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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.  

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TiNY Report for August 29, 2019 (reporting on DTA cases issued August 22)

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Today we report on three determinations. Two are quick-hitters. One requires a little more analysis.

Matter of Krause; Judge: Behuniak; Division’s Rep.: Linda Farrington; Petitioners’ Rep.: Dean Nasca; Application for costs under Tax Law § 3030.

Sometimes I just don’t get people.

Petitioners received a letter from the Division saying, “send us proof of your deductions.” Petitioners wrote back eight months later saying, “we insist on being audited.” The Division wrote back three months after that with, “since you didn’t send us documentation supporting your deductions, your claimed tax refund of $2,198.06 is being reduced to $96.94.” Then, Petitioners filed for a Request for Conciliation Conference. And, at the Conciliation Conference, Petitioners proved their entitlement to the deductions claimed on their original return.

Following the Conciliation Conference, Petitioners petitioned for costs of $422.75. That petition included an unsworn statement that Petitioners’ net worth, at the time the action commenced, was less than the $2 million limit.

Judge Behuniak ruled that the Division’s assessment was substantially justified because, at the time it was issued, Petitioners had not provided substantiation for their deductions. Then, the Judge reminded Petitioners that they would not be a prevailing party unless their petition for costs was accompanied by a sworn statement that their net worth did not exceed $2 million. Consequently, the Judge denied the petition for costs on two grounds. Seems right to me.

I have a couple of comments/questions:  1. Who in their right mind would invite an audit? Were Petitioners trying to make a point? If so, what was it?  2. Was all this trouble really worth the $422.75 sought?  3. As a taxpaying citizen of the State of New York, next time I’d appreciate it if Petitioners would just send in their substantiation when it is first requested by the Department, rather than wasting our tax dollars on some quixotic adventure.

I mean, c’mon now!

Matter of Donnelly; Judge: Gardiner; Division’s Rep.: Judge Behuniak; Petitioner’s Rep.: pro se; Articles 28 and 29.

Petitioner bought a door for his house from a building supply place. He paid $119.60 in sales tax when he bought the door (Ed. it must have been a pretty nice door). Petitioner filed a refund claim to recover the $119.60 on the basis that the door was a capital improvement to real property.

OK, capital improvement rules are a little counter-intuitive, so I get Petitioner’s confusion. But the way it works is this: unless you buy the door with installation included, then it is still tangible personal property (TPP) and the receipts from the retail sale of TPP are subject to sales tax. It is the permanent installation of the door that converts it to a non-taxable capital improvement to real property, but, even then, the last purchaser of the door before installation must pay sales tax on the purchase. If the installer purchases the door and then sells it installed to Petitioner, then the installer must pay sales tax, and the door is not purchased for resale because the installer is not re-selling tangible personal property—it is selling real property. I know, it’s confusing.

In a tight, 3-page determination, Judge Gardiner explained the above rules and sustained the Division’s denial of Petitioner’s refund claim.

Matter of Obus and Coulson; Judge: Gardiner; Division’s Rep.: Linda Farrington; Petitioners’ Rep.: Glenn Newman; Article 22.

This determination raises two main issues worthy of thoughtful debate.

Petitioners are a couple who are domiciled in New Jersey. He works full-time in New York City and, accordingly, is in New York State more than 183 days per year. At the end of 2011, Petitioners purchased a vacation home in Northville, New York, which is in the North Country near Great Sacandaga Lake. It is roughly a three-and-a-half-hour drive from New York City to Northville. And, the Northville home was used exclusively for vacations by Petitioners. And, those vacations totaled no more than two or three weeks per year.

The Division audited Petitioners and took the position that because the Northville home constituted a permanent place of abode, and Petitioner husband spent more than 183 days in New York, Petitioner husband was a “statutory resident” of New York State and required to pay New York income tax on all of his income and not just on his New York source income.

Petitioners argued that the Northville home was not a permanent place of abode for Petitioners. In particular, Petitioners argued that the presence of a full-time tenant in a separate building on the property indicated that the property was maintained for the benefit of the tenant and not for the exclusive benefit of Petitioners. The Judge found that the tenant’s use of the separate building did not affect Petitioners’ use of the Northville home. I can see where the Judge is coming from on this issue.

The Judge then cites to the following passage in the Court of Appeals’ decision in Gaied“The legislative history of the statute [i.e. that created the statutory residency rules], to prevent tax evasion by New York residents, as well as the regulations, support the view that in order for a taxpayer to have maintained a permanent place of abode in New York, that taxpayer must, himself, have a residential interest in the property.” (22 N.Y.3d 592, 596 [2014] (emphasis added)). But then, the Judge finds that Gaied is distinguishable and inapplicable, because Petitioners admit to having purchased the Northville home for use as a vacation home. Given the inapplicability of Gaied, the Judge found the Northville home was a permanent place of abode for Petitioners.

My interpretation of Gaied is different from the Judge’s. In particular, I think that Gaied is applicable and that the “residential interest” requirement mentioned by the Court of Appeals must be viewed in light of the Court’s analysis—in the same sentence—that statutory residency rules were “created to prevent tax evasion by New York residents.” Obviously, the Court was not referring to tax evasion by statutory residents because asserting that the Legislature created statutory residency to prevent tax evasion by statutory residents just doesn’t make any sense (I have a picture in my mind of an Ouroboros – you know, a snake eating its own tail). So I expect that the Court of Appeals was saying that the statutory residency rules were created to combat tax evasion by domiciliary residents who claimed faux-tax residence elsewhere. When viewed in this light, it seems natural to view the Court’s “residential interest” language as requiring the use of the abode in question like one would use his/her own home. And, in my opinion, two-to-three weeks per year of vacation use does not make an abode a home.

Petitioners also argued “that the imposition of a resident income tax in these circumstances is unconstitutional as applied to them.” Petitioners felt that the statutory residence rules result in an unconstitutional double-taxation of their non-source income. While I agree with Petitioners, the Judge is required to follow decisions by New York’s civil courts, and since the double-taxation of a statutory resident’s non-sourced income has recently been found to be constitutionally permitted in Matter of Chamberlain, the Judge was obliged to follow that prior precedential decision. (166 A.D.3d 1112 [3d Dept. 2018], lv denied 32 N.Y.2d 1216 [2019]). Our shop is trying to get this issue before the US Supreme Court. But, until Chamberlain is reversed, it is the law in New York State, and it was appropriate that the Judge followed it.

The Judge also found that Petitioners’ Constitutional arguments amounted to a facial challenge which she lacked the jurisdiction to hear. I don’t quite understand that, since the Judge confirmed that Petitioners argued that the law was unconstitutional “as applied to them,” and the DTA has the jurisdiction to adjudicate as-applied constitutional challenges (see, e.g., Matter of Ciccone, Tax Appeals Tribunal, January 23, 1997). In addition, this case could not have been styled as a facial challenge since there are circumstances in which the law could be applied consistent with constitutional limitations. Facial challenges of statutes are not permitted if a statute may, under certain circumstances, be applied constitutionally. And if a statutory resident had, for example, nothing but income sourced to New York and/or other states, the application of the statutory resident rules would not offend the Constitution.

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