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State and Local Tax Blog

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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 December 12, 2019 (reporting on DTA cases issued December 5)

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There are three determinations and three orders this week.  But first, this rant:

The longer I do this tax thing, the more I appreciate the fine line state legislatures must walk.  Unlike the federal government, states typically are not permitted to “deficit spend.”  So for every dollar that goes out the door during a state’s fiscal year, a dollar has to come in the door.  In times of economic malaise, finding those dollars can be difficult.  And finding dollars became more difficult when the first President Bush said “read my lips,” making increases in tax rates and new taxes an easy target for every self-proclaimed fiscally conservative candidate, with a consequence of making it more difficult for career law-writers to raise tax rates.  So legislatures reach for gimmicks, and tax administrators stretch interpretations, all in the service of their state’s fiscal volcano whose growing hunger is assuaged—not by an increasing number of virgins—but instead by larger dump trucks of dollars. 

And while I appreciate the difficulty of legislating taxes, there are constant reminders of when it has been done poorly.  Cases in point:  Two of this week’s determinations consider the tobacco products tax under Tax Law Article 20.  New York has a slew of special taxes and tax compliance procedures applicable to the tobacco/cigarette industry.  Even if they were well-intentioned, these special laws have, I posit, the unintended consequence of fomenting illegal activity.  I can imagine you groaning “Lighten up-Francis.*  Surely you don’t mean that taxes create crime.”  But that is exactly what I mean.  Any time a state, through targeted taxes, makes a product two times more expensive when purchased in-state than when purchased in the surrounding states, profit-maximizing ne’er-do-wells are going to crank-up illegal smuggling activities.  In New York, think cigarettes.  In California, think gasoline.

Along the same lines, laws that make compliance more complex, expensive, and/or difficult discourage compliance.  No surprise there.

I don’t applaud or encourage illegal behavior.  But when a legislature enacts (or perpetuates) laws which make the economics (or the compliance environment) of a situation so lopsided as to discourage legal behavior, the causal relationship should be acknowledged.

And now, back to our regularly-scheduled programming.

* Meme from “Stripes” (1981).  Google it.

DETERMINATIONS

Matter of Tripifoods, Inc.; Judge Law, Division’s Rep.: Brian Evans; Petitioner’s Reps.: Stephen Solomon and Kenneth Moore; Article 20.

We’ve seen a bunch of these cases in the last month or so, starting with the Tribunal’s decision in early November in Matter of Globe Tobacco Distributors, and they all arise out of the following same base background facts.  A tobacco products seller is the subject of a Tobacco Products Tax audit.  The audit is strung along for years using statute of limitations extenders.  Either during the audit, or after it, the Division develops an easier way for computing the “wholesale price” of the tobacco products purchased by the taxpayer which negates most, if not all, of the additional tax that would have otherwise been owed using a different method of calculating the wholesale price.  Indeed, the new method is so much more beneficial that the new approach means the taxpayer overpaid its taxes for the audit period.  Great news!  Unfortunately, it turns out that most of the periods open for audit were closed for refund claims because the additional audit/assessment statute of limitations (three years) is a year longer than the refund claim statute of limitations (two years), so the Division denies all of the refund claims for which the statute was closed.

In this particular case, Judge Law determined that some extensions of the audit/assessment statute of limitations were executed by Petitioner after the two-year refund statute of limitations had expired, so the refunds were denied for the expired periods.  Petitioner argued that, notwithstanding the expiration of the “regular” two-year statute of limitations, its refunds should nonetheless be granted under a Taxpayer Bill of Rights (“TBOR”) provision permitting extra time for a taxpayer to file a refund claim when the Division discovers a refund is due during the course of an audit.  Under the TBOR provision, taxpayers have up to 120 days after the Division discloses a discovered refund to the taxpayer.  Unfortunately for Petitioner, the Judge found that there was no evidence that the Division discovered an underpayment during its audit, so the Division was not required to notify Petitioner.

I would stop here, but for this quote from the determination:  “The Division is under no obligation to advise a taxpayer how to file its returns such as to maximize a refund or how [to] minimize its tax obligations.”  I don’t like the implications of this statement.  I think the Division has an obligation to enforce all of the Tax Law, and not just those provisions of the Tax Law that result in additional revenue for the State.  In the context of an audit, the Division is required to determine whether taxpayers filed their returns in compliance with the law.  And in connection with that obligation, the Division should advise audited taxpayers whether they filed correctly or incorrectly, even when the taxpayer filed incorrectly and the error results in a right to a refund.  I am not suggesting that auditors need to look at every issue.  But when an auditor sees that the taxpayer is doing something inconsistent with the Tax Law, the auditor should tell the taxpayer, even when disclosure is to the taxpayer’s benefit.  If the auditor does not do this, then the auditor is not enforcing the Tax Law.

Matter of AJIT K. Corporation; Judge Maloney, Division’s Rep.: Brian Evans; Petitioner’s Reps.: Stephen Solomon, Kenneth Moore and Roger Blane; Article 20.

See above for background.  In this particular case, Petitioner received two Notices of Determination asserting additional tax.  Petitioner filed a Request for Conciliation Conference.  The Conferee canceled the Notices and the Order issued to cancel the Notices stated that “[the Audit Division recommended] a refund of $67,688.35 be granted for the period 3/1/08-5/31/11, [and] a refund of $20,884.82 be granted for the period 7/1/11-11/30/11.”  Petitioner filed its petition nominally protesting the Notices, but actually seeking, I guess, the refund recommended by the Division.

Judge Maloney found that the DTA did not have jurisdiction to entertain the case since no refund claims had been filed and the Conciliation Conferee had canceled the Notices asserting additional tax.

Matter of Ronald P. Bellantonio and Richard Rock; Judge Russo, Division’s Rep.: Ellen Krejci; Petitioner’s Rep.: John Juva; Article 22.

Petitioner was a partnership that provided accounting services, and it used software to prepare returns for individuals, partnerships, corporations, and fiduciaries.  However, Petitioner did not file the returns electronically.  The Judge sustained penalties for failure to file these returns electronically.  The Judge found that the reasons articulated by Petitioner for its failure to file electronically (i.e. most of Petitioner’s elderly clients were worried about identity theft) either weren’t supported by the facts (many of Petitioner’s clients were not old) or did not rise to the level of reasonable cause to abate the penalties.

ORDERS

Matter of Capeci et. al.; Judge Russo, Division’s Rep.: Osborne Jack; Petitioners’ Reps.: Howard Davis and Amit Shertzer; Article 28.

Petitioners moved for the Division’s lawyer to be disqualified on the basis that he would be an “essential fact witness” once the petitions went to a hearing.  The Petitioners cited an affidavit offered by the lawyer in a federal civil case involving the same taxpayers and general subject matter, and they argued that the affidavit was prepared in violation of the New York Rules of Professional Conduct.  In that affidavit, the Division’s lawyer avers to certain facts regarding conclusions reached during the audits of Petitioners.  The Judge found that the affidavit indicated only that the Division’s lawyer was recounting facts he had gleaned from reviewing the audit file, thereby indicating (I suppose) that the lawyer did not have firsthand knowledge of material facts that would be necessary to the determination of the issues at the ALJ hearing.  And further: “[T]he mere submission of a declaration as an attorney for a party in support of a motion to dismiss does not necessarily make the affiant a fact witness. It is common practice for attorneys to submit affirmations in support of motions. . . .”  The Judge also noted in passing that the DTA doesn’t have jurisdiction to enforce the Rules of Professional Conduct.  Based on this, the Judge denied Petitioners’ motion to disqualify the Division’s lawyer.

Matter of Capeci et. al.; Judge Russo, Division’s Rep.: Osborne Jack; Petitioners’ Reps.: Howard Davis and Amit Shertzer; Article 28.

The Petitioners who moved to disqualify the Division’s lawyer also moved for a stay in the ALJ hearing on the basis that there were ongoing civil court cases adjudicating legal issues relevant to the determination.  The Judge denied Petitioners’ motion on the grounds that a motion to enjoin the ALJ hearing had been made in one of those civil court cases and was denied by the civil court on the basis that Petitioners were required to exhaust administrative remedies (i.e. the ALJ hearing).

Matter of Robinson; Judge Friedman, Division’s Rep.: Stephanie Lane; Petitioner’s Rep.: pro se; Article 22.

Petitioner failed to appear at her hearing and the Judge thereafter issued a default determination in favor of the Division.  Petitioner timely moved to have the default vacated.  Supervising ALJ Friedman denied Petitioner’s motion finding that she had neither provided an acceptable excuse for the default nor had a meritorious case.

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