TiNY Report for DTA Cases Issued Since October 12, 2022

TiNY is back after a brief public sabbatical! In this blog, we're taking a look at three weeks worth of recent cases.

“Where has TiNY been?” you ask.  There is no short answer to that question. 

Interestingly, TiNY has been written and circulated internally at Hodgson Russ for the last half-year or so. So it’s not like we haven’t been keeping up with the cases. One of the partners recently suggested that if we were writing these anyway, we might as well post them too. That comment made too much sense to ignore. 

Note that we have refreshed our look by embedding hyperlinks to the cases in the case names. Yup, old dogs can learn new tricks.

Anyway, we’re back now. And since we’re jumping back into the swamp after a long absence, I thought I would give you three weeks of cases instead of the usual one week.

What we wrote on October 13, 2022:

Two ALJ Determinations today, both penned by Kevin Law. Both include a little weirdness.

Determinations

First is Matter of Silvestri, ALJ Law (October 6, 2022); Div’s Rep. Mary R. Humphrey, Esq.; Pet’s Rep. Abraham Schwartz, CPA; Article 28 and 29. This is a tortured timey. In May 2021, ALJ Galliher granted the Division’s motion for summary determination on timeliness grounds. Petitioner’s representative did not respond to the motion. Petitioner took a timely exception to the Summary determination. The Tribunal reversed and remanded (without prejudice) the case to the Supervising ALJ after its review of the record showed that the Division didn’t offer or include a copy of the Notice of Motion in its motion for summary determination. The TAT’s ruling was dated January 19, 2021. On June 14, 2022, the Division filed another motion for summary determination, but this time included the Notice of Motion. 

Petitioner also did not respond to this motion.

Judge Law granted the Division’s motion for summary determination … again.

I think this Petitioner is getting more than due process; she is getting do-over process (Grand-dad pun). 

And then there is Matter of Employment Screening Services, Inc., ALJ Law (October 6, 2022); Div’s Rep. Michael Hall, Esq.; Pet’s Reps. David L. Roach, Esq. and J. Michael Lennon, Esq.; Article 28 and 29. Judge Law applies a primary purpose analysis to determine that the employment screening services Petitioner performed were not taxable “protective or detective services.” Petitioner did not hold itself out as a detective service, and Petitioner was not licensed as a detective or private investigator. So, the Judge reasoned, the services could not be detective services. Further, Petitioner’s services were found to not constitute protective services since the services did not consist of watching, guarding, and patrolling. Judge Law determined that the extension of the “protective” label to screening services was not a reasonable interpretation of the statute. Appropriately, Judge Law did not show any deference to the Department’s interpretation of the statute since it is an imposition statute.  

And the Judge found that the information provided by Petitioner was, for the most part, personal or individual information receipts from the provision of which was excluded from the sales tax on information services. 

But here is where things go off the rails: Even though the issue was pretty much moot, Judge Law held that it was appropriate for the Division to have imposed penalties on Petitioner: “A finding that the taxpayer acted in good faith is a prerequisite to the conclusion that the failure or delay was due to reasonable cause and not willful neglect. The most important factor in determining whether reasonable cause and good faith exist is the extent of the taxpayer’s efforts to ascertain the proper tax liability [citations omitted]. In this case, petitioner has failed to make a showing of reasonable cause. While petitioner elicited testimony from its office manager/bookkeeper that its former principal, Mr. Wright, made inquiries with the Division concerning petitioner’s sales tax obligations, there is no other information in the record concerning the specific details concerning same nor any contemporaneous documentation evincing said conversations. ‘Advancement of a reasonable legal theory in good faith or reliance upon professional advice, in the absence of inquiry to ascertain the position of the Department of Taxation and Finance, does not constitute reasonable cause….’” [citation omitted]

And the following passage really cranked up my blood pressure: “Here, although it is concluded that petitioner’s legal theory is certainly reasonable (as is evident from the conclusions of law above), this is not enough of a basis to abate penalties without some evidence to document its claim that the Division informed it that its services were not taxable, and it had a right to rely on such representations.” This is crazy! Taxpayers that know what the law is have to ask the Division to confirm what the law is to avoid penalties? Why? Many view the Department’s typical reaction to inquiries as “when in doubt, it’s taxable.” Like many practitioners, I think I give more unbiased and accurate tax advice than the Department. And look how often the Department is wrong! Like in this case! And don’t get me started on how long it takes to get an advisory opinion. Most often the opinion won’t be issued until well after (often years after) the position must be taken on a return. 

I’m not saying that Judge Law has misstated the law. I’m saying that the “reasonable cause” standard has evolved into something that makes absolutely no sense. The standard for “reasonable cause” should be the same as the “substantially justified” standard used for determining whether an award of fees against the Department is appropriate under Tax Law § 3030. That would be a sane, common-sense, and even-handed approach.

What we wrote on October 20, 2022:

Two determinations (both run-of-the-mill timeys) and an order today (not a timey, hurray).

Determinations

Matter of Fitzgerald, ALJ Maloney (October 13, 2022); Div’s Rep. Colleen McMahon, Esq.; Pet’s Rep.: Unspecified; Article 22.

Judge Maloney granted the Division’s motion for summary determination after finding Petitioner filed his BCMS request too late. For you Gordon Lightfoot fans: Petitioner’s name “John E. Fitzgerald” has the same number of syllables as “Edmund Fitzgerald,” a song that you now won’t be able to get out of your head for the rest of the day.  

Matter of Maples, ALJ Russo (October 13, 2022); Div’s Rep.: Mary Humphrey, Esq.; Pet’s Rep. Fred Wightman, CPA; Articles 28 and 29.

Judge Russo granted the Division’s motion for summary determination after finding Petitioner filed her BCMS request too late.

Order

Matter of Mukhitdinov and Abeuova, ALJ Russo (October 13, 2022); Div’s Rep.: Christopher O’Brien, Esq.; Pet’s Rep: Dewey Golkin, Esq.; Article 22.

Judge Russo denied Petitioner’s Motion for Summary Determination on the basis of unresolved facts that require determination. Petitioners claimed to live in Kazakhstan (maybe they were Borat’s neighbors) with their children for all of 2012. They had affidavits supporting that fact. On the other hand, their 2012 U.S. federal income tax return Form 2555 stated that: (1) Mr. Mukhitdinov’s children did not live abroad with him, (2) he maintained a home at 211 East 51^st Street, New York, NY, and (3) his spouse occupied the New York City home. Judge Russo found that the inconsistency between the affidavit evidence and the federal income tax return statements raised factual issues requiring resolution through an evidentiary hearing.

What we wrote on October 27, 2022:

There are a late-posted decision and two determinations this week. One of the determinations is worthy of thoughtful consideration.

Decision

Matter of Moyler, Tax Appeals Tribunal (October 13, 2022); Div’s Rep. Jennifer Hink-Brennan, Esq.; Pet’s Rep. Pro Se; Article 22. The Tribunal agreed with the ALJ that the DTA does not have jurisdiction to address Notices and Demands or a protest of a Notice of Deficiency issued more than three years prior to the protest being filed by Petitioner. Yup, it’s a timey.

Determinations

Matter of Lasorsa, ALJ Gardiner (October 20, 2022); Div’s Rep. Peter B. Ostwald, Esq.; Pet’s Rep. Steven J. Schreiber, CPA.; Article 22. A typical timey. The Judge granted the Division’s Motion for Summary Determination after finding that Petitioners filed their BCMS request five months after the date of the Notice.

Matter of O'Connor, ALJ Gardiner (October 20, 2022); Div’s Rep. Michael Trajbar, Esq.; Pet’s Rep. Patrick Bryan, EA; Art. 22. Petitioner filed a timely 2016 PIT return requesting a refund of $4,467, which the Division paid on November 2, 2017. More than two years later, on November 25, 2019, the Division issued a Notice of Deficiency to petitioner assessing additional tax of $400 for the 2016 tax year, plus interest from April 15, 2017. Petitioner paid the tax, but not the interest, and in her petition alleged that interest should be calculated from the date the Division initially paid the refund (i.e. November 2, 2017), and not April 15, 2017. The Judge found that Petitioner failed to prove that the Division’s method of calculating the tax was in error. The Judge also determined Petitioner’s complaint that the Division’s method of calculating the interest was “unfair” was a facial constitutional challenge over which the DTA had no jurisdiction.

There’s a couple of things about this determination worthy of a deeper dive.

Here’s the passage from Tax Law § 684 that the Judge quotes:

“(a) General.—If any amount of income tax is not paid on or before the last date prescribed in this article for a payment, interest on such amount at the underpayment rate set by the commission pursuant to section six hundred ninety-seven of this part, or if no rate is set, at the rate of seven and one-half percent per annum shall be paid for the period from such last date to the date paid, whether or not any extension of time for payment was granted.”

I think the tax was paid “before the last date prescribed for payment.” The refund claimed was five times greater than the amount of additional tax assessed. So on the original due date of the return there was enough money deposited with the Division to cover the tax owed and the amount of the assessment. There was not, in my opinion, any “underpayment” at that time. The underpayment only arose when the Division paid the erroneously-claimed refund. So, I am not certain that Tax Law § 684(a) even applies here. And even if this were not so, wouldn’t the more specific rule of Tax Law § 684(j) apply?

“(j) Any portion of tax or other amount which has been erroneously refunded, and which is recoverable by the commissioner, shall bear interest at the underpayment rate set by the commissioner pursuant to section six hundred ninety-seven, or if no rate is set, at the rate of seven and one-half percent per annum from the date of the payment of the refund, but only if it appears that any part of the refund was induced by fraud or a misrepresentation of a material fact.”

I read this section of the Tax Law as saying interest is applicable on refunds issued in error only if the refund is the result of fraud or misrepresentation by the taxpayer, and even then the refund interest starts accruing on “the date of the payment of the refund.”

Furthermore, under the facts found by the Judge, Petitioner’s equitable argument is righteous: since the State was only “out of pocket” after it had paid the erroneously-claimed refund, the underpayment interest should have started to accrue at the time the refund was paid. 

I think it is great that Judge Gardiner recognized Petitioner’s fairness argument as implicating the Due Process Clause of the federal Constitution since I imagine that the argument was not explicitly made by Petitioner’s representative. But the Judge could have treated the “fairness” argument as an “as applied” constitutional challenge since there are circumstances under which the application of the statute would not be unfair (e.g. where a taxpayer actually hasn’t paid-in enough tax by April 15). Facial challenges are usually reserved for those situations in which the statute (arguably) may never be applied constitutionally. The DTA has jurisdiction over as-applied challenges. 

The Judge did not mention that there is a special two-year statute of limitations that applies to recoveries of erroneous refunds. Under 20 NYCRR § 107.7, the two-year statute of limitations for erroneous refunds only applies when the erroneous refund is the result of an error of the Department of Taxation and Finance. So, even though the Notice issued in this case was more than two years after the refund, the notice was nonetheless timely under the “three-years-from-the-filing-date-of-the-return” limitations period, at least according to the regulation.