TiNY Report for December 6, 2018 (covering DTA cases issued November 29)

Two Tribunal Decisions and 6 ALJ Determinations.

TRIBUNAL DECISIONS

Matter of March; Division’s Rep: Charles Fishbaum; Taxpayer’s Rep: Roger Gromet; Award of Costs Under Tax Law § 3030.  Petitioner and her husband were previously involved in a criminal tax matter due to their alleged failure to file several years of personal income tax returns.  The criminal matter was resolved by a plea agreement, in which the Court ordered the payback of taxes and fraud penalties.  Petitioner’s husband died prior to the taxes and penalties being paid.  Petitioner subsequently sold their residence.  Part of the proceeds from the sale of the residence went to the Tax Department to pay the tax liability asserted including the fraud penalties.  Petitioner then applied for a refund of the penalties, which was denied.  Petitioner protested the refund denial. 

The ALJ found Petitioner liable for the fraud penalties jointly imposed on Petitioner and her husband for the tax years at issue.  But in May, 2017, the Tribunal reversed the ALJ, finding that the Division had not borne its burden of proving the underpayment at issue was due to Petitioner’s fraud as opposed to the fraud of her spouse.  Petitioner made a motion for costs and attorneys’ fees, which was denied by another ALJ.  In this decision, the Tribunal sustained the denial of fees.

An award of costs and fees may be made to a prevailing party in a Division of Tax Appeals matter if the party’s net worth does not exceed certain limits.  But there is an exception where the Division can establish, by a preponderance of the evidence, that its position was substantially justified.  Here, the Tribunal found that the Division proved its position was substantially justified at the time it issued the refund denial giving rise to this proceeding because of the persistent non-filing of Petitioner’s returns and underpayment of Petitioner’s taxes.  Petitioner also failed to establish eligibility for an award of costs under the financial eligibility guidelines, because her affidavit regarding her net worth did not relate back to the time of the filing of her petition, but instead stated what her net worth was at the time of the filing of her motion for costs. 

Matter of Randle; Division’s Rep: Charles Fishbaum; Taxpayer’s Rep: pro se; Article 22.  Petitioners amended their joint 2012 income tax return claiming a NY subtraction of $11,100 for contributions to NY’s 529 college savings program, and requested a refund of $560.  The Division audited Petitioner’s 2012 return.  The auditor submitted an audit program request with the 529 program for the 2012 year, which showed that neither Petitioner made contributions to the 529 program.  The Division issued a Notice of Deficiency to Petitioners, disallowing their claimed contributions.  BCMS sustained the Notice.  Petitioners appealed to DTA.  The Division moved for summary determination.  Petitioners failed to establish they had made contributions to the 529 program, and did not submit evidence to support a claim of either the unreasonableness of the assessment or the incorrectness of the tax assessed.  The Tribunal granted summary determination in favor of the Division.  Additionally, Petitioners made several typical “tax protester” arguments, such as that no law required them to pay taxes, there was no lawful income tax, the 16^th Amendment was never properly ratified and was illegal, etc.  As a result, the Tribunal also imposed on Petitioners a $500 frivolous petition penalty. 

ALJ DETERMINATION

Matter of Schahet; Judge: Maloney; Division’s Rep: Tobias Lake; Taxpayer’s Rep: Christopher Doyle and Ariele Doolittle; Article 22.  This case involved the proper computation of the empire zone real property tax credit (RPTC).  When payment in lieu of tax (“PILOT”) payments are involved, the statute limits the credit to the product of the federal tax basis of the property and the estimated effective full value tax rate in the county in which the property is located (the “statutory cap”).  

Petitioners were members of Schenectady Hotel LLC (“SHLLC”).  In 2006, SHLLC was certified as a Qualified Empire Zone Enterprise (“QEZE”), and it remained a QEZE throughout the periods at issue.  Subsequent to its certification (and as its name implies) SHLLC built a hotel in Schenectady.   SHLLC’s investment in the hotel was about $10 million.  But SHLLC’s federal tax basis in the Hotel was reduced to account for SHLLC’s receipt of: 1) a grant from Empire State Development in 2007, and 2) a $5 million allocation of the Federal Renewal Community benefit in 2007 (both reductions were required by the Internal Revenue Code).  Petitioners filed personal income tax returns for each of the 2011-2013 tax years under audit, and claimed the RPTC for the full amount of the PILOT payments made by SHLLC.  Following an audit, Petitioners received Notices of Deficiency reducing the credits claimed by applying the statutory cap computed using a single average county-wide full value tax rate.  During the audit, and while the statute of limitations was still open for all of the audit years, SHLLC requested that the Division disregard the two basis adjustments mentioned above for purposes of the QEZE credits.  This would have permitted petitioners to receive most of the claimed RPTC.  The Division responded saying it would disregard the basis reductions for the tax returns that had not yet been filed (i.e. 2014 and subsequent years), but not for the 2011-2013 returns that had been filed and were under audit.  The Division stated that it viewed Petitioners’ request as similar to a discretionary adjustment to a business allocation percentage, which the Division asserted was permitted only on a prospective basis.  Accordingly, the Division deemed the request untimely for the 2011-2013 years.

Petitioners argued that the Division’s decision to deny SHLLC’s basis request for a discretionary adjustment in the federal tax basis in the hotel for 2011-2013 was arbitrary and capricious.  Petitioners argued that whether tax returns have been filed or not is not relevant to the value of the Hotel, or whether that value was properly reflected in its federal tax basis, which (Petitioners posited) was the only relevant issue.  The Division argued its decision to deny the request pertaining to the 2011-2013 years was entirely reasonable given the lack of authority on the issue of whether such decisions could have retroactive effect.  Petitioners’ basis request was the first such request ever received by the Division, so it was uncertain whether it should be applied retroactively and prospectively or prospectively only.  And the prospective/retroactive issue was not addressed in in any published authority or guidance. 

The Judge agreed with Petitioners that the Division’s decision to ignore the basis reductions only for the periods after the audit was arbitrary and capricious based on the Division’s stated rationale for the decision.  The Judge found that even if the procedure for requesting a discretionary adjustment varying the business allocation percentage was applicable to the basis adjustment issue, the Division’s published guidance on discretionary adjustments explicitly provides that a request “may be submitted either before or after” a tax return is filed.  Accordingly, the Judge allowed the basis adjustments for the 2011-2013 tax years. 

Petitioner also argued that the “estimated effective full value tax rate” was computed incorrectly by the Division since the Division used one county-wide rate and the language in the statute requires the Division to calculate “rates” (plural) for each county.  The Judge found that the Division’s interpretation of the Tax Law (i.e. that only one rate per county needed to be calculated) was reasonable and that Petitioners did not meet their burden of proof to show their interpretation was the only reasonable construction. 

Matter of Kayumi; Judge: Galliher; Division’s Rep: Robert Maslyn; Taxpayer’s Rep: Mumtaz Alvi; Articles 28 and 29.  This was a Supplemental Determination on Remand in response to a prior Decision in which the Tribunal identified a threshold jurisdictional issue not raised or addressed in the original ALJ Determination.  The issues were the timeliness of Petitioner’s BCMS requests challenging the Notices at issue, and, if timely, whether Petitioner was liable for the sales tax due on the transfer of tangible personal property. 

Petitioner purchased a Popeye’s Chicken franchise through an asset purchase.  The Division received a notification of a bulk sale regarding the sale of the Popeye’s Chicken assets, which included a Rider that indicated a sales tax liability was due.  The Division sent letters to Petitioner warning him of possibly incurring the seller’s sales tax liability.  Eventually, the Division issued two Notices of Determination to Petitioner assessing tax due from the prior owner and tax due on the asset transfer.  The first Notice asserted tax, penalty, and interest on the asset purchase.  With respect to that Notice, after reviewing the evidence the Judge determined that Petitioner’s BCMS request was timely filed, and thus the conciliation order improperly dismissed the request as untimely.  After having determined the request was timely, the Judge addressed the substantive sales tax issue.  The Judge determined the Division properly assessed tax due on the furniture, fixtures, and equipment via its issuance of the Notice of Determination.  Petitioner admitted that for two years post-transfer, the furniture, fixtures, and equipment were utilized by Petitioner in the operation of the business.  As a result, sales tax was properly due on the sale of those items. 

On the issue of timeliness, the Judge found that the Division adequately proved its standard mailing procedures.  The Judge noted that each Notice was mailed separately, one mailing involved many pieces of certified mail, and the other involving only one piece of certified mail, and the mailings were made via two different branch offices of the USPS, with a separate CMR for each mailing.  Because the manner of each mailing had certain differences, the Judge addressed each individually. 

The first Notice asserted tax, penalty, and interest on the asset purchase of the Popeye’s Chicken.  With respect to that Notice, after reviewing the evidence the Judge determined that Petitioner’s BCMS request was timely filed, and thus the conciliation order improperly dismissed the request as untimely. 

The second Notice asserted derivative liability based on the bulk sale transferor’s outstanding and unpaid tax liability.  With respect to that Notice, the Judge found Petitioner’s BCMS request was not timely filed.  The Tribunal’s instructions on remand were that the substantive issue of derivative liability was not to be addressed since the parties already had an adequate opportunity to address it. 

Matter of Cruz; Judge: Gardiner; Division’s Rep: Charles Fishbaum; Taxpayer’s Rep: unknown; Article 22.  Petitioner claimed an earned income credit and an empire state child credit on her 2014 return.  Petitioner failed to established he had the necessary relationship to the three claimed dependents for entitlement to the earned income credit.  Petitioner claimed he was the stepfather of the three children on which the credits were based.  The Judge found Petitioner was never married to the children’s’ mother and was never appointed as a legal guardian of the children.  Thus, Petitioner was not entitled to the earned income credit.  As a result, Petitioner was also not entitled to the empire state child credit.

Matters of Jahangir Chowdhury; Judge: Friedman; Division’s Rep: Christopher O’Brien; Taxpayer’s Rep: pro se; Article 22.  These two Determinations related to Notices and Demand issued to Petitioner for the 2012 and 2013 tax years.  Taxpayers may not protest Notices and Demands, so on the Supervising Administrative Judge’s own motions, he summarily dismissed the petitions.

Matter of Aquino; Judge: Friedman; Division’s Rep: Colleen McMahon; Taxpayer’s Rep: pro se; Article 22.  Petitioner protested a Notice and Demand and an Income Execution Form.  Neither may be protested by taxpayers.  On the Supervising Administrative Law Judge’s own motion, he summarily dismissed the petition.

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