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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 4, 2019 (covering DTA cases issued March 28)

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There are three determinations this week.  One is the obligatory timeliness case, but the other two delve into taxes we don’t get to read about too often:  The Article 9-A Franchise Tax and the Real Property Transfer Tax.  Good times!

DETERMINATIONS

Matter of Solomon; Judge: Gardiner; Division’s Rep: Jennifer Hink-Brennan; Petitioner’s Rep: Bryan Farrell; Article 31. 

Holding owned land.  FBC (related by ownership to Holding) constructed homes.  On the same day, Petitioners bought a plot of land from Holding for $2.5 million and contracted with FBC to construct a house on the land for $3.3 million.  As a condition for closing the land sale, Holding required Petitioners to make a $500,000 milestone payment to FBC.  On the real property transfer tax return, Petitioners and Holding reported $2.5 million as the consideration for the sale of the land and $10,000 as the tax due on that transfer.  The parties reported that the land was vacant at the time of purchase.

The Division audited and took the position that the sale of the property and the contract to construct the house were one taxable transaction in the amount of $5.8 million and asserted additional transfer tax commensurate with this position.  There was some support for the Division’s conclusions.  Ads for the sale of the plot with a single-family residence listed a price of $5.995 million.  Further, the contract for the sale of the property included an acknowledgement by the parties that a construction agreement would be executed simultaneously with the execution of the property sale agreement.

The owner of Holding and FBC affirmed that the construction business was separated from the real property holding business because personal injury suits are common in the construction business and having the construction business and the land ownership in separate corporations would protect the real property from these potential liabilities.

Following the Division’s assessment of additional tax, Petitioners paid the asserted tax and filed a refund claim.  Once the refund claim was denied, Petitioners sought relief in the DTA.  And once issue was joined, Petitioner made a motion for summary determination.  The Division argued that there were factual issues requiring a hearing.  Judge Gardiner disagreed, finding that the question of whether the sale of the land and the agreement to build the house was one transaction or two was a pure question of law.  So the Division lost that battle, but then won the war when the judge ruled summarily in its favor finding that the two agreements were one transaction in substance.  The Judge is permitted under the DTA’s regulations to rule in favor of the non-moving party when addressing a motion for summary determination, but it looked a little weird to see the Division prevail after arguing that summary judgement was inappropriate. 

The Judge did not cite a lot of authority in support of her decision to conflate the transactions.  So I’d be interested to see the Tribunal’s take on this if it goes further.

Matter of Ark Bryant Park; Judge: Connolly; Division’s Rep: David Markey; Petitioner’s Rep: Kenneth Zemsky; Article 9-A. 

Petitioner calculated its entire net income by deducting excess FICA.  Federally, Petitioner opted to take a credit for its excess FICA in lieu of taking a deduction.  On audit, the Division denied the deduction on the basis that the deduction was not taken on the federal return.  The Judge agreed with the Division, relying on the strict application of the federal conformity principle found in many personal income tax cases.  I think the Judge was probably correct in his ruling, but I‘m not 100% behind his rationale.  The PIT statute says NY taxable income shall be NY AGI less NY itemized deductions.  And then it defines NY AGI as federal AGI with certain modifications.  There isn’t any wiggle-room in the language, and a strict application of the federal conformity principle makes sense for the PIT.  However, contrast the PIT statute with the franchise tax statute which says something like “entire net income is presumably the same as the federal taxable income the corporation is required to report to the US Treasury.”  A presumption implies that it may be overcome, thus suggesting that a less-strict application of the federal conformity principle might be appropriate in franchise tax cases.  A less-strict application may have made more palatable Petitioner’s argument that the tax benefit rule should permit the deduction sought.  I would have loved to have seen this issue fleshed out.  Maybe it will be if the case goes to the Tribunal.

Matter of Lord of Kings Inc.; Judge: Galliher; Division’s Rep: Jessica DiFiore; Petitioner’s Rep: Ahmed Faisal; Articles 28 and 29. 

The Division proved both its standard mailing practices, and that these practices were followed to mail a Notice of Determination to Petitioner (at its last known address), and Petitioner’s representative, on June 24, 2015.  Therefore, the petition filed on July 6, 2018 was just a little bit late.  The petition was dismissed as untimely based on the Supervising ALJ’s Notice of Intent to Dismiss.

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