TiNY Report for August 2, 2018 (covering DTA cases from July 26)

These are the dog days.  And not surprisingly, today’s single DTA output is a yawner.  I have thrown in some “other news” to pad this week’s report.

TRIBUNAL DECISION

 Matter of Crail; Division’s Rep: Michele Milavec; Taxpayer’s Rep: pro se; Article 22.  Even if you have a good excuse, you still must ask to get an extension of time to file an exception. 

The Division of Tax Appeals issued its ALJ determination on November 9, 2017 and Petitioner thus had “30 days from the date of such mailing (on or before December 11, 2017) to file an exception or request an extension of time to file an exception (Tax Law Section 2006 [7]).”  Petitioner did not ask for an extension of time to file her Petition, and the 30-day deadline had passed by the time Petitioner filed her exception on December 17, 2017.  But wait: Petitioner had a reason for the late filing.  Petitioner had three broken bones in her right hand (and I thought that our Thanksgiving dinners were rough!), and Petitioner mistakenly thought that the 30-day deadline was actually a 60-day deadline.  Would there be a Christmas miracle?  Sadly, no.  “While it appears that petitioner may have had good cause to request an extension,” she did not do so in a timely manner.  Hence, on the Tax Appeals Tribunal’s own motion, the exception of Petitioner was dismissed.

AND IN OTHER NEWS

This week a new Third Department case, a new Advisory Opinion, and a couple of new Notices came across my desk.  Since there is not much else to talk about, I thought I’d raise these up the flagpole too.

Matter of Angelo Balbo et al. v. Tax Appeals Tribunal et. ux.; (App Div., 3d Dep’t); Division’s Rep.: Brian D. Ginsberg; Petitioner’s Rep: David A. Brodsky; Article 78.  In this appeal, the Appellate Division reviewed the Tax Tribunal’s denial of Petitioner’s request for a refund of personal income tax. Petitioners owned Angelo Balbo Realty (Realty) and Angelo Balbo Management LLC (Management).  Management was a real estate management company and was certified as a qualified empire zone enterprise (hereinafter “QEZE”).   Both Realty and Management were flow-through entities.  In 2007, property owned by Management was transferred to Realty. Management leased-back the property from Realty and was responsible for all state, county, city, and school taxes. Wells Fargo, pursuant to a mortgage servicing agreement, received from Management monthly principal and interest payments on the mortgage plus a ratable portion of the annual real property taxes.  The real property tax payments received by Wells Fargo were accumulated in an escrow account from which Wells Fargo paid the property taxes to the municipal taxing authorities on Management’s behalf. Petitioners filed joint New York resident income tax returns, claiming the QEZE credit with respect to the real property taxes paid by Management, and seeking a refund of personal taxes for both tax years 2011 and 2012.  After an audit, the Division denied the claim for QEZE real estate credits and reduced the amount of their refunds to 41% of the Petitioners’ original 2011 refund claim and 36 % of Petitioners’ 2012 refund claim.  According to the Division, “petitioners were not eligible for the QEZE subject tax credits because Balbo Management did not, as a lessee, pay the subject property taxes via a ‘direct payment’ and instead reemitted said payments through Wells Fargo, an intermediary, and allowed Wells Fargo to make the relevant tax payments to the taxing authority.”

Following a hearing, the ALJ sustained the Division's determination, finding that the plain language of Tax Law § 15 (e) required Management, as a lessee, to tender the requisite real property tax payments directly to the taxing authority in order for them to be QEZE credit-eligible. Following Petitioners’ exception, the Tax Appeals Tribunal affirmed the ALJ's determination. This Article 78 action ensued.

In resolving the issue of varied statutory interpretations, the Third Department noted that even though the Tax Law may contemplate a “direct payment,” “Balbo Management’s use of a mortgage escrow account did not preclude petitioners from claiming QEZE property tax credits.”  According to the Appellate Division: “neither the Commissioner of Taxation and Finance nor the relevant legislative history provide any cogent policy argument to support why utilizing a mortgage tax escrow account in such a manner should have a preclusive effect on petitioners' ability to claim the QEZE tax credit, to which they are otherwise unquestionably entitled.”  In the end, it was the view of the Third Department, under the particular circumstances of this case, that the manner in which Management made the tax payments should be deemed to be the functional equivalent of a direct payment to the taxing authority (see Tax Law § 15[e][3]) and therefore it found that Petitioners had sufficiently demonstrated their entitlement to the claimed QEZE real property tax credits.

TSB-A-18(2)S, Department of Taxation and Finance Office of Counsel:  Petitioner, a vendor, requested an Advisory Opinion asking whether it should have collected and remitted sales tax on the rental of a truck if the customer provided a Contractor Exempt Purchase Certificate (Form ST-120.1) with box “A” selected.  

In this instance, the Form ST-120.1 that was given to Petitioner indicated that the TPP being purchased would become an integral component part of a structure, building or real property owned by an exempt organization. 

It is not clear whether the Form was provided to Petitioner as a blanket certificate for multiple purchases, or whether it was given to Petitioner specifically for the truck rental at issue.  In either case, the Advisory Opinion reminds us that vendors who accept an exemption certificate (including Form ST-120.1) may be relieved of liability for the failure to collect sales tax with respect to a transaction when such certificate is accepted within 90 days of the delivery of the TPP at issue, and when such certificate is accepted in good faith.    See 20 NYCRR 532.4(b)(2).  A certificate is “accepted in good faith” when, upon the exercise of reasonable ordinary due care, a vendor has no knowledge that it is false or fraudulently presented.  See 20 NYCRR 532.4(b)(2)(i). 

The Department advised this vendor that the amount it charged a customer for the rental of a truck for use in a project for an Exempt Organization is subject to state and local sales tax because the truck was tangible personal property that did not become an integral part of the Exempt Organization’s real property. The take away here is that Petitioner could not have accepted the Form ST-120.1 for the truck rental in this case in “good faith.”  So, Petitioner should have collected tax from the customer on the purchase.

Look, we make the “good faith” argument for our clients all of the time, and we often prevail.  There is, in our opinion, no duty for a vendor to dig around and determine whether the actual use of the item is consistent with the exemption claimed by the purchaser.  That said, the transaction claimed exempt was the rental of a truck.  The exemption claimed was for TPP that was to become an integral component of a building.  It’s hard to imagine a truck becoming a component part of a building.  But the real problem with Petitioner’s position, in my opinion, is that this is a rental transaction.  The truck was returned to Petitioner upon the termination of the rental.  So how could the truck have become an integral part of the building?

While there may be no duty to investigate the customer’s actual use of purchased items claimed exempt, a vendor can’t put on blinders and discard all logic to treat a transaction as falling within an exemption claimed by a customer.   I mean, c’mon.

Notice N-18-7, Department of Taxation and Finance.  In this Notice, the Department explains its position on how C corporations are to report, for 2017, the deemed repatriation of income required by the federal Tax Cut and Jobs Act.  The Notice has nothing we didn’t expect:  The IRC § 965(a) inclusion amount and the corresponding federal tax deduction are included in the computation of the starting point of the business income tax base.  After that, the income is adjusted out (assuming it is “other exempt income” under the statute), and the deduction is likewise adjusted out.  Lastly, interest expenses attributable to the IRC § 965(a) inclusion amount are adjusted out.  There are a lot of words in the Notice, and it is pretty complicated.  But this is the gist.  Interesting passage:  “If a taxpayer has IRC § 965 amounts in its 2017 tax year and has already filed its 2017 New York State corporation tax return, it must file an amended return using these instructions.”

Notice N-18-8, Department of Taxation and Finance.  In this Notice, the Department explains its position on how flow-through entities are to report, for 2017, the deemed repatriation of income required by the federal Tax Cut and Jobs Act.  TiNY readers are reminded that New York resident individuals get beat up pretty good tax-wise as a result of the New York tax treatment outlined in April’s Notice N-18-4.  And it looks as if the beatings continue here since the Department is going to treat IRC § 965(a) inclusion amounts earned by S corporations as includable in business income regardless of whether there is representation of that income in the calculation of the business apportionment factor.  This could result in nonresident shareholders being taxed in New York on what is, in essence, deemed (read “phantom”) dividend income from foreign corporations.  And that just doesn’t seem right to me on a bunch of different levels.

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