TiNY Report for December 2, 2019 (reporting on DTA cases issued November 21)

Apparently the DTA doesn’t take Black Friday off.  Our office was closed that day, and I am Thankful for that (see what I did there?).  But the DTA was open for business, and, after a week without any cases, it posted five determinations on Friday. So, assuming the DTA posts cases on Thursday, you’ll get a double-dose of TiNY this week.  The Pilgrims should have had it so good!

DETERMINATIONS

Matter of Marchione; Judge DiFore; Division’s Rep.: Colleen McMahon; Petitioner’s Rep.: Anthony Marro; Article 22.

On July 5, 2015, the Division issued a notice disallowing Petitioner’s refund claim.  The notice disallowing the claim advised Petitioner that he had two years to challenge the denial by filing a Request for Conciliation Conference or a Petition for an ALJ Hearing.  Petitioner filed a timely BCMS request.  The BCMS Order dated November 30, 2018 denied Petitioner’s request and sustained the notice.  Petitioner filed his ALJ petition on March 4, 2019.

The Division proved both its standard mailing procedures and that they were followed to mail the Conciliation Order to Petitioner and his representative at their last known addresses on November 30, 2018. Petitioner filed his petition on March 4, 2019, a few days too late. Thus, the Judge dismissed the petition as untimely.

Curiously, the petition was filed within the two-year period allowed for challenging refund claim denials.  I wonder if Petitioner argued that the petition was timely filed under the two-year statute even though it may not have been timely under the 90-days-from-the-BCMS Order statute.  Certainly the ALJ did not address this point.

Matter of Collins; Judge: DiFiore; Division’s Rep.: Linda Farrington; Petitioner’s Rep.: Dean Nasca; Application for costs under Tax Law § 3030.

If this case sounds familiar, it’s because it is substantially similar to Matter of Bentham, Matter of Krause, Matter of Doyle, and Matter of Langston all of which were published in the last six months. Except this time, the Division also requested penalties. 

The Division sent a letter to Petitioner requesting substantiation for her itemized deductions. Sometime later, Petitioner responded with a letter entitled “STATEMENT TO AUDIT DEMAND,” and stated that she would not respond to the request and that the correspondence from the Division was generated by a program that denies itemized deductions based on arbitrary and capricious thresholds which is in violation of the State Administrative Procedure Act.

The Division then issued a Statement of Proposed Audit Change which stated that Petitioner’s deductions were denied because she did not substantiate them, and, ultimately, it sent a Notice of Deficiency.  Then, Petitioner filed a Request for Conciliation Conference, and at the Conciliation Conference, Petitioner proved her entitlement to the deductions claimed on their original return for the first time.

Following her successful defense at the Conciliation Conference, Petitioner moved for costs of $365.57, and the motion included an unsworn statement that Petitioner’s net worth, at the time the action commenced, was less than the $2 million limit for obtaining costs. In response, the Division denied that Petitioner was a prevailing party (i.e. because the Division’s position was substantially justified) and moved to have the maximum penalty for filing a frivolous petition imposed.

Judge DiFiore found that the Division’s assessment was substantially justified because Petitioner did not provide any substantiation for her deductions until the Conciliation Conference, a.k.a. after the Notice was issued.  The Judge also noted that, while not raised by the Division, an unsworn statement that Petitioner’s net worth did not exceed $2 million was insufficient -- a sworn statement of net worth is required to establish entitlement to fees. However, the Judge did not impose a frivolous petition penalty because she found that, although the petition was poorly reasoned, it was not completely without merit.  And the Judge found that the petition was not filed for delay, since the correct tax had already been paid.

And for those keeping count, that’s costs for Nasca’s clients: 0; Division not paying costs: 5. It might be time for a new strategy…

Matter of Mohyuddin; Judge Galliher; Division’s Rep.: Stephanie Lane; Petitioners’ Rep.: Sanjay Grover; Article 22.

Petitioners electronically filed their 2011 return on April 16, 2012, reporting tax owed of $256,347, and they paid the full amount shown as owed. Petitioners then filed an amended return for the 2011 tax year requesting a refund of $109,570. The amended return was the result of a change in the characterization of settlement proceeds resulting from a decision in a civil suit bearing on that issue.

The Division issued a Notice of Disallowance on the basis that the amended return was not timely filed. Petitioners challenged this denial claiming that the amended return had been filed within three years, as required, and submitted a return with the typewritten date “04-10-2012.” This return was identical to the amended return that the Division alleged that it had actually received which was signed by Petitioners’ representative and dated May 19, 2015. The envelope which contained this return had an illegible postmark, but was date stamped by the Division on May 26, 2015. Petitioners also submitted an unsigned copy of an application for an automatic six month extension of the time to file the original 2011 return, as well as an unsworn statement from an employee of their accountant who alleged that he mailed the application by “regular mail” in April 2012.  The Division could not find an application for extension filed by Petitioners or a return filed prior to May 26, 2015.

The Judge found that the amended return was not timely filed as Petitioners failed to demonstrate any verifiable evidence that Petitioners had filed an amended return on April 10, 2015 or that Petitioners had filed an application for an extension to file the original return. The Division had no record of either, and Petitioners could not produce any evidence of mailing. The Judge also afforded no weight to the unsworn statement.

We’ve said it before, and I’m sure we’ll say it again – pay the extra few dollars and send things registered mail. Why, when timeliness is a factor, people continue to send things via “regular” mail is beyond me.

Matter of Cathey; Judge Galliher; Division’s Rep.: Peter Ostwald; Petitioner’s Rep.: Lara Chwat; Article 22.

Petitioner was a tax preparer and the Division reviewed all of the returns that she prepared from 2011 to 2013. On 789 of the returns, about 79 percent of the returns reviewed, Petitioner’s taxpayer-clients claimed itemized deductions for employee job expenses and charitable deductions. The Division questioned these deductions and issued pre-refund audit letters to 506 of the taxpayers. Thereafter, the Division issued a statement of proposed audit changes to Petitioner which included a return preparer penalty of $1,000 for each of the 506 returns for which it had issued pre-refund audit letters.  The penalty was based on the fact that Petitioner had allegedly been repeatedly preparing returns and reporting job expenses and charitable contributions without proof of the deductions.

In support, the Division submitted the affidavit of a tax technician who handed the review of the 789 returns as well was the audit of the 506 returns. The technician stated that the returns prepared by Petitioner had a questionable pattern of improperly claimed itemized deductions. But he gave no explanation of why letters were only sent to 506 taxpayers. The technician also stated that “not one of the [506 taxpayers selected for such review] was able to substantiate the itemized deductions claimed [on their return].” In addition, he claimed that Petitioner had submitted “forged fraudulent documentation” including letters from the taxpayers’ employers verifying job expenses. The technician determined the application of the penalty was warranted because the level of diligence required to determine the treatment of the itemized deductions was low, the number of returns with itemized deductions was high, and the Division’s success rate on audit was (allegedly) 100%.

Judge Galliher found that, in order to determine if a tax preparer penalty is warranted, the Division weighs three criteria: (1) the egregiousness of the position; (2) total number of returns where the position was claimed; and (3) audit success rate based on that position. Essentially, the Division claimed that since so many of Petitioner’s clients were employed in the public sector, their job expenses were reimbursable and not properly included as itemized deductions, and that Petitioner’s position that these expenses could be deducted was not a position that Petitioner could reasonably believe was more likely than not the proper tax treatment of such expenses. The Division largely ignored the claimed itemized deductions for gifts to charity.

However, the Judge determined that Petitioner’s position was not per se improper. Rather, the Judge stated that taxpayers may properly claim a miscellaneous itemized deduction for unreimbursed expenses related to his or her employment. Nor did the fact that the taxpayers’ inability to substantiate these expenses mean that the original position was improper. Petitioner could in good faith rely on the information from the taxpayers, and she was not required to review the taxpayers’ records to claim the deductions so long as the positions were not incorrect on the law or inconsistent with other information known to Petitioner. In sum, the Judge stated that: “The Division’s assertion that as a tax preparer, petitioner should be aware that most New York State and New York City employees do not have any eligible job expenses to be claimed on their tax return because the expenses are reimbursable, represents at best supposition, and clearly does not support a conclusion that an otherwise allowable reporting position concerning the deductibility of employee job expenses is somehow in essence patently unreasonable, much less egregiously improper.”

The Judge also noted that the Division claimed that the returns were “successfully audited” when in fact all that the record showed was that the Division issued pre-refund inquiry letters (which is clearly not a full audit). Surprisingly, the Judge did not take more of an issue with Petitioner’s submission of “obviously manufactured documents” and found that it would only potentially expose Petitioner to sanctions. I’m usually on the side of petitioners.  But if the Judge had taken Petitioner to the woodshed for falsifying documents and then submitting them to the Division, I guess I’d be OK with that.

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

Petitioner was a tobacco wholesaler and distributor. The Division began an audit of Petitioner in March 2011 for the period of September 1, 2008 through March 31, 2011. Prior to the auditor’s issuance of Proposed Audit Changes, two waivers were executed. The first extended the time within which to assess any additional tax for the periods September 1, 2008 through September 30, 2009, to October 20, 2012 and it was signed on June 7, 2011.  And the second waiver extended the time within which to assess any additional tax for the periods September 1, 2008 through November 30, 2010, to December 20, 2013. Prior to the second waiver, Petitioner’s attorney filed correspondence entitled “Application for Credit or Refund of Tobacco Product Taxes” with the Division’s Miscellaneous Tax Unit. This protective claim stated that Petitioner was filing a refund claim for all open periods through December 31, 2012.

The auditor issued the first statement of proposed audit change to Petitioner in August 2013, and it totaled roughly $310,000 of additional tax and interest due.  Thereafter, a third waiver was executed and it extended the time within which to assess any additional tax for the periods September 1, 2008 through March 31, 2011, to June 20, 2014 – this was the last of the executed waivers. On December 5, 2013, the Division issued a Technical Services Bureau Memorandum (a “TSB-M”) which provided guidance on determining a distributor’s wholesale price of cigars, and it was effective for cigars imported into New York on or after December 1, 2013. On May 6, 2014, the auditor revised his workpapers applying this new standard, and it resulted in a credit to Petitioner of $180,500. Thereafter, there were two meetings between the auditor and Petitioner’s counsel. On February 10, 2015, the auditor’s team leader sent a letter enclosing their workpapers and stating that Petitioner was entitled to a net refund of $150,656.10, and that Petitioner would need to prepare amended returns.

There was another round of revisions which resulted in a refund of $201,661.96, and in August 2015, Petitioner’s representative sent a letter to the Division’s Audit Division-TDAB Cigarette Unit requesting a refund for $201,668. Prior to the close of the audit, however, the auditor prepared and signed a field audit narrative sheet which stated that “the audit resulted in a credit of $201,661.96 in the entire audit period. . .  However, based on the waivers signed, the first nine months in the audit period are out of statute for credit purposes.” This resulted in a credit of only $89,902.53.

Petitioner filed a second refund claim on March 9, 2016 for the entire audit period and for the amount of $201,666. The Division allowed the refund in the amount of $89,902.03, and denied the remainder as being out of statute.

At the hearing the Division conceded that the correct date for the statute of limitations was two years from the date the first waiver was signed (June 7, 2011) so May 2009 was also open for refund purposes. However, the Judge determined that for the period September 1, 2008 through April 30, 2009, the two year statute of limitations for filing an application for refund expired before the first waiver was even signed. Thus, the Division properly denied this portion of the refund claim.

Petitioner also argued that it was entitled to relief under the Taxpayer Bill of Rights (“TBOR”) on the basis that the Division’s failure to provide Petitioner with notice of its potential refunds kept the period to file a refund open.  The Judge did not agree.  The Judge found that the TBOR permits an extension of the statute of limitations only when the potential refund is discovered by the Division prior to the expiration of the two-year statute of limitations for claiming a refund.   Petitioner had notice of the potential overpayments on a number of occasions, but the first date that the Judge listed was June 2, 2011.  The Judge’s train of thought on the issue is a little unclear, but apparently the Judge felt it very unlikely that the Division would have discovered a potential refund during or before the initial audit meeting held on June 2, 2011, at which time the two-year statute of limitations had already run for periods through April 2009.