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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 9, 2018 (covering DTA cases from August 2)

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The lazy days of summer continue with only one determination this week.

ALJ Determination

Matter of Michael and Suzanne Doyle; Judge: Gardiner; Division’s Rep: Linda Farrington; Petitioner’s Rep: Dean Nasca; For an Award of Costs Pursuant to Article 41Judge Gardiner denied Petitioners’ action to recover costs pursuant to Article 41 Tax Law.

Petitioners (no relation that I know of) filed their 2015 personal income tax return seeking a refund of $3,127.  In December, 2016, the Division wrote Petitioners that it was unable to verify some of Petitioners’ itemized deductions, so it recomputed the refund to $1,439.22 using the standard deduction.  But even though the correspondence seemed to suggest a final decision had been made (and said a check for the recomputed refund would be in the mail in 60 days), the letter asked Petitioners for a copy of their Schedule A from their Federal Form 1040 and supporting documents.

Petitioners responded to the Division’s letter just like you or I would, claiming that the Division’s unilateral reduction of the claimed refund was a violation of their Constitutional right to due process and threatening to sue in Federal District Court.  Wait. Kidding. I don’t know how you’d react.  If I were having a good day (and I usually am) I would have sent the substantiation and requested a reinstatement of the full refund claimed on my original return.  But Petitioners were more principled than pragmatic, and their escalation to DEFCON 3 made for good reading.

The Division responded “that no additional refund would be granted since no further documentation was provided; however, the Division would review anything that petitioners submitted in the future.” 

Fast-forward to a year later.  At BCMS, Petitioners, for first time, provide documentation substantiating the claimed itemized deductions, and the Conciliation Consent reflected that Petitioners were entitled to the full $3,172.00 refund they originally requested on their 2015 personal income tax return.  Conflict resolved, right?  Not nearly.

On February 21, 2018 Petitioners filed a timely petition with the Division of Tax Appeals seeking an award of $384 of costs and fees paid to their tax representative. The Division’s response to Petitioners’ application for costs included an affidavit noting that a review of Petitioners’ account showed that Petitioners did not submit any documentation to the Division’s request for substantiation of their itemized deductions during the course of the desk audit.

Judge Gardiner denied Petitioners’ request for an award of costs, finding that the Division’s determination that the itemized deductions were bogus was “substantially justified” since Petitioners did not provide substantiation of their itemized deductions. 

And now, some perspectives:

1. According to the Facts Found:  “The Division of Taxation (Division) issued correspondence to petitioners, dated December 19, 2016, requesting information regarding itemized deductions reported on petitioners’ 2015 resident income tax return that resulted in petitioners seeking a refund of $3,172.00. This correspondence indicated that the Division was unable to verify amounts claimed by petitioners as itemized deductions.  Therefore, the Division recomputed petitioners’ return using the allowable standard deduction which reduced the requested refund amount to $1,439.22. … The Division indicated that a refund check, in the amount of $1,439.22, would be issued within 60 days based upon its recomputation of petitioners’ return.”  Though not clear from the determination, it seems that the partial denial of refund manifest in the Division’s December 19 letter was the position being challenged at the DTA.  It also appears that at the time the December 19 letter was prepared the Department had not previously requested substantiation from Petitioners.

The Division’s “shoot first and then ask questions” approach is unbecoming for an institution that is supposed to be providing a service to the taxpayers of New York.  And, from a legal perspective, I do not feel the Division’s position was substantially justified since the position was developed by the Department before it requested proof from Petitioners. 

2. On the other hand, Petitioners could have helped themselves by sending the requested documentation when it was first requested instead of tossing out Constitutional due process violation grenades and threats about federal court cases. The statute providing that costs may be recovered does not include a “duty to mitigate” per se, but it does state that a party cannot recover costs attributable to that party’s unreasonable protraction of the proceeding. So, while I may have found that Division’s position was not substantially justified, that does not mean Petitioners would have recovered the fees they paid.

3. This was over $384.  Like I said, more principled than pragmatic.

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