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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 18, 2019 (covering DTA cases issued April 11)

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Only one decision today, but it is a good one.

DECISION

Matter of Accidental Husband Intermediary, Inc.; Division’s Rep: Bruce D. Leonard; Petitioner’s Rep: Glenn Newman; Article 9-A. 

Petitioner landed a taxpayer-favorable reversal of a taxpayer-adverse ALJ Determination in this film-credit case. 

Petitioner produced a film in New York and finished production in 2007.  In accordance with applicable procedures, in 2006 Petitioner submitted its initial application requesting New York film credits.  In 2007, it submitted its final application reporting its actual production costs and requesting a certificate evidencing the grant of the film credits.  In 2008, the State issued a certificate to Petitioner allocating $1,203,501 in film credits.  Under the Tax Law, those credits were permitted to be claimed by Petitioner in two equal chunks, one in the tax year in which production completed (i.e. 2007) and one in the next succeeding tax year (i.e. 2008).  However, inasmuch as the certificate had not been issued at the time Petitioner filed its original 2007 tax return, Petitioner did not claim the first chunk of the credit with that original 2007 tax return.

Petitioner’s accountant prepared and mailed Petitioner’s 2008 return claiming the second chunk of the credit on or about September 14, 2009.  Prior to that, on or about January 22, 2009, the accountant sent an amended tax return to Petitioner for filing, and Petitioner’s Secretary/VP testified via affidavit that he signed and instructed his receptionist to mail the amended 2007 return, and later confirmed that the receptionist did, in fact, mail the return.  Given the lack of proof of certified or registered mailing, however, the Tribunal found that Petitioner had fallen victim to one of the classic blunders, the most famous of which is: “Never get involved in a land war in Asia,” but only slightly less well known is: “Never file a refund claim via regular mail when a bunch of money is on the line!”  (ed.  Next week we’re going to channel quotes from “My Cousin Vinny”; but this week we’re still stuck on “The Princess Bride.”)  Of course, the Division had no record of receiving Petitioner’s amended 2007 return mailed in January 2009.  According to the Division, it had no record of receiving an amended 2007 return until June 2012 when Petitioner sent a copy of the amended return (this time via certified mail) to the Division.  The Division thereafter denied the claimed 2007 credit on the grounds that it was time-barred under the three-year statute of limitations.

Petitioner challenged the denial of the credit in a DTA petition arguing: (1) It filed the 2007 amended return in January 2009; (2) it’s original 2008 return constituted an informal refund claim for 2007 thereby tolling the statute of limitations; and (3) the Commissioner should exercise her discretionary authority under Tax Law § 1096(d) to grant the credit claimed for 2007.

The ALJ denied the petition finding: (1) Petitioner had not proven mailing of the 2007 amended return prior to June 2012; (2) Petitioner’s 2008 return was not an informal refund claim for 2007 since it did not contain explicit language that put the Division on notice that Petitioner was claiming a similar credit for its 2007 tax year; and (3) because this case involved a refundable credit, there was no “payment” under a mistake of fact that would permit the Commissioner to exercise her discretion under Tax Law §1096(d).

On exception the Tribunal agreed with the ALJ that the mailing of the amended 2007 return prior to June 2012 was not sufficiently proven by Petitioner.  However, unlike the ALJ the Tribunal found that, under the particular facts of this case, the 2008 return constituted an informal refund claim for the 2007 tax year!  The Tribunal agreed that the 2008 return did not include explicit language putting the Division on notice that a credit was being claimed for 2007.  But the Tribunal determined that the facts and circumstances indicated that the Division knew or should have known that Petitioner intended to receive a film credit for its 2007 tax year. 

The Tribunal found that whether a taxpayer has satisfied the requirements of informal claim is based on a case-by-case analysis on the totality of the circumstances, and that there are three elements to an informal claim:  (1) it must provide the taxing authority with notice that the taxpayer is asserting a right to a refund; (2) it must describe the legal and factual basis for the requested refund; and (3) it must have a written component.  And even though the 2008 return lacked an explicit statement that Petitioner was seeking a refund for the 2007 year, the Tribunal’s “inquiry into the existence of an informal claim does not end with an examination of the four corners of the proffered documents, however… .  [T]he sufficiency of the written component of an informal claim must be considered in the context of the surrounding circumstances [citation omitted]. Indeed, ‘[a]n informal [refund] claim develops through a course of conduct which consists of various elements’ and may include information gathered during an audit, before any tax is formally assessed… . Moreover, such information need not be in writing.” 

And what circumstances did the Tribunal find compelling in this case?  Pre-production, Petitioner applied for and was granted an allocation of film credits.  Post-production, Petitioner provided the State with Petitioner’s actual costs of production and received from the State a certificate evidencing the credit allocation to which Petitioner was entitled.  Even though the certificate was not issued by the Division, the Division certainly knew that the certificate represented a credit allocation that was to be paid out in 2007 and 2008.  In short, the Tribunal felt that the 2008 return—when combined with the surrounding facts and circumstances—was sufficient to put the Division on notice that Petitioner was looking for a refund/credit for the 2007 year.  Thus, the 2008 return constituted a valid informal refund claim for 2007.  Given that there was no dispute that the credit would have been granted had there been a timely refund claim filed, the Tribunal granted Petitioner the 2007 credit.

This is a great result for Petitioner.  But should it have ever gotten this far?  Petitioner undeniably did everything it was required to do to be eligible for the credit.  I mean, for goodness sake, an instrumentality of the State issued a certificate to Petitioner confirming Petitioner’s entitlement to the credit!  Absent its (alleged) procedural screw-up, Petitioner would have received the credit with no muss or fuss.  And in a more enlightened state, Petitioner would have received its credit without a fight even in light of its procedural miscue.  But we live in the State of New York, and it seems like the authorities here will grasp on almost any excuse to avoid delivering tax benefits to taxpayers who have earned them under reasonable interpretations of the statutory rules.   And while that approach is good for our business, in the long run it’s bad for New York Business.

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