ITC credit to be allowed, the property must “have a useful life of four years or more” under Tax Law former  § 210.12 [b]. Relying on the Division’s finding the property at issue had a useful life of less than four years, the ALJ found that the Division properly disallowed the claimed ITCs on those assets and, ultimately, sustained the notice of deficiency.

Matter of Stanton; Judge: Russo; Division’s Rep: Christopher O’Brien; Petitioner’s Rep: Edward F. Thaney; Article 22 and 30-A.

Petitioner owned the rest of Refractron Technologies Corp’s. shares and claimed the same investment tax credits as the Walshs (above). They were represented by the same CPA, and we imagine he made the same arguments on behalf of both owners. The Judge’s analysis is exactly the same (literally word for word), so see above, we won’t bore you with a redundant analysis.

Matter of Perez; Judge: Maloney; Division’s Rep: Colleen McMahon; Petitioner’s Rep: pro se; Article 22.

Petitioner protested her notice of deficiency by filing a BCMS request about six months too late. A conciliation order was issued stating that the protest was untimely filed. Petitioner then filed a petition (this one was only a week late) seeking review of the order. The DTA initially issued a Notice of Intent to Dismiss the petition as untimely filed, but rescinded the Notice because the Division did not initially present any evidence establishing the proper mailing of the conciliation order. The Division then filed its answer with supporting papers demonstrating timely mailing and seeking summary determination on the grounds of the late-filed BCMS request.  Petitioner did not respond to the motion, thus she was deemed to have conceded that no question of fact existed, and she presented no evidence to contest any of the facts alleged by the Division.

The ALJ concluded the that the Division introduced adequate proof to establish that its general mailing procedures were followed in mailing the notice of deficiency to Petitioner’s last known address. The mailing commenced the 90-day period during which Petitioner needed to, but did not, initiate her administrative challenge through the filing of a BCMS request or a DTA petition.  So the ALJ granted the Division’s motion for summary determination,  noting that Petitioner may still pay the tax and file a claim for refund.

Matter of Barakat and Amadeo; Judge: Law; Division’s Rep: Linda A. Farrington; Petitioner’s Rep: pro se; Article 22.

Petitioners filed a NY resident income tax return for 2014 on which they claimed $17,255 of Schedule C business income, $351 of interest income, an earned income credit for both NYS and NYC, a NYC school tax credit, and a college tuition credit. The Schedule C income was from the business “Gus Edward Barakat” and no business expenses were claimed. The Division sent a letter requesting substantiation for the claimed dependent, college tuition credit, and reported income, but the record didn’t show what was provided. The Division issued an account adjustment notice and, ultimately, disallowed the college tuition credit and both earned income credits.  

Petitioners submitted with the petition documentation regarding their claimed dependent, which revealed that their daughter was 22 and living with Petitioners during 2014. She was also pursuing a master’s degree but was only enrolled as a ¾ time student from September to December 2014, as her school defined full time as 12 credit hours and she was only enrolled in 9 credit hours. Also attached to the petition was a form 1099-MISC, which reported $17,255 in non-employee compensation paid to both Petitioners, and a federal corporate income tax return, which reported compensation to officers which was almost $400 more than Petitioners reported. There were also checking account statements submitted for the business which also did not match the 1099-MISC. In sum, the record didn’t adequately explain how the income on Petitioners’ return was calculated.

The ALJ began by noting that Petitioners’ eligibility for NYS and NYC earned income credit depends on their eligibility under federal law. Under federal law, to be eligible, the taxpayer must have an AGI below a certain level, have a valid social security number, not file as “married filing separate”, be a US citizen or resident alien, not have foreign income, and have investment income below a certain amount. The amount of the credit depends on the taxpayers’ AGI and number of qualifying children. Both of these were at issue here.

A qualifying child can be a daughter of the taxpayer but she must have the same principal place of abode and be less than 19 years old or a full time college student. Whether a student is a full time students depends of how her educational institution defines full time. The Division conceded that their daughter was in fact their daughter, but the ALJ determined that she was not a full time student as her college considered her a ¾ student, and thus was not a qualifying dependent. Because Petitioners had failed to document the income they earned in 2014, the ALJ determined that they had not met their burden of proving that the disallowance of their earned income credit was improper or erroneous.

Petitioners also challenged the disallowance of tuition expenses paid for their daughter. The ALJ noted that the allowable college tuition expenses specifically exclude “other graduate degrees.” As their daughter was pursuing her master’s degree, the ALJ found that this credit was properly disallowed and sustained the notice of disallowance.   

Matter of Aldabbagh; Judge: Connolly; Division’s Rep: Christopher O’Brien; Petitioner’s Rep: pro se; Article 22.

Petitioner filed a NY resident income tax return for 2014 on which he claimed wage income of $1,308, business income of $14,280, an empire state child credit, a NYS and NYC earned income credit, and a NYC school tax credit. He also filed an IT-215 which listed his two sisters as qualifying dependents because both were disabled. At audit, the Division requested documentation of wage income, self-employment business income and expenses, and proof verifying the age, relationship, and disability status of the claimed dependents. Petitioner then provided W-2s, a 1099-MISC from Jackson Gourmet Deli for $14,200, a letter from Jackson Gourmet Deli signed by the president stating that Petitioner worked there and was paid $297 a week, a letter from the International Rescue Committee verifying the identities of his sisters, and a school registration for one sister. The Division then granted the NYC school tax credit and tax withheld, but denied the earned income and empire state credit.

At the hearing, a tax technician 2, who was not the auditor, testified that the Division didn’t accept one of Petitioner’s sisters as a dependent because she was 23 years old and not a student. Petitioner testified that he came to the US in March 2014 and had one job for 6 months where he earned $290 a week. The record was held open for Petitioner to submit proof that his 23-year old sister was permanently disabled and proof of his employment. Petitioner then submitted a Notice of Decision from the Social Security Agency concluding that she was disabled. The Division then conceded that she qualified as dependent and allowed the empire state child credit claimed by Petitioner. Petitioner also provided a letter from Jackson Gourmet Deli which stated that Petitioner was employed there part time and paid $275 per week and that it had issued him a 1099-MISC of $14,180 in wages. All that remained at issue was Petitioner’s entitlement to the NYS and NYC earned income credit.

As we noted in the last case, eligibility for the NYS and NYC earned income credit is based on eligibility for the federal credit. However, a person who has been a qualified nonresident alien for any part of the year is not eligible for the credit, with exceptions that were not applicable to this case.  Because Petitioner entered the US in March of 2014, he was a nonresident alien before he entered, and thus did not qualify. The ALJ also noted that even if Petitioner had been eligible, he failed to establish the amount of his income as the amount reported in the two letters was different and didn’t match Petitioner’s testimony regarding what he was paid.  Accordingly, the ALJ denied the earned income credit for NYS and NYC.

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