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Taxes in New York (TiNY) is a blog by the Hodgson Russ LLP State and Local Tax Practice Group members Chris Doyle, Peter Calleri, and Zoe Peppas. The weekly reports are intended to go out every Tuesday after the New York State Division of Tax Appeals (DTA) publishes 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.

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TiNY Report for February 13, 2020 (covering DTA cases issued February 6)

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This week we have two determinations and two orders. It seems fitting that they came in pairs the day before Valentine’s Day, but, unfortunately, there was no love for the taxpayers.


Matter of 608 Franklin, LLC, Judge: Maloney; Division’s Rep: Howard Beyer; Taxpayer’s Rep: Herschel Friedman, CPA; Articles 28 and 29 (by Joe Endres).

This is a Groundhog Day case: It looks just like a determination issued about a month ago. Petitioner is different, but the Judge, the Division’s counsel, and Petitioner’s counsel are all the same. And this case was also decided based on submitted documents without a hearing. You can read our review of the prior case, Matter of Evergreen Gardens, LLC, here. This determination predictably reads like a carbon copy of the prior case.

The issue in both cases was whether security services provided at a real property construction project are taxable. As with her prior determination, the Judge relied on a 1996 Appellate Division case concluding that such protective services are, indeed, taxable. The Judge cited the following analysis from the 1996 case: “that Tax Law § 1105(c)(8), which specifically imposes a sales tax upon security services of every nature, takes precedence over the more general language of Tax Law § 1105(c)(5) [i.e. the provision that exempts services to real property in capital improvement projects].” Thus, the Judge, following the Appellate Division’s lead, concluded that, since Tax Law § 1105(c)(8) does not contain a capital improvement exemption, the “end result test” does not apply like it would in Tax Law § 1105(c)(5) cases.

But is this really correct? As Petitioner pointed out, the Division has applied the capital improvement analysis and tax treatment to interior decorating services under Tax Law § 1105(c)(7), despite the fact that this section contains no capital improvement exemption language. See TSB-A-08(30)S and TB-ST-400; but see TSB-A-91(76)S. The weakness in Petitioner’s argument might be that to be nontaxable, a taxpayer providing the interior decorating services must also implement those design service (i.e., do the installation). When that happens, in the Division’s view, the taxpayer ceases to be an interior designer and becomes a contractor, causing sections 1105(c)(3) and 1105(c)(5) (i.e., the sections of the law that contain the capital improvement language) to come into play. Petitioner also cited the L & L Painting case and the Division’s analysis of “temporary facilities” used on construction projects.  But Tax Law § 1105(c)(8) never factors into this authority.

In short, Petitioner made some interesting points.  But the likelihood of success at the Tribunal is speculative.

Matter of Rosales; Judge: Connolly; Division’s Rep.: Charles Fishbaum; Petitioner’s Rep.: Mark Glass; Article 22 (by Chris Doyle).

On his 2012 New York return, Petitioner reported a net business loss of $13,266 and itemized deductions of $16,817. The itemized deductions included $6,471 in charitable gifts and $10,346 in “Job expenses/miscellaneous deductions.” The Division audited Petitioner seeking verification of the deductions claimed. Being dissatisfied with the proof provided, the Division issued a Notice of Deficiency to Petitioner. Petitioner filed a timely petition.

Petitioner did not attend his hearing. Instead, his representative produced some documents and his own testimony (!?) which showed that Petitioner’s business was working as an artist, but that in the six years between 2010 and 2016 the business had not shown a profit, and, in most years, revenue was less than 10% of claimed expenses. Judge Connolly found that Petitioner had not shown his artist activity was a trade or business, and, even if he had, he had not proven the expenses for which deductions were claimed were ordinary and necessary business expenses.

As for the claimed itemized deductions, the Judge found that Petitioner had failed to produce any evidence (wow) of the “job expenses,” and the summary schedule submitted into evidence without any foundation (oops) or corroboration (double-oops) didn’t even coincide with the charitable donation deductions claimed on the return.

Unsurprisingly, the Judge found for the Division and sustained the Notice.


Matter of Summer Pavilion Corp., Judge: Behuniak; Division’s Rep: Elizabeth Lyons, Esq.; Taxpayer’s Rep: Gary Kanaley, Esq.; Articles 28 and 29 (by Joe Endres).

In this order, the Judge considered Petitioner’s motion for summary determination. To win a motion for summary determination, the requesting party must “make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to eliminate any material issues of fact from the case.” So the initial question here is whether Petitioner offered sufficient evidence to support its motion. The Judge thought not.

During the audit, Petitioner executed a “Test Period Audit Method Election” form. This form allows the Division to review a taxpayer’s records for a limited portion of the audit period and then extrapolate any results (liability and credits) to the rest of the audit period. In our experience, most audits proceed in this manner, and a test period theoretically benefits the taxpayer by limiting the amount of records it must produce, which, in turn, usually limits the length of the audit.

In the present case, the Division determined that Petitioner’s records were inadequate and, “based on available information,” determined that Petitioner owed additional sales tax for the audit period. The issue in the motion for summary determination was whether the Division properly determined that Petitioner’s records were inadequate. Petitioner’s representative and an associated CPA submitted affidavits asserting that Petitioner maintained adequate records, but they did not submit those records as part of the motion for summary determination. Because the ALJ could not determine whether Petitioner had, in fact, maintained adequate records for the test period, he concluded that Petitioner did not meet its burden of establishing a prima facie case in support of summary determination.

Though the ALJ could have stopped there, he concluded that even if Petitioner had made a prima facie case for summary determination, its motion would still have to be denied because the Division’s response to the motion raised a material question of fact regarding the test period. Because the executed test period election form did not specify a particular period of time as the test period, the ALJ concluded that the Division appropriately established that a material issue of fact exists regarding the length of the test period.

We here at TiNY (ed.: pretty sure Joe should have written “I” here) love a good sales tax audit methodology case, and look forward to reading a full determination on the merits at a later date.

Matter of Troy City Garage, Inc.; Judge: Behuniak; Division’s Rep.: Michael Hall; Petitioner’s Rep.: Richard Sleicher; Articles 28 and 29 (by Chris Doyle).

Let me put your fears to rest:  I am not poaching on Joe’s sales tax territory. This is really a process case, and Joe still allows me to write on those.

Back in 1967, folk singer Arlo Guthrie wrote a song called “Alice’s Restaurant,” which really isn’t about Alice or her restaurant. Instead, it is a satire about dodging the Vietnam War draft using an actual event in Arlo’s life in which he was arrested and convicted of littering. According to the song, the evidence against Arlo gathered by Police Officer “Obie” included “twenty-seven 8 x 10 colored glossy photographs with circles and arrows and a paragraph on the back of each one explainin' what each one was, to be used as evidence against us.” And at the hearing (again, according to the song): “Man came in, said, ‘All rise!’ We all stood up, and [Officer] Obie stood up with the twenty-seven 8 x 10 colored glossy pictures, and the judge walked in with a seein' eye dog and he sat down.We sat down. Obie looked at the seein' eye dog, then at the twenty-seven 8 x 10 colored glossy pictures with the circles and arrows and a paragraph on the back of each one…and began to cry. Because Obie came to the realization that it was a typical case of American blind justice, and there was nothing he could do about it… .

In this case, Petitioner filed a timely protest of two Notices of Determination. The petition had 71 separately-numbered paragraphs regarding how the audit was conducted and certain sales transactions were made, and it made assertions regarding alleged errors by the Division. The Division filed its answer 89 days later, with 17 paragraphs and a general denial. Six days later, Petitioner filed a motion to compel an answer in proper form.  In the motion, Petitioner demanded an answer having 71 separately numbered paragraphs, each of which either accepted or denied the corresponding paragraph in the petition. This approach is the same that is required by the Civil Practice Law and Rules (“CPLR”) for civil cases.

The Division responded that its Answer was good enough.

The Judge agreed with the Division, citing Tribunal precedent holding that “the [DTA’s] Rules do not require the Division to admit or deny each allegation of the petition in separate distinct paragraphs corresponding to the separate and distinct paragraphs contained in the petition. In fact, the Tax Appeals Tribunal has ruled that a general denial addressing several of petitioner’s assertions in one paragraph may sufficiently comply with the [DTA’s] Rules.”

And what does “Alice’s Restaurant” have to do with Matter of Troy City Garage? Maybe nothing.  Or maybe I am trying to establish a parallel between Office Obie and Petitioner. Or maybe it’s just that I loved the song when I was a kid.

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