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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 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 14, 2017 (covering DTA cases issued December 7)

By on

One ALJ Determination, three ALJ Orders, and one interesting Tribunal decision this week.  We’re really busy with year-end planning for clients who, among other things, want to maximize their last bites at the state income tax deduction apple.  So we didn’t have enough time to back-fill this week’s Report with our usual clever quippery.

The Determination

Matter of Ngae; Judge: Bennett; Division’s Rep: Barry Weinstein; Taxpayer’s Rep: Gabriel Nugent; Article 20.  Case dismissed on timeliness grounds.  The Division adequately proved its standard mailing procedures and that they were followed to mail the Notice of Determination to the Petitioner’s last known address.  Petitioner filed her DTA petition after the 90-day limit expired. 

The Orders

Matter of Jarvis (DTA Nos. 828169 & 827955); Judge: Maloney; Division’s Rep: Hannelore Smith; Taxpayer’s Rep: pro se/Robert Jarvis; Article 8.  Note there was a separate Order issued to each spouse.  The Division issued to Petitioners a Notice proposing driver’s license suspension based on outstanding tax liabilities from 1998.  Petitioners timely submitted a BCMS request, went through the BCMS process , and received a conciliation order sustained the suspension notice.  Petitioners then filed a DTA petition challenging the conciliation order.  At some point prior to the Division’s suspension notice, Petitioners challenged the underlying Notice of Deficiency.  The ALJ in that case upheld the Division’s adjustment to Petitioners’ adjusted gross income, except for two exemptions and credit for taxes that the Judge held Petitioners were entitled to.  Petitioners filed an exception to that ALJ Determination, and the Tribunal sustained the ALJ’s determination.  Petitioners then petitioned the Appellate Division, Third Department for an Article 78 review of the Tribunal’s decision.  In this case, the Division failed to submit anything to show the assessment (attached to the suspension notice) accurately reflected the re-computation of tax previously directed by the ALJ and affirmed by the Tribunal.  So, Judge Maloney determined it was impossible to determine whether the underlying tax liabilities exceeded the $10,000 threshold to warrant a suspension notice at the time the suspension notice was issued to Petitioners.  The Judge also determined there was a question whether Petitioners still had the right to judicial review of the underlying Notice of Deficiency at the time the suspension notice was issued.  The Judge held there were material issues of fact, so she denied the Division’s motion for summary determination. 

Matter of Gannon; Judge: Galliher; Division’s Rep: Ellen Roach; Taxpayer’s Rep: Dean Nasca; Application for Costs under Tax Law § 3030.  Petitioner’s application for costs was denied.  The Division provided sufficient evidence to establish that it didn’t receive any response to its audit inquiry or documents substantiating Petitioner’s claimed deductions prior to the BCMS conference.  Petitioner also failed to respond to the statement of proposed audit changes.  Because Petitioner failed to respond to the Division’s requests, the Division met its burden to prove its position was substantially justified in issuing the underlying Notice of Deficiency.  Additionally, the Judge determined that even if Petitioner was entitled to recover costs, the amount Petitioner claimed exceeded the statutory limit allowed.  The Judge also determined Petitioner failed to establish her net worth didn’t exceed $2 million at the time she filed her petition (another requirement to recover costs).

The Decision

Matter of Silverstein; Division’s Rep: David Gannon; Taxpayer’s Rep: Elaine Platt; Articles 28 & 29.  Petitioner was issued two Notices of Determination, one for sales tax due by Crest Auto Leasing, Inc. (Crest) and one for sales tax due by Metro Auto Leasing, Inc. (Metro), as a person required to collect sales tax for the two companies.  Prior to this audit case, Petitioner was involved in a long criminal investigation related to the underlying sales tax at issue, which resulted in Petitioner entering into a guilty plea in criminal court.  During the plea proceedings, Petitioner admitted that he was a responsible person for Crest and Metro during the periods at issue, and knowingly and deliberately failed to cause Crest and Metro to report and remit sales tax collected by the two companies. 

First, the Tribunal held Petitioner was estopped from claiming he was not a responsible person for the companies owing sales tax.  The Tribunal found the Division adequately showed that the issue of whether Petitioner was a responsible person was addressed in the prior criminal proceedings and through the guilty plea agreement concluding those proceedings.  As a result, Petitioner’s guilty plea precluded him from claiming he was not a responsible person for the two companies because he had a fair opportunity to litigate that issue during the criminal proceeding.  Regardless of estoppel, the Tribunal agreed with the ALJ’s determination that the record did not support Petitioner’s argument that he wasn’t a responsible person given his status within and authority over Crest and Metro.  Second, the Tribunal upheld the ALJ’s determination that the Division’s audit method was reasonable.  Crest and Metro failed to provide their sales records after repeated requests by the Division, so the Division concluded the companies did not maintain or have available books and records sufficient to verify the sales in question.  With no books or records, the Division was entitled to use indirect methods to determine the sales and sales tax liability.  The auditor compiled third-party records (like bank records) and cross-referenced them against questionnaires returned by customers who purchased cars from Crest and Metro.  The auditor used that information to determine the amount of sales and sales tax liability.  Because the only transactions counted as taxable sales were those evidenced by bank deposits and DMV information, the Tribunal held the audit method was reasonably calculated to determine the amount of tax due.  Petitioner failed to meet his burden to prove by clear and convincing evidence that the audit result was unreasonably inaccurate or that the assessment was erroneous, as he did not provide any business records or testimony to support his argument.  Third, the Tribunal disagreed with Petitioner’s argument that the wrong corporate entity was the subject of Metro’s audit.  The Tribunal held that the evidence in the record clearly showed that Metro’s sales transactions were the subject of the audit.  Fourth, the Tribunal held Petitioner’s argument that the Notices should be canceled for failure of service on his or his rep were without merit.  The Tribunal agreed with the ALJ that it was hard to believe Petitioner did not receive the Notices where Petitioner timely filed a BCMS request challenging those Notices.  But in any event, the ALJ determined the Notices were properly sent to Petitioner’s last known address.  Fifth, the Tribunal sustained the fraud penalties asserted against Petitioner.  The Tribunal held Petitioner’s admission during the plea proceedings of his criminal trial that he had the intent to defraud in order to avoid paying sales tax was direct evidence of fraud to warrant the penalty.  Again, the Tribunal held Petitioner was estopped from arguing otherwise.  Lastly, the Tribunal disagreed with Petitioner’s argument that the penalty imposed for failure to pay sales tax violated the excessive fines clause of the NYS Constitution as specifically applied to Petitioner.  The Tribunal held that given the record and the volume of transactions at issue for two companies over 20 years, the penalty imposed against Petitioner was not grossly disproportional. 

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