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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 28, 2017 (covering DTA cases issued December 21)

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Two ALJ Determinations and two Tribunal decisions this week.  The last of the DTA cases to top off 2017 as we come to year’s end. 

DETERMINATIONS

Matter of Connecticut Insulation Distributors Corporation; Judge: Maloney; Division’s Rep: Howard Beyer; Taxpayer’s Rep: Mark Burns; Articles 28 & 29.  Case dismissed on timeliness grounds.  The Division sufficiently proved its standard mailing procedures, but not that they were followed to mail the Notice of Determination.  However, the Division proved the day Petitioner actually received the Notice.  Petitioner filed its BCMS request more than 90-days after receipt of the notice, so the Judge dismissed Petitioner’s petition as having been untimely filed.

Matter of Silver Saddle Deli Grocery, Inc. and Amir Musaed; Judge: Russo; Division’s Rep: Osborne Jack; Taxpayer’s Rep: Jacqueline Kafedjian; Articles 28 & 29.  Petitioner did not respond to the Division’s requests for Petitioners’ books and records. So the ALJ determined the Division reasonably concluded that Petitioners did not maintain or have available books and records sufficient to verify its sales during the audit period.  As a result, the Division was entitled to use an indirect audit method – the use of a rent factor – to determine Petitioners’ sales and resulting tax liability.  The Division put on the record the statistical report on which its calculations were based, and it adequately explained to Petitioners at the hearing why its use of the IRS Ratios was an appropriate method.  Petitioners presented nothing to show the rent factor method was unreasonable, so they failed to meet their burden to establish the Division’s audit method was unreasonable or that the resulting tax assessment was erroneous.  Petitioners made several arguments in opposition to the Division’s audit method, with which the Judge disagreed based on the evidence in the record.  The Judge sustained penalties.  The Notices of Determination were sustained. 

DECISIONS

Matter of Kayata; Division’s Rep: Peter Ostwald; Taxpayer’s Rep: James Kridel and Anne Heldman; Article 22.  The issue in this case was whether Petitioner, Mr. Kayata, was a professional gambler and how Mr. Kayata should have reported his gambling income and losses for the 2006-2008 tax years.  Mr. Kayata was a full-time chiropractor, and had gambled every weekend since he was 18 years old.  Petitioners were previously audited for the 2006-2008 years and it was determined they were statutory residents of NYS and NYC for those years.  For the audit years, Petitioners filed NY nonresident returns.  After the audit closed, NYS issued to Petitioners a Notice of Deficiency based on the information from their federal returns, on which Mr. Kayata originally reported his gambling income and losses on Schedule A as miscellaneous income.  The Notice asserted Mr. Kayata’s gambling winnings were subject to the itemized deduction limitation under Tax Law § 615(f).  Under that computation, Mr. Kayata’s claimed itemized deduction amounts on his NY returns would be reduced.  After the Notice was issued, under new tax advice Petitioners amended their federal, NYS, NYC, and NJ returns for the years at issue and claimed Mr. Kayata was a professional gambler and entitled to report his gambling activities as a trade or business on Schedule C. 

As a threshold matter, gambling winnings and losses constitute income that are includable in NY adjusted gross income.  On the federal income level, casual gamblers are treated differently than professional gamblers.  Professional gamblers may report their gambling activities on Schedule C and can take an above the line deduction by deducting their gambling losses and other necessary business expenses against their gambling winnings (which is how  Mr. Kayata reported his gambling activities).  Casual gamblers must report their gambling activities on Schedule A and report gambling losses as itemized deductions, or below the line deductions.  So, casual gamblers’ losses don’t reduce adjusted gross income while professional gamblers’ losses do.  Unlike professional gamblers, casual gamblers can’t take a deduction for additional expenses.  In NY, casual gamblers are further limited by the itemized deduction reduction factor under Tax Law § 615(f).  A taxpayer must engage in gambling for profit to be considered a professional gambler, and the IRC provides 9 factors to be considered in determining profit motive as applied to the facts and circumstances of the case.  The Tribunal reviewed each of those 9 factors and determined that Mr. Kayata was not a professional gambler for the years at issue.  He was thus required to report his gambling activities as a casual gambler.  As a result, the Tribunal held that the deduction limitation under Tax Law § 615(f) was properly applied to Mr. Kayata’s gambling income and losses, and affirmed the ALJ’s determination. 

Matter of Mays; Division’s Rep: Peter Ostwald; Taxpayer’s Rep: Larry Kars; Article 22.  Petitioner was audited for 2008-2011, presumably because she changed her domicile and moved out of NYC.  After the audit and a BCMS conference, the only issue left was whether Petitioner was a NYC statutory resident for the 2011 year.  It was undisputed that Petitioner spent more than 183 days in NYC in 2011, so the question in this case was whether Petitioner maintained a permanent place of abode (PPA) in NYC.  Petitioner began new employment in January 2011, and her employer provided an apartment in NYC for Petitioner to stay.  Petitioner had a fully-furnished, one-bedroom, one-bathroom apartment.  Petitioner’s term of employment was not defined or limited, and Petitioner’s lease term was initially for 3 months (Petitioner then got a short, 1-month extension).  After the lease on that apartment ended, Petitioner moved into a different NYC apartment with her fiancé.  It was undisputed the new apartment was a PPA. 

The Tribunal agreed with the ALJ’s determination that Petitioner’s temporary apartment qualified as a PPA.  The Tribunal determined the apartment had the physical elements of a PPA and that Petitioner treated it as a residence and had unfettered access to the apartment.  So, even though the apartment was provided on a temporary bases as an employment benefit, the apartment constituted a PPA.  The Tribunal also held Petitioner maintained that apartment because she took the necessary steps to continue her living arrangements – i.e. she maintained her employment that gave her the right to reside in the apartment, had exclusive use of the apartment, and was able to extend her stay by request.  Petitioner argued she did not maintain the apartment for substantially all of the year, however, the Division’s policy is that “substantially all of the year” means 11 months, and Petitioner maintained the temporary apartment and new apartment for 11 months in the aggregate. Additionally, the Tribunal sustained negligence penalties against Petitioner.  Petitioner’s argument that she relied on her accountant to prepare her return was not sufficient as reasonable cause to abate the penalties.  

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