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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 12, 2018 (covering DTA cases from April 5)

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There’s lots of good stuff this week for the DTA – 6 ALJ Determinations, 2 ALJ Orders, and 2 Tribunal decisions.  DTA also revamped its website recently, and it looks great!

Guest-blogging in this week’s TiNY Report is our transportation tax correspondent, Joe Endres!  He wrote the bit on Matter of Goode Delivery, LLC

ALJ DETERMINATIONS

Matter of Kallianpur; Judge: Russo; Division’s Rep: Peter Ostwald; Taxpayer’s Rep: Scott Shimick; Article 22.  The Division proved it properly mailed the Notices of Deficiency to Petitioner’s last known address.  Petitioner filed his BCMS request after the 90-day limitations period expired, so the Judge deemed the BCMS request untimely filed. 

Matter of Olshanetskiy; Judge: Bennett; Division’s Rep: Christopher O’Brien; Taxpayer’s Rep: Neil Cohen; Article 22.  Case dismissed on timeliness grounds when Petitioner didn’t file the DTA petition until after the 90-day deadline passed for 11 Notices of Deficiency.

Matter of Goutos; Judge: Bennett; Division’s Rep: Christopher O’Brien; Taxpayer’s Rep: Neil Cohen; Article 22.  Petitioner also didn’t file his DTA petition until after the 90-day deadline passed for 11 Notices of Deficiency.  The Judge deemed the DTA petition untimely filed. 

Matter of John J. Petito, CPA, PLLC; Judge: Maloney; Division’s Rep: Robert Tompkins; Taxpayer’s Rep: John Petito; redetermination of deficiencies or for refund for failure to E-file under Article 1.  Daffy Duck would say it’s rabbit season...Bugs Bunny would say it’s duck season…Based on this determination I’m thinking it’s accountant season. 

There were two determinations issued for the same tax preparer, one for each year at issue:  2012 and 2013.  Petitioner prepared tax returns, and provided accounting, bookkeeping, and management services for various business entities and individuals.  Petitioner filed as a partnership for federal purposes. 

The 2012 determination:

Petitioner received a Notice and Demand asserting a penalty of $1,900 for the 2012 tax year.  “Corporation” was listed as the tax type on the Notice, and the Notice asserted Petitioner failed to e-file 38 corporation franchise tax documents that Petitioner paper-filed on behalf of its clients.  Tax Law § 29 requires almost all tax return preparers to e-file tax documents, and subjects tax return preparers to a penalty of $50 for each failure to file an authorized tax document unless there was reasonable cause for the failure.  Petitioner was a tax return preparer required to e-file its clients’ returns, which Petitioner did not dispute.  Petitioner instead argued that the “corporation” tax type listed on the Notice invalidated the penalties imposed because it filed as a partnership and not as a corporation.  However, the Judge determined that argument was without merit because the penalty was for failing to file its clients’ corporate returns, not its own returns.  The Judge directed the Division to nonetheless abate penalties because she determined Petitioner met its burden to prove reasonable cause for the failure to e-file.  The Judge determined it was clear that the devastation caused by Hurricane Sandy had a significant impact on Petitioner from October 2012 through the 2013 tax preparation and filing period.  Petitioner’s office, in the basement of Mr. and Mrs. Petito’s residence in North Woodmere, New York, was destroyed.  The Petito’s basement was flooded, their four cars were submerged by water, and their house lost electricity, heat, and internet for several months.  It took several months to restore and repair the damage caused by Hurricane Sandy.  In the meantime, Mr. Petito worked from his laptop and out of his car as his office.  Petitioner eventually rebuilt the office in the Petito’s house, which was not fully-functioning until January 2014.  Given the circumstances, the Judge cancelled the Notice and Demand for the 2012 tax year.

The 2013 determination:

Petitioner received two Notices and Demand for the 2013 tax year asserting penalties of $2,100 and $21,850 for failure to e-file 42 corporation franchise tax documents and 437 individual income tax documents that Petitioner paper-filed on behalf of its clients.  “Corporation” was listed as the tax type on each of the Notices.  Petitioner again argued that the “corporation” tax type listed on the Notices invalidated the penalties imposed because it filed as a partnership and not as a corporation.  The Judge again determined Petitioner’s argument was without merit with respect to the Notice asserting failure to e-file corporation franchise tax documents.  With respect to the Notice asserting failure to e-file individual income tax documents, the Judge determined the “corporation” tax type appearing on that Notice was erroneous.  However, the Judge acknowledged that defects on the face of a Notice won’t invalidate the Notice if there’s no evidence of harm or prejudice to the Petitioner.  Here, the Judge determined the error on the Notice did not prejudice Petitioner in any way.  Petitioner also argued it had an IRS hardship waiver for the 2012-2014 years and was exempt from the e-file requirement for those years.  Though Petitioner proved it had a hardship waiver for the 2011 tax year, the Judge determined the record showed it was only for 2011 and Petitioner did not have a multi-year hardship waiver.  Petitioner did face hardship because of Hurricane Sandy, however, by 2014 Petitioner had restored the office and used it throughout 2014.  There were also some administrative steps Petitioner failed to take to be able to e-file.  The Judge determined Petitioner failed to establish reasonable cause for its failure to e-file and sustained the penalties imposed by both 2013 Notices. 

Quote-worthy: “Mr. Petito, in the section 9 explanation of the section 7c and 7d hardship, indicated, among other things, that: … he, a certified minister, is ‘religiously and morally against putting client’s soc sec#/tax info/personal info/children info onto internet in efile to get hacked and stolen.’”  He should have stuck with the “My dog ate my modem” excuse.

Matter of Goode Delivery, LLC; Judge: Bennett; Division’s Rep: Frank Nuara; Taxpayer’s Rep: James Goode; revision of determinations or for refund of highway use tax under Article 21. BY JOE ENDRES.  Our loyal reader(s) may wonder why we’re taking up so many pixels discussing a case which involves a highway use tax (“HUT”) assessment of $292.35 and a penalty assessment of $2,000.  The short answer is that we here at TiNY are tax nerds, who can’t help ourselves when confronted with interesting tax issues, regardless of the economic impact.  The long answer, as discussed in excruciating detail below, involves fundamental constitutional rights, limits on the government’s power to punish and basic notions of fairness and justice.  So buckle up!  This seemingly small “trucking” case is going to take us on quite a ride. 

Petitioner (“Goode”) is a Texas-based business engaged in trucking and hauling to locations throughout the United States, including over the public roads of New York State.  Goode never registered any vehicles with the State, nor did it file any HUT returns or pay any tax.  The NYS Tax Department audited Goode for HUT for the period July 1, 2013 through June 30, 2015.  As a result of this audit, the Tax Department assessed Goode $292.35 in additional HUT as well as applicable interest.  In a separate assessment, the Tax Department also imposed a $2,000 penalty because Goode operated a motor vehicle in New York State without a required certificate of registration or a HUT decal. 

Given the amounts at issue, it’s pretty clear that Goode didn’t put much effort into defending the assessments.  In fact, Goode did not respond to the tax assessment in any way, as the ALJ notes: “it did not respond to the submission schedule with any documents, arguments, evidence or a brief.”  And the only argument raised by Goode against the failure-to-register penalty was that it should be cancelled because the state failed to adequately notify businesses about the registration requirement.  This argument was based on the fact that “New York State does not have port of entry notifications alerting carriers to its highway use tax requirements, as do other states.”

Okay, so this case seems pretty straightforward.  You have a taxpayer who failed to comply with any aspect of NY’s highway use tax regime and was assessed tax, interest and penalties.  At first glance, there doesn’t seem to be much to discuss, right?  Well, let’s pump the breaks and take a look under the hood, something I’m pretty sure Goode did not do, due to the minimal liability at stake. 

Let’s start with one tiny fact that is not mentioned anywhere in the decision, namely, that in 2016, a NYS Supreme Court Judge in Owner Operator Ind. Drivers Assn. v. New York State Dept. of Taxation & Fin. declared portions of the law imposing the registration requirement to be unconstitutional because the registration included a flat $15 per-truck fee that violated the Commerce Clause of the U.S. Constitution.  Here’s where the rubber meets the road.  The Judge in Owner Operator concluded that the flat fee had a disproportionate impact on out-of-state companies because they drove less on NY highways than did in-state companies.  The fee was deemed to be unconstitutional because there was no apportionment based on miles travelled in NY.  At this point, the authors are reminded of the famous Grateful Dead lyric that seems to perfectly describe Goode’s defense: “Truckin', like the do-dah man. Once told me 'You’ve got to play your hand.’  Sometimes your cards ain't worth a dime, if you don't lay 'em down….”  Goode clearly did not lay its best cards down. 

Several questions come speeding to mind at this point.  First, how can a penalty imposed for failing to register a truck be enforced when the underlying registration requirement was deemed to be unconstitutional?  The Tax Department might try to respond to this query by noting that the registration itself was not deemed unconstitutional, but rather, the constitutional infirmity was in the registration fee.  The authors think this argument would be spurious at best considering that, at the time, if a company attempted to register a truck but refused to pay the fee on constitutional grounds, the Tax Department would have undoubtedly refused to issue the registration.  In other words, such an argument is akin to driving on bald tires; we don’t think it has much traction. 

Another question raised by these facts is whether the penalty imposed by the Tax Department, a flat per-vehicle penalty for failing to register any vehicles that enter the state, suffers from the same constitutional infirmary as the underlying registration fee since the penalty is also not apportioned.  The authors can see arguments both for and against this position, but it was certainly worth raising at trial. 

Finally, it is important to keep one fact firmly in our headlights, and that’s the disproportionate nature of the penalty.  In this case, the Tax Department assessed HUT of $292.35 and a penalty of $2,000.  In other words, the penalty imposed by the Department is almost seven times larger than the HUT liability.  This is significantly more punitive than some of the most draconian penalties in New York’s Tax Law.  For example, when a taxpayer commits fraud in a sales tax case, the Tax Department can impose a penalty equal to twice the tax liability that resulted from the fraud.  At least in the sales tax case, you might be able to justify such a harsh result because the taxpayer had to commit significant malfeasance.  In the HUT case, however, no such requirement exists. 

Perhaps you’re sitting there thinking that this is an atypical result due to the unusual amounts at issue.  Well, you better slow your roll.  This author has encountered cases where the economics of the case were actually worse!  Here’s how this frequently plays out.  Some large trucking companies with thousands of vehicles have to respond to hauling requests quickly.  As a result, some companies decide to “blanket” register their trucks so they can work in any region/state.  Despite this conservative compliance approach, occasionally a truck will cross a state’s borders without the requisite permit (this was especially true in NY where the state’s online OSCAR permitting system was notoriously difficult to deal with).  Because of this “blanket” permitting, scores of trucks would have a NY permit, but never enter the state, providing a windfall to NY.  We’ve seen audits of such businesses result in multi-million dollar penalty assessments despite the fact that the number of trucks that had a permit but never entered the state exceeded the number of trucks that entered the state without a permit (providing a net benefit to the state) and having paid all of the HUT that was due on trucks operating in NY.  In other words, NY ended up with more fees than it would have had the taxpayers perfectly permitted their fleets, yet NY still imposed a huge penalty.

Now, you might be thinking, “this can’t be legal, can it?”  We don’t think it is. 

The Eighth Amendment of the U.S. Constitution forbids the imposition of “excessive fines.” The New York Constitution’s Bill of Rights contains the same prohibition.  As the Court of Appeals explained in County of Nassau v. Canavan, these safeguards are in place to limit “the government’s power to extract payments, whether in cash or in kind, or ‘as punishment for some offense.’”  County of Nassau at 139.  The Excessive Fines Clause of the Federal and State Constitutions apply to civil fines that “constitute punishment for an offense.”  The civil fine at issue in this case was imposed as punishment for failing to obtain a certificate of registration.  Since the civil fine at issue is punitive in nature, it is a “fine” within the meaning of the Excessive Fines Clause.

As the First Department explained in Prince v. City of New York, a fine is unconstitutionally excessive (i.e., in violation of the Excessive Fines Clause), if it “notably exceeds in amount that which is reasonable, usual, proper or just.”  In order to determine if a fine “notably exceeds in amount that which is reasonable, usual, proper or just,” courts have applied two tests.  First, the fine must not be “‘grossly disproportional to the gravity of [the] offense.’”  Second, the fine must bear some “relationship to the actual loss sustained by the [government] as a result of the violation.”  Prince at 119. 

In the Goode case, we think this argument could have carried the day.  Is the $2,000 penalty grossly disproportional to the gravity of the offense?  A penalty almost seven time larger than the unpaid registration fees surely seems disproportionate, especially when compared to other fines and penalties in the Tax Law.  Does the fine bear some relationship to the actual loss sustained by the government as a result of the violation?  Again, a penalty seven times larger than the tax liability vastly exceeds the loss sustained by the government.  Indeed, the Judge seems to have recognized the disproportionate nature of the penalty in this case and reduced it to $500.  See also Matter of Snyder (DTA No. 825785). 

So where does this leave us?  Well, trucking companies, especially out-of-state companies, should be extremely mindful of the harsh penalties imposed by NY for failing to register vehicles.  And they should review the arguments discussed here if they are faced with a vastly disproportionate penalty.  We’ll end with another Truckin’ lyric that once again seems apropos: “New York’s got the ways and means; but just won’t let you be, oh no.”

ALJ ORDERS

Matter of Phito; Judge: Russo; Division’s Rep: M. Greg Jones; Taxpayer’s Rep: Larry Kars; award of costs under Tax Law § 3030.  Petitioner received several Notices of Estimated Deficiency and Notices and Demands (“the Notices”) for payment of tax due, asserting Petitioner hadn’t filed quarterly taxicab trip tax returns.  Petitioner protested the Notices, and the Division cancelled the Notices.  Petitioner then sought an award of costs for fees paid to his representative.  The Judge determined Petitioner satisfied all of the criteria for being the prevailing party to be eligible for an award of costs, and the remaining question was whether the Division’s position was substantially justified. 

Petitioner owned a taxicab, which he leased to a company.  The Judge determined leasing the taxicab did not relieve Petitioner of his tax responsibilities, and as a result, the Division was substantially justified in issuing the Notices based on the underlying facts.  However, Petitioner raised the issue of whether the Division was substantially justified in mailing the Notices to a Woodside, New York address as Petitioner’s last known address, which was not Petitioner’s home or business address but was the company’s address.  The Division provided some evidence of returns and address related to Petitioner, however, the Judge ultimately determined that the Division failed to provide sufficient evidence that the Notices were sent to Petitioner’s last known address and failed to establish substantial justification for mailing the Notices to the Woodside, New York address.  The Division had in its records Petitioner’s address that he used in his last filed personal income return, but did not use that address.  The Division argued Petitioner had no right to a hearing for the Notices and Demands, but the Judge disagreed and held the statute preventing such hearing rights was limited to Notices based on math/clerical errors or failure to pay tax shown on a return, none of which the Notices and Demands at issue were.  Here, the Notices and Demands were based on non-filing of taxicab trip returns, not based on tax due on a return already filed or math/clerical errors.  Lastly, the Division argued that Tax Law § 3030 prohibited the award of costs in this matter because of a separate, unresolved matter, which together with this matter should be treated as one.  The Judge disagreed and determined the matters were properly treated as separate matters and should not prevent the award of costs here.  The Judge awarded Petitioner costs, but reduced the costs claimed 1) for work Petitioner’s representative performed in relation to an unrelated BCMS conference, 2) because the invoice did not distinguish between hours spent with respect to the Notices in this matter versus the separate, unresolved matter, and 3) under the statutory limit of $75 per hour for attorney services. 

Matter of Hofsommer; Judge: Maloney; Division’s Rep: Stephanie Lane; Taxpayer’s Rep: Richard Storto; Article 22.  There was some careless work on the Division’s part in this matter.  The Division sufficiently established its standard mailing procedures.  However, the Division’s evidence was inadequate to establish the fact and date of mailing of the Notice of Deficiency.  The Division also found to have not mailed the Notice to Petitioners’ last known address.  The Division used a Michigan address listed on Petitioners’ unsigned 2009 nonresident return, which was not the last return filed by Petitioners.  That return was submitted to the Audit Division in response to the Statement of Proposed Audit Changes previously issued to Petitioners.  The last return filed by Petitioners was their 2013 resident return, which listed a New York address.  The Judge determined the Division did not properly mail the Notice of Deficiency to Petitioners, so the 90-day limitations period was tolled until the date Petitioners actually received the Notice.  There was no evidence showing when the Notice was received, so the Judge held Petitioner’s BCMS request could not be deemed untimely.  So, a hearing will be scheduled. 

TRIBUNAL DECISIONS

Matter of Emerald International Holdings, Ltd.; Division’s Rep: M. Greg Jones; Taxpayer’s Rep: Otu Obot; Articles 28 & 29

The ALJ Determination in this matter was issued in August, which we included in TiNY:  “Petitioner is a liquor store.  The Desk Audit Casual Sales Unit(!) performed an audit that essentially determined Petitioner’s purchases and then divided that CoGS by an industry-survey cost of operations factor to determine audited sales.  The Division then sent a Consent form that said, in effect ‘sign and pay and you can always file a refund claim later.’  Petitioner signed and paid and then filed a refund claim.  Petitioner claimed the refund claim was mailed to the Casual Sales Unit (and not the Refund Unit) on March 4, 2013, but the Division alleged it did not receive that refund claim.  The Division confirmed it did receive a refund claim from Petitioner on July 14, 2014, which it denied on September 5, 2014.  Petitioner filed a timely petition that included 45 paragraphs of allegations.  The Answer filed by the Division contained 10 affirmative allegations and the following general denial:  ‘2. DENIES any and all of the other allegations contained in the petition, inclusive of paragraphs 1 through 45.’  Judge Galliher found that:  (1) By using regular mail to file the March 4 refund claim Petitioner bore the burden of proving delivery and the risk of non-delivery.  Since Petitioner could not prove delivery, the six-month time limit for acting on the refund claim did not begin until the July 14, 2014 refund claim had been posted;  (2)  Even if the refund claim had been filed on March 14, 2014, the Division’s failure to have acted on it within six months as required by Tax Law § 1139(b) did not mean it was deemed granted, rather, it should mean that it was deemed denied;  (3)  The Division’s general denial of the 45 paragraphs of allegations in the Petition satisfied the DTA’s requirement that the Answer contain ‘a specific admission or denial of each statement contained in the petition’ (20 NYCRR 3000.4(b)(2));  (3) The execution of the Consent by Petitioner took the Division’s methodology off of the table (i.e. Petitioner was prohibited from arguing that the Division’s methodology was wrong and was instead required to prove the accuracy of its original returns); and (4) Petitioner did not prove that its originally-filed returns were correct.”

And now for the Tribunal’s decision in the matter:  The Tribunal affirmed the ALJ’s determination and sustained the Division’s refund denial.  The Tribunal agreed with the ALJ that the Division’s general denial of Petitioner’s allegations was sufficient to comply with the Tribunal’s rules, where it specified all of the allegations in the petition by reference to the paragraph numbers.  The Tribunal agreed with the ALJ that the record did not support a finding Petitioner filed a refund claim on March 4, 2013.  The Tribunal also agreed with the ALJ that Petitioner had not met its burden to prove entitlement to the refund. The Tribunal also found it could not address whether the Division had an obligation to respond to a refund claim within 6 months since it could not identify when, exactly, the refund claim was filed.  Lastly, the Tribunal agreed with the ALJ that the assessment became fixed and final when Petitioner signed the consent to proposed audit changes.  Petitioner could not prove the additional tax it consented to was erroneous because 1) by signing the consent, the Division’s audit methodology was no longer an issue and 2) Petitioner submitted no evidence supporting the accuracy of its original sales tax returns. 

Matter of Ahmed; Division’s Rep: Adam Roberts; Taxpayer’s Rep: Jacqueline Kafedjian; Articles 28 & 29.  The Tribunal agreed with the ALJ that the Division sufficiently established its standard mailing procedures and that they were followed to mail the Notice of Determination to Petitioner’s last known address.  Petitioner’s refusal to accept the Notice when USPS attempted delivery didn’t count as non-receipt, and the Notice was deemed constructively received.  The Tribunal dismissed the Petition. 

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