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State and Local Tax Blog

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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 27, 2017

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Wow.  An absolute landslide of cases today.

DETERMINATIONS

Matter of Deitsch; Judge Russo; Division’s Rep: Adam Roberts; Taxpayer’s Rep: Isaac Sternheim; Articles 28 & 29.  Division’s summary judgement motion was granted.  The Division proved its standard mailing practices but did NOT prove that it followed them when it mailed the notices at issue to the taxpayer’s last known address.  So the period of time to respond was tolled until the actual date of receipt of notice by the taxpayer, which was March 25, 2015.  Since the BCMS requests were not filed until March 16, 2016, they still were not timely.

Matter of Wyne; Judge Russo; Division’s Rep: Michelle Milavec; Taxpayer’s Rep: Pro se; Article 22.  Division’s summary judgement motion was granted.  The Division proved its standard mailing practices and that it followed them when it mailed the notice at issue (i.e. a disallowance of refund) to the taxpayer’s last known address.  Since the Notice of Disallowance was mailed on July 8, 2013, the taxpayer had two years to challenge it.  Inasmuch as the BCMS requests were not filed until April 9, 2016, they were not timely.

DECISIONS

Matter of Wiesen; Division’s Rep: Christopher O’Brien; Taxpayer’s Rep: Pro se; Article 22.  Actually, this one was from April 10, but it was posted after last week’s DTA report went out.  Soooo, you get it this week.  Bonus!  The Tribunal reversed and remanded the ALJ’s dismissal  (on timeliness grounds) of the petition.  The remand requires the Judge to make findings of fact and conclusions of law on mailing that were missing in the original dismissal order.  One cannot blame the Judge to much for the summary treatment of the case since the taxpayer admitted the petition was filed late.  But the Tribunal, to its credit, is going to require that process be respected.  Quote:  “[T]he finding of fact regarding an admission of a party adverse to accelerated determination is not sufficient to show that the proponent was entitled to accelerated determination as a matter of law.”

Matter of Horn; Division’s Rep: Marvis Warren; Taxpayer’s Rep: Joseph Lipari; Article 22.  The Tribunal affirmed the ALJ’s determination that each of three separate business lines in the Taxpayers’ S corporation were engaged in for profit and were not “hobbies.”  Following the path initially taken by the ALJ, the Tribunal disaggregated the three business lines and applied the IRS’s nine-factor test of Treas. Reg. § 1.183-2(b) to each of the lines individually.  There are good quotes here about relying on the ALJ’s witness credibility determinations:  “Here, it is appropriate to note that we have held that the credibility of witnesses is a determination within the domain of the trier of the facts, the person who has the opportunity to view the witnesses first hand and evaluate the relevance and truthfulness of their testimony (Matter of Moss, Tax Appeals Tribunal, November 25, 1992; Matter of Jericho Delicatessen, Inc., Tax Appeals Tribunal, July 23, 1992; Matter of Spallina, Tax Appeals Tribunal, February 27, 1992).  While this Tribunal is not bound by an Administrative Law Judge’s assessment of credibility and is free to differ with the Administrative Law Judge to make its own assessment, we will only make our own determination of credibility where contrary evidence in the record compels us to do so (see Matter of Stevens v. Axelrod, 162 AD2d 1025 [1990]).  Where, as here, the legal issue revolves about the subjective intent of a taxpayer, we will generally defer to the credibility determination of the Administrative Law Judge unless such determination is not substantially supported by the record (cf. Matter of Wachsman, Tax Appeals Tribunal, November 30, 1995).”

Matter of The Executive Club LLC; Division’s Rep: Osborne Jack; Taxpayer’s Rep: Alvan Bobrow; Articles 28 & 29.  The Tribunal affirmed the determination of ALJ Bray holding that receipts from the sale of scrip used in an adult entertainment business are subject to sales and use taxes as admission charges.  Petitioner used a unique structure to operate its adult entertainment business.  Petitioner charged admission fees at the door to its gentlemen’s club and charged tax on these fees.  A separate related entity sold admission to private rooms within the club.  The admission charges appeared on the books and records of the separate entity and presumably tax was imposed on these charges.  Scrip could not be used to pay the admission charge to either the club or the private rooms.  The issue in the case was whether the sales of scrip, used to buy private time with dancers and to tip the dancers, was taxable as an admission charge.  Petitioner charged a 20% surcharge when patrons purchased scrip and a 13% redemption fee when the dancers redeemed the script.  The dancers retained the cash value of the scrip after the redemption fee and Petitioner did not include the dancers’ portion of the scrip transaction in its income for tax purposes.  Petitioner set the minimum fee for private dances.  Otherwise, Petitioner took the position that the private dance transactions were between the dancers and the club patrons. 

The Tribunal held that the sales of scrip were taxable as admission charges despite the fact that: (1) the ALJ concluded that the scrip could not be used to pay the admission fee to the club or the private rooms (i.e., the scrip did not grant admission to anything), (2) a separate (albeit related) entity handled the admission to the private rooms, and (3) the Department did not seek to charge tax on dance transactions that were paid for in cash.  The Tribunal reasoned that the definition of “admission charges” was broad enough to include the scrip transactions because the definition also includes charges for “entertainment or amusement” provided therein.  Petitioner also made the argument that the sale of scrip is not a taxable event because it is akin to the sale of a gift card.  Sales of gift cards are generally not taxable because they represent the sale of intangible personal property.  Tax is imposed when the gift card is redeemed for a taxable item or service.  Thus, if the redemption of the scrip for a dance is taxable, it should be the dancers who are liable for the tax.  The Tribunal dismissed this argument, reasoning that Petitioner: (1) maintained control over the transaction (it provided access to both the facilities and the scrip and controlled the minimum prices charged for private dances) and, (2) maintained a financial interest in the transaction (it derived revenue from the surcharge and the redemption fee).  Petitioner’s representative also advanced a novel argument for these types of cases in asserting that the transactions with the dancers were sales of a nontaxable service “similar to a therapeutic massage conducted in a sensual manner or personal services provided by a sex therapist.”  The Tribunal dismissed this argument because the record was “devoid of testimony, or any other evidence, as to the conduct of the performances at the Club.” 

Matter of Majestic Deli Grocery et ux; Division’s Rep: Robert Maslyn; Taxpayers’ Rep: Jacqueline Kafedjian; Articles 28 & 29.   For the most part, the Tribunal affirmed that the Taxpayers were subject to additional tax as determined by the audit of the convenience store.  The ALJ and the Tribunal found that penalties were also appropriate given that the business’ record-keeping was shoddy.  The Tribunal explicitly found that the Division’s use of an estimated methodology was appropriate given the poor condition of the taxpayers’ records.  And it was found that the method used was not shown to be improper. However, the Tribunal did find for the Taxpayers on two points: (1) The Tribunal found that the liability should be reduced by a credit for prepaid cigarette taxes; (2) A fifteen minute observation test to estimate the sales of prepared foods was too short to provide an estimate with reasonable accuracy.  Interesting quote:  “The Division cites petitioners’ refusal to allow an in-store observation, the lack of any sales records and the lack of complete purchase records in support of its argument.  While the state of a taxpayer’s available records has been cited as a factor justifying the use of an observation test (see Matter of Mera Delicatessen, Inc., Tax Appeals Tribunal, November 2, 1989 [“observation test virtually the only means available to the Division to estimate tax liability”]), it does not appear to us that the method chosen here to estimate prepared food sales was the only method available.”  So, you can compel the Division to use a method other than an observation test by refusing the Division permission to hang around your store.

Matter of Costabile et ux; Division’s Rep: Stephanie Scalzo; Taxpayers’ Rep: pro se; Articles 28 & 29.  The Tribunal affirmed the ALJ’s determination that sales tax or (if no sales tax was paid) use tax applied to tangible personal property purchased and used to construct capital improvements to real property.  ‘Nuff said.

Matter of Abdullah; Division’s Rep: Peter Oswald; Taxpayer’s Rep: pro se; Article 22.  The Tribunal affirmed the ALJ’s summary determination against the Taxpayer for failure to timely file a BCMS request.  There’s nothing here that we haven’t seen dozens of times before.

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