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Taxes in New York (TiNY) is a blog by the Hodgson Russ LLP State and Local Tax Practice Group members Chris Doyle, Peter Calleri, and Zoe Peppas. The weekly reports are intended to go out every Tuesday after the New York State Division of Tax Appeals (DTA) publishes 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.

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TiNY Report for August 13, 2020 (reporting on DTA cases issued August 6)

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This week’s offerings include two decisions from the Tax Appeals Tribunal. I’m a fan of the Tribunal, and I love to see it tackle difficult issues such as the ones presented this week. One deals with the mostly factual issue of whether a petitioner was a responsible person liable for a business’s withholding taxes. The other deals with the legal issue of whether a non-US affiliate of Disney would not, for New York franchise tax purposes, be required to add back to income royalty payments it made to an affiliate. Reasonable minds may differ, and (with due respect to the Tribunal) you will see below that I surmise that both cases could have been decided differently.


Matter of Black; Division’s Rep.: Stephanie Lane; Petitioner’s Rep.: David Cherubin; Article 22 (by Chris Doyle)

The ALJ’s determination (which we wrote about here) that Petitioner was a responsible officer who willfully failed to remit payroll taxes was affirmed by the Tribunal. Petitioner was found liable for his employer’s (“NECC’s”) payroll income tax notwithstanding that:

It was uncontroverted that he only owned 51% of the shares of NECC;

His 51% ownership and his employment would be forfeited to Anthony Nastasi for a payment of $26;

Credible third-party witnesses with first-hand knowledge, as well as Petitioner, testified that Anthony Nastasi was in charge of everything;

The IRS determined Petitioner was not a responsible person for federal withholding taxes; and

The business’s checkbook, as well as the other books and records of the business, were in the control of Anthony Nastasi.

As for his status as a responsible person, the Tribunal found:

We have reviewed the findings of fact and observe that petitioner was an officer of NECC and its majority shareholder, managed its field operations, had check signing authority, filed tax returns on behalf of the company and had considerable economic interest in NECC. These facts, considered in conjunction with petitioner’s holding himself out to third parties, as well as to the Division itself in responding to its questionnaire, are uncontested and require the conclusion that petitioner qualifies as a responsible person for NECC.

As for whether Petitioner acted “willfully” the Tribunal found that Petitioner could not negate his responsibility by delegating financial matters to Anthony Nastasi.

This was a harsh decision. Petitioner was pretty obviously a straw man used to get minority business enterprise contract work for the Nastasi interests. The real power was always held by Anthony Nastasi or his dad, Frank Nastasi. That Petitioner ended up holding the bag for the withholding taxes is tragic.

Matter of The Walt Disney Company; Division’s Rep.: Jennifer Baldwin; Petitioner’s Reps.: Marc Simonetti, Andrew Appleby, Dimitrii Gabrielov; Article 9-A (by Chris Doyle)

The ALJ’s determination that Petitioner was not entitled to exclude royalty payments from its income was affirmed by the Tribunal. Here’s some of what TiNY wrote about the ALJ Determination (in full here):

“Petitioner received royalty income from its non-US subsidiaries. On its sixth (!?) amended NYS franchise tax return, it deducted those royalties in computing its entire net income based on its interpretation of former N.Y. Tax Law § 208.9(o)(3). At the time, N.Y. Tax Law § 208.9(o)(3) provided that: ‘[A] taxpayer shall be allowed to deduct royalty payments directly or indirectly received from a related member during the taxable year to the extent included in the taxpayer’s federal income unless such royalty payments would not be required to be added back under subparagraph two of this paragraph. . . .’ And, at the time, N.Y. Tax Law § 208.9(o)(2) provided that a taxpayer paying a royalty to a related person was not required to add-back to entire net income any deduction for such payment if  ‘(i) the related members were part of a combined report (combined reporting exception); or (ii) the related member paid the royalty during the same tax year to a non-related member for a valid business purpose in an arm’s-length deal (the conduit exception); or (iii) the royalty payments were paid to a related member organized under the laws of a foreign country subject to a comprehensive tax treaty with the United States and the payments were taxed in that country at a rate equal to or greater than the rate in New York (treaty exception).’ (Conclusion of Law C).

Petitioner argued that it was entitled to exclude the royalties that it received from its foreign affiliates because those foreign affiliates would have been required to add-back the royalty payment deductions if they had been New York taxpayers. The Division argued that Petitioner did not prove that the royalties were, in fact, royalties. And the Division argued that even if the royalties were royalties, Petitioner could only deduct the royalties if the payer of the royalties was a New York taxpayer and the payer’s deduction for the royalty payments was required to be added-back to income.

After finding that Petitioner had proven that the payments were royalties, Judge Law went on to analyze the statute based on its language and legislative history. And here we stop to commend Judge Law for not applying the ‘only reasonable construction standard’ (ORC) in considering the proper interpretation of the statute. Some of our authors have written often and recently that the ORC standard has no place in the DTA’s arsenal of interpretive tools. We were pleased to see that the Judge did not resort to it even though the case involved a special exclusion. We hope other judges and the Tribunal follow suit.

Judge Law determined that the statute is properly read to require that the payer of the royalty be a New York taxpayer for the recipient to be able to deduct the payment. We think this is a close question, and (with respect) we would have fallen on the other side. But we admit that there is support for both interpretations. To us, the use of the phrase ‘would not be’ instead of ‘are not’ in former N.Y. Tax Law § 208.9(o)(3) indicates that the Legislature contemplated that non-taxpayer royalty payers would not preclude a royalty recipient from claiming the special exclusion. We agree with the Judge that the royalty payment add-back and exclusion was intended to combat the use of intercompany royalties to shift earnings out of high-tax states and into low or no-tax jurisdictions. But fairness dictates symmetry in tax provisions like this. So for every deduction denial, there ought to be a corresponding exclusion. Certainly the Division would not have permitted a New York royalty payer to avoid the deduction add-back requirement if the royalty recipient were not a New York taxpayer since this is exactly the situation the law was intended to address. But there is no symmetry unless the law is properly construed to permit an exclusion for a New York royalty recipient when the payer is a non-taxpayer. Otherwise, New York has a ‘heads I win, tails you lose’ situation.”

Like the Judge, the Tribunal focused a lot of energy parsing the statutory phrase: “would not be.” And even though the Tribunal conceded that Petitioner’s position—that the royalty payer does not need to be a New York taxpayer for the recipient to benefit from the statutory exclusion—was “not unreasonable,” it sustained the Department’s position because it was also not unreasonable. In so doing, the Tribunal reaffirmed its adherence to the “only reasonable construction” standard. As I have written here so many times my typing fingers are numb, I will never agree that the ORC  standard is the proper standard for the Tribunal to apply. I think it is arbitrary and capricious for the Tribunal to apply the same standard to a Division position as a reviewing court applies to a Tribunal Decision. The Tribunal should always strive to apply the most reasonable construction of the statutes it analyzes. Its failure to do so is a shortcoming. Shouldn’t taxpayers expect that the Division of Tax Appeals will promote statutory interpretations that reflect the most reasonable, logical, common-sense, and plain-reading analyses of the Tax Law? Apparently not. 

The Tribunal also didn’t recognize a commerce clause defense under the discrimination prong of Complete Auto Transit. But, as I wrote in my summary of Matter of IBM (here):

“I think there is an as-applied constitutional argument to be made here, and that is that the Division’s interpretation of the statute violates the fair apportionment prong of Complete Auto Transit, and in particular that the interpretation creates a violation of the internal consistency test: If every taxing jurisdiction had the same law and interpreted it as the Division and the Judge interpret it, New York would require inclusion of the royalty income by Petitioner and the royalty payer’s jurisdiction would deny the payer a deduction for the royalty payment. This results in double taxation of the royalty income. Given that foreign commerce is implicated (thus triggering even stricter Commerce Clause scrutiny than normal per Kraft), I think a constitutional argument like this might receive a favorable reception at the Tribunal.”

The lack of fair apportionment evidenced by a failed internal consistency test is what doomed Maryland’s tax credit regime in Maryland v. Wynne. So, this argument has some fairly-recent Supreme Court support. This close case should go to the Third Department for a review of both the statutory and constitutional issues.


Matter of Jessop; Judge Russo; Division’s Rep.: Ellen Krejci; Taxpayer’s Rep.: pro se; Article 22 (by Emma Savino)

Petitioner claimed an Empire State child credit (“ESCC”), a child and dependent care credit (“CDCC”), and earned income credit (“EIC”) on his 2014 and 2015 returns. Petitioner listed his daughter and grandson as dependents on his 2014 return, and just his grandson as a dependent on his 2015 return. The Division sent Petitioner letters requesting additional information to support the claimed credits, to which Petitioner responded and provided a number of documents. As a result of Petitioner’s responses, for 2014, the Division allowed the full ESCC and the EIC in the amount of $1,346.80, but disallowed the full CDCC. For 2015, the Division again allowed the full ESCC and EIC claimed, but disallowed the claimed CDCC. Petitioner timely filed his request for conciliation conference, and a conciliation order was issued on November 10, 2017, sustaining the notices.

Petitioner timely filed his petition, and, during the hearing, Petitioner presented additional documents not provided during the audit. As a result, the Division agreed to allow the 2014 CDCC in the amount of $1,054. So all that remained at issue was the 2015 CDCC.

The CDCC is based on a percentage of care expenses, including the care of a qualified dependent who is under age 13, incurred by a taxpayer who is gainfully employed. Since the Division did not dispute that Petitioner had a qualified dependent and was gainfully employed, all that was at issue was whether Petitioner provided sufficient documentation of his child care expenses. For 2015, Petitioner provided legible versions of the money orders payable to Mommy Daycare, so the Judge directed the Division to recalculate the refund accordingly. But the Judge determined that the remaining documents were insufficient to prove the claimed balance of the credit.

So in the end, Petitioner got most of the credits claimed. Not bad for a pro se taxpayer.

Matter of Bruni; Judge Galliher; Division’s Rep.: Hannelore Smith; Taxpayer’s Rep.: pro se; Proposed Driver License Suspension Referral under Tax Law § 171-v (by Emma Savino)

The Division issued a Notice of Proposed Driver License Suspension Referral (“the 60-Day Notice”) to Petitioner on December 18, 2019. The 60-Day Notice included a consolidated statement of liabilities that showed unpaid personal income tax for 2013 of $12,634, plus additional penalty and interest. Petitioner timely filed a petition dated December 30, 2019, protesting the 60-Day Notice. In the reasons for dispute section, Petitioner stated that he frequently drives his elderly mother to the hospital and other care centers; he has little income and receives a disability pension from New York City; and the “suspension of his license would be a hardship as it would hinder his and his mother’s way and quality of life.” But he did not assert any of the statutorily-required defenses.

The Division brought a motion to dismiss for lack of jurisdiction or for summary determination on the basis that Petitioner did not contest the proper issuance, amount, validity, or fixed and final status of the tax liability underlying the 60-Day Notice, and did not seek relief under any of the specifically-enumerated defenses. Petitioner did not respond to the Division’s motion so it was deemed that he conceded that no question of fact requiring a hearing existed.

The Judge found that Petitioner had failed to assert any of the eight enumerated grounds. In a footnote, he noted that Petitioner’s claimed reasons did not demonstrate economic hardship, but rather spoke to Petitioner’s quality of life. So the Judge denied the petition, sustained the 60-Day Notice, and granted the Division’s motion for summary determination.

Matter of LCAV Enterprises, LLC; Judge Friedman; Division’s Rep.: Elizabeth Lyons; Taxpayer’s Rep.: Larry Cavallaro; Articles 28 and 29 (by Emma Savino)

Petitioner was issued a Conciliation Order dated July 19, 2019, sustaining the Notice of Deficiency issued on October 15, 2018. Petitioner had timely filed its request for conciliation conference. Petitioner then filed its petition on October 18, 2019. The Judge found that the Division proved both its standard procedures and that they were followed when it mailed the Conciliation Order to Petitioner’s last known address on July 19, 2019. Petitioner’s petition filed on October 18, 2019 was therefore one-day late. The rule is 90 days, not three months.  So, the Judge granted the Division’s motion to dismiss the petition.

Matter of Cavallaro; Judge Friedman; Division’s Rep.: Elizabeth Lyons; Taxpayer’s Rep.: pro se; Articles 28 and 29 (by Emma Savino)

I’m guessing that Petitioner received a notice as the responsible person of LCAV Enterprises, LLC, explained above. The dates and outcome are the same, so if you feel the need, just re-read the above summary.

Matter of Borinquenya Deli Restaurant, Inc.; Judge Galliher; Division’s Rep.: Eric Gee; Taxpayer’s Rep.: Joseph Balisok; Articles 28 and 29 (by Emma Savino)

The Division issued Petitioner a Notice of Deficiency dated February 11, 2019. Petitioner filed a request for conciliation conference on August 23, 2019. BCMS issued an order dismissing the request as untimely. Petitioner then filed a timely petition, but did not respond to the Division’s motion for summary determination. The Judge found that the Division proved both its standard procedures and that they were followed when it mailed the Notice to Petitioner’s last known address on February 11, 2019. So, the Judge sustained the dismissal of Petitioner’s request for conciliation conference as untimely and granted the Division’s motion for summary determination.


Matter of Bellantonio and Rock; Judge Russo; Division’s Rep.: Ellen Krejci; Taxpayer’s Rep.: John Juva; Article 22 (by Chris Doyle)

Judge Russo denied Petitioner’s motion to reopen the record and for reargument. The Judge found that the issues upon which Petitioner wished to reargue (two instances in which Petitioner claimed the Division’s Hearing Memorandum was vague or misleading) were the same issues that had been addressed by the Judge during the hearing.

CPAs who wish to represent their clients in DTA hearings ought to read this case. Sure, CPAs are permitted to represent petitioners in matters before the DTA, but that doesn’t mean they should in every instance.

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