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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 August 8, 2019 (reporting on DTA cases published August 1)

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I guess the DTA decided to embrace the summer slow-down this week after pumping out so many decisions and determinations last week.  There’s just one determination this week, and it’s not particularly noteworthy, but at least it’s not a timy.

DETERMINATION

Matter of Brown; Judge: Russo; Division’s Rep: Linda Farrington; Petitioners’ Rep. Kevin Conlon; Article 22.

The petitioner filed an amended joint return with her spouse for the 2014 tax year.  The amended return claimed a business loss of $ 37,902, which was supported by two attached amended Schedules C for Online Advertising Medium and CakeChronicles.  The petitioner alleged that Online Advertising Medium and CakeChronicles were businesses in which she was involved.  Neither proprietorship claimed having revenues in 2014, but both reported significant expense deductions. Also claimed was a $2,740 loss from the reported sale of a Dodge Durango.

At the hearing, the petitioner explained that she started working on Online Advertising Medium under the name “Hoosevents” in June 2014.  That business was intended to provide an online business directory and events listing for Rochester, New York, with the intent to expand nationally.  The petitioner hired web developers to create a website. According to records submitted, the website was still being developed through December 2014.  The petitioner also hired a graphic designer to perform work for the business.  With regard to the absence of gross receipts, the petition averred that, “It was not possible for this business to incur income as I am still completing NY State forms to qualify this business as a minority and woman owned business.”

As for CakeChronicles, the petitioner described the CakeChronicles Schedule C business  as a relationship coaching provider, but she did not explain what she charged for this service. The judge found that there was insufficient support to prove that the petitioner was engaged in activities for profit with respect to CakeChronicles.

The petitioners testified that there were some unreported receipts.  However, records of the amount of unreported receipts were not provided for either business, and the testimony regarding the amount of unreported receipts was inconsistent.  The petitioners provided some records for expenses for hosting fees, advertising, hotels and airfare, trademarks, meals, entertainment, security, office supplies, license fees, developer costs, business checks, and mileage.  However, for the most part, the petitioners' records were incomplete and disorganized. The  petitioner also admitted to comingling personal and business funds.  And in the end, the judge disallowed all of the petitioner's business losses, finding that the petitioner failed to prove that the businesses’ deductible expenses did not exceed their receipts.

Not that it mattered, but the judge found that the petitioner demonstrated that she was engaged in a business activity with the actual and honest objective of making a profit with respect to Hoosevents.  The judge noted that the petitioner engaged web developers, provided a statement of work, spent significant time and money on the website development, and eventually opened a separate bank account for the business.  The judge also understood that losses in the first year of a new business could be expected, and found that the petitioners had met their burden of proving certain expenses for Hoosevents including amounts for hosting fees, advertising, office supplies and developer costs, which totaled $7,841.07. But given the lack of verifiable records confirming the amount of revenue generated, the judge found that the claimed losses lacked a foundation.  And the judge noted that even if Hoosevents had been entitled to a deduction, it would have been limited by IRC § 195 as a startup expenditure since Hoosevents had (apparently) not received any payments from customers. 

Finally, the judge found that the petitioners were not allowed a deduction for the loss on their Dodge Durango. The petitioners gave the car to their daughter and there was no evidence that it had been previously used for business purposes.

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