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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 December 1, 2017 (cover DTA cases issued November 23)

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Just three Tribunal decisions this week. 

Decisions

Matter of Henrie and McBride; Division’s Rep: Michael Hall; Taxpayer’s Rep: Avraham Cutler; Articles 28 & 29.  Petitioners McBride and Henrie were the manager and the principal, respectively, of Namwest, LLC (“Namwest”), which was a firm that invested in US commercial real estate.  Namwest was also 100% owner of Namwest of Niagara, LLC (“Namwest Niagara”), which initially owned 99% of NS Partners, LLC (“NS Partners”).  Petitioners later acquired direct interests in  NS Partners.  NS Partners purchased a hotel in 2005, and owned and managed the hotel for a while.  But then in March 2008, it defaulted on its financing and its prime financer (“Gramercy”), assumed control over the hotel operations and revenue.  Gramercy refused to pay the hotel’s sales tax due for the period of March 1, 2008 through November 30, 2008.  NS Partners continued to own the hotel during the period at issue.

Petitioners argued that when Gramercy took control of the hotel, NS Partners no longer had any say in payments to the hotel’s creditors and thus was no longer a vendor or hotel operator.  As a corollary, Petitioners argued that if NS Partners was no longer responsible, they likewise should not be considered responsible persons liable for the sales tax.  The Tribunal disagreed, and found that Petitioners were not relieved of the sales tax liabilities.  The Tribunal reasoned that a vendor remains obligated to collect and remit sales tax even after a creditor takes control of the business pursuant to an agreement with the business.  The Tribunal found that NS Partners defaulted on the loan, and as a result, Gramercy was within its rights under the loan agreement to take control of the hotel.  Taking control of the hotel included deciding which of the hotel’s creditors got paid.  So, the Tribunal held that NS Partners caused its own inability to pay its taxes by entering into a lending agreement with Gramercy under which Gramercy could not be compelled to collect and remit sales tax, and NS Partners should have expected that it would not be able to pay its taxes if it went into default.  NS Partners thus remained liable for its sales taxes.  The Tribunal based its decision on several principles:  (1) financial problems shouldn’t ever be an excuse for failure to remit sales tax that was collected, (2) a person required to collect sales can’t just abdicate from operating a business and then expect to be relieved of the business’ sales tax liability, and (3) an owner can’t continue to derive benefits from a business (like cashing-in on QEZE benefits) and at the same time get relief from the obligation to remit the business’ sales tax.

The Tribunal also determined that Petitioners, as LLC members, were per se responsible persons under Tax Law § 1131(1).  And the Tribunal did not agree with the Petitioners’ argument that they were eligible for relief under TSB-M-11(17), which limits certain LLC members’ responsible person liability to the greater of that person’s percentage ownership of the business or percentage share of the profits and losses of the business.  To be eligible, an LLC member must show their ownership interest is less than 50% and that they were not under a “duty to act” for the LLC in complying with the Tax Law.  The Tribunal found Petitioners failed to prove they were not under a duty to act for NS Partners for several reasons:  Each Petitioner had a greater than 16% ownership interest in NS Partners;  each personally guaranteed the loan from Gramercy, thereby indicating they had an economic interest in the continued operation of NS Partners;  each Petitioner had the right to review the hotel’s books and records;  Petitioner McBride was the manager of Namwest, was the manager of NS Partners, signed NS Partners’ 2008 NYS partnership return, etc.;  and Petitioner Henrie was involved in the negotiation of the loan, was the principal of Namwest, etc.  So, the Tribunal held Petitioners did not qualify for relief under the TSB-M because they were under a duty to act for NS Partners.  The Tribunal also sustained penalties. 

Matter of Quinn; Division’s Rep: Mary Hurteau; Taxpayer’s Rep: pro se; Article 22.  The Division sufficiently proved its standard mailing procedures and that they were followed to mail the conciliation order to the Petitioner’s last known address.  Petitioner’s DTA petition was delivered to FedEx Express 1 day after the 90-day statute of limitations expired.  The Tribunal dismissed Petitioner’s petition as untimely filed and sustained the ALJ’s determination.  

Matter of Tuohy; Division’s Rep: Christopher O’Brien; Taxpayer’s Rep: pro se; Article 22.  The Division sufficiently proved its standard mailing procedures and that they were followed to mail the Notice of Deficiency to the Petitioner’s last known address.  Petitioner filed his DTA petition after the 90-day limitations period expired, so the Tribunal dismissed the petition as untimely filed and sustained the ALJ’s determination. 

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