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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 19, 2019 (reporting on DTA cases issued December 12)

By on

I’m going out on a limb here, but I’m guessing that the DTA will not be issuing any cases next week because of the holiday – I may end up eating my words like I did after Thanksgiving. But as we gear up for the holidays, I thought it would be appropriate to do a holiday movie quote after each case - which may or may not be relevant or typical quotes you think of when you think holiday movie.

DETERMINATIONS

Matter of Zimmerman; Judge Connolly; Division’s Rep.: Michelle Helm; Petitioner’s Rep.: pro se; Article 22 (by Emma Savino).

The Division proved both its standard mailing procedures and that they were followed to mail a Notice of Deficiency to Petitioner at his last known address on November 30, 2017. The Division also provided a sufficient explanation for the differing postmark zip codes on the CMR through the affidavit of business service network representative for the USPS in Albany, who explained that both postmarks went to the same postal facility.

Petitioner alleged that he had faxed his request for conciliation conference on May 8, 2018 and then refaxed the request on July 11, 2018 after he received a tax warrant dated June 21, 2018. Petitioner did not provide any evidence of the original fax (which would have been irrelevant as it was still late). Thus, the Judge dismissed the petition as untimely.

“Next, goddammit. This is not the DMV, alright? Move it along.” [Bad Santa (2003)]

Matter of Almonte; Judge Maloney; Division’s Rep.: Ellen Krejci; Petitioner’s Reps.: Leon Greenspan and Michael Greenspan; Article 22 (by Emma Savino).

Petitioner was a registered tax preparer for just 6 months, providing preparation services for only the 2014 tax year (she has since began working as driver for Lyft, just like everyone else). She took a tax preparation course at H&R Block in 2011, but never actually worked at an H&R Block.  Instead, Petitioner opened up her own shop for 1 year in 2015 where she prepared over 2,000 returns for both friends and those who had been referred to her. She would ask her clients to fill out a set questionnaire, interview them, and then prepare the return. One of Petitioner’s clients provided her form 4797 and told her that losses from a business loaning money to others could be reported on it. Petitioner reviewed the form, her H&R Block books, and the IRS website to determine whether this was appropriate, which she ultimately determined it was. Lots of Petitioner’s clients had losses from their investments in what turned out to be a pyramid scheme, and she similarly reported them on the form 4797.

At some point during February 2015, the Division’s Income/Franchise Desk Audit Division analysis team noticed that the returns Petitioner prepared had a pattern of claiming other losses, capital losses, or federal adjustments to income, so they referred her to the Division’s Office of Professional Responsibility. The Division’s Office of Professional Responsibility sent Petitioner two identical letters, one to her business address and the other to her mother’s old address, about the correct reporting of business losses, capital losses, other gains and losses, and deductions for student loan interest. Petitioner alleged that she never received either letter.

On June 30, 2015, the Audit Division-Income/Franchise Desk issued a Notice of Deficiency to Petitioner asserting a penalty of $713,000 (!) for the 2014 tax year. The Notice explained that Petitioner had repeatedly prepared returns reporting other losses from federal form 4797, and that the audit of these returns determined that the taxpayers were not entitled to these deductions. Since the audited 713 returns that reported other losses did not conform to the established guidelines, which Petitioner should have reasonably known, a penalty of $1,000 per return was imposed under Tax Law former § 685(aa). A tax technician who was part of the analysis team testified that of the over 2,000 returns Petitioner filed, 1,019 returns claimed other losses and the Division conducted desk audit reviews of 713 of those returns. He also testified that in determining that a penalty was appropriate, the analysis team relied on the following facts: (1) it’s uncommon for individuals to claim “other losses” on the federal return; (2) many of the forms 4797 were incomplete; (3) many of the forms 4797 reported the same amount as a loss; (4) there were  material reductions to federal AGI that resulted from the claimed other losses; and (5) none of the contacted taxpayers could provide any additional support for the claimed losses.

Petitioner argued that the Division could not use Tax Law former § 685(aa) as a basis for the Notice, since it had been repealed effective July 1, 2015. The Judge dismissed this argument as meritless because the Petitioner’s liabilities were incurred when the returns were filed, i.e. before the statute was repealed. The Judge also noted that, contrary to Petitioner’s claims, “[i]t does not matter when the notice of deficiency ‘ripened’ into an assessment.” The Judge next found that the Division had a rational basis for the penalty because 713 returns included an incomplete form 4797, claimed other losses, and the taxpayers could not substantiate the losses.

The Judge found that Petitioner did not meet her burden of proving that the penalty was erroneous. In finding this, the Judge relied on the fact that Petitioner did not consult any other authorities regarding the applicability of form 4797 or submit any information provided by her clients. Perhaps most importantly, Petitioner herself did not report any of the income she earned from her tax preparation services, nor did she withhold or file W-2s for her 2 employees. So the Judge sustained the Notice.

I have to say, I feel badly for Petitioner. She clearly relied on what the taxpayers told her to her detriment. While that sometimes will get you off the hook, (see Matter of Cathey) I guess it just didn’t fly here. But I feel like the real nail in her coffin was the fact that she didn’t even report her own income properly.

"Now I have a machine gun. Ho ho ho." [Die Hard (1988)*]

*Yes, Die Hard is a holiday movie, don’t fight me on this.

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