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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.  

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TiNY Report for February 22, 2018 (covering DTA cases from February 15)

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“The defense is wrong!”  There’s a courtroom scene in “My Cousin Vinny”  in which defense attorney Vinny Gambini (Joe Pesci) hands expert witness/girlfriend  Mona Lisa Vito (Marisa Tomei) two photographs and asks her to confirm that the defense’s theory of the case “holds water.”  After reviewing the photos with a critical eye, Ms. Vito loudly declares “No, the defense is wrong!”  It all works out; while the truth Ms. Vito deduces from the tire tracks in the photographs trashes Mr. Gambini’s articulated theory of the case, it nonetheless exculpates the defendants Mr. Gambini represents.

Do I have a point?  Sure.  It’s OK if you’re wrong every once in a while.

And I think I was wrong two weeks ago when, after excoriating the authors of the Memorandum in Support (MIS) of the Governor’s Revenue Budget Bill for a lack of balance and accuracy, I made the following statement:  “[T]o say that the result in Sobotka ‘leads to absurd results’ while not acknowledging that the proposed ‘legislative fix’ leads to results that many would view as even more absurd is, at best, disingenuous.”   After publishing that, I tested my hypothesis by talking with a few knowledgeable tax practitioners, and their opinions were that Sobotka and the legislative fix could lead to equally absurd results. 

Anyway, it seems I may have been engaging in the same type of hyperbole I accused the MIS’s authors of when I said that the legislative fix would lead to results “that many would view as even more absurd,” and I apologize.  At TiNY, inaccuracy is bad, but hypocrisy is worse.


Matter of Alsayedi; Judge: Gardiner; Division’s Rep: Karry Culihan; Taxpayer’s Rep: Lance Lazzaro; Proposed driver license suspension referral under Tax Law § 171-v.  Judge Gardiner granted the Division’s motion for summary determination after finding that the Petitioner failed to respond to the motion and did not allege one of the six explicit (and exclusive) statutory defenses. 

Matter of Reuben; Judge: Galliher; Division’s Rep: Jessica DiFiore and David Gannon; Taxpayer’s Rep: Norman Berkowitz; Articles 28 & 29.  The Petitioner, the founder and 99% owner of an LLC providing parking lot management/operation services, was found liable for the LLC’s unpaid sales taxes even though there were indications in the record that the CFO hired by the Petitioner absconded with the tax money.  The ALJ found LLC owners liable “per se” under Tax Law § 1131(1).  The Judge also found that the CFO’s malfeasance would not affect the Petitioner’s liability because the law contemplates that there may be multiple responsible officers, all of whom would be jointly and severally liable for the unpaid sales tax.  Further, the Judge ruled that one cannot avoid responsibility by simply delegating tax responsibilities to another. 

The Judge sustained penalties  Although not entirely clear, the gist of the determination on penalties is that the Petitioner should have done more to confirm that accurate and timely filing of sales tax returns.

Matter of Est. of Siegal; Judge: Russo; Division’s Rep: Kathleen O’Connell; Taxpayer’s Rep: Miriam Fisher and Brian McManus; Article 22.


A three-day long hearing.  A 74-page decision with 35 footnotes and 173 findings of fact.   There’s a bunch of procedural and substantive issues too, including statute of limitations, fraud, tax-motivated transactions, tax treatment of intangible drilling costs, etc.  Judge Russo does a nice job of explaining the facts and her analysis.  Her determination is persuasive, and she did one heck of a job just getting it all down on paper in a way most readers will be able to understand.  And, contrary to the standard practice, she “names names” of some of the Division’s players involved in the audit; and some of the characterizations are not favorable.  Indeed, overall the Division’s conduct here looks dodgy.  So, all credit to the Judge for allowing us to peek behind the curtain.

Anyway, before he died, the Petitioner was in the oil and gas business, promoting oil and gas drilling partnership investments as well as investing in many of the drilling partnerships he was promoting.  He had done this for many years and had a considerable amount of experience.  Investments in drilling partnerships are risky: if the well turns out to be commercially viable, investors may recover substantially more than their investments.  But the wells drilled may be entirely non-producing, in which case investors might lose their entire investments.  As explained by the Judge, the Internal Revenue Code allows investors in drilling partnerships to accelerate deductions for intangible drilling costs.  However, the deductibility of those deductions might be limited by the investor’s basis in their interest, the amount at risk, etc.  Investors have been maneuvering around these limits by making some of their contributions to the drilling partnerships in the form of cash, and the rest in the form of notes payable.  The drilling partnerships would, in turn, pay the drillers drilling the wells with a combination of cash and notes payable.  Those last three sentences summarize about ten pages in the decision.  So, obviously, there are nuances.

The audit history here is pretty unflattering to the Division.  In 2001 and 2002 the Petitioner invested in some of the drilling partnerships he was also promoting.  In late 2003, the Division issued correspondence indicating it had closed its audit of the Petitioner’s 1999-2001 tax years and was accepting his returns as filed.  In 2005, the Division opened an audit of the Petitioner’s 2002-2004 PIT returns.  In 2007, the Division decided to expand the 2002-2004 audit to cover 2001 and 2005-2006.  In the meantime, the Division and the IRS were cooperatively auditing many of the drilling partnerships in Houston.  In May 2008, the Division requested a statute of limitations extension for the 2001-2004 years.  The Petitioner refused to extend for 2001 since he viewed that as a closed year.  So the Division issued a Notice recalculating the Petitioner’s tax based on a disallowance of all of his Schedule E losses, which were primarily (but not exclusively) made up of his intangible drilling cost deductions.  The Judge makes a point of the fact that the sum of the disallowed Schedule E losses was significantly higher than the total of the Petitioner’s intangible drilling costs at issue.  In the words of the Judge: “There was no explanation for the discrepancy.”  Hmmm.

Nor is there an explanation of why the Division sought to assess based on the denial of intangible drilling cost deductions for investments that were all-cash.  And the Division’s current auditor testified he didn’t know why that was the case.  Errr.

And then there is this:  “At some point prior to the conciliation conference, the Division lost its audit file for Mr. Siegal’s [ed: the Petitioner] 2001 tax year.”  Really?  Can it get worse? 

Yup:  “On April 8, 2015, the Division filed its answer to petitioner’s petition, related to tax year 2001, affirmatively asserting fraud as a new, alternative ground for the deficiency and asserting additional penalties for fraud.”

Meanwhile, back at the ranch, the new auditor discovered that there never was an assessment issued against the Petitioner for 2002.  He reports that fact to the Division which did nothing.  However, in late 2013, the Division, at the instruction of the Office of Counsel, issued a fraud assessment against the Petitioner.   The auditor testified that he did not know the basis upon which the Office of Counsel had determined fraud.  Regardless, something smells fishy, right?  And, once again, the disallowed deductions significantly exceed the intangible drilling cost deductions the Petitioner claimed.

The Division’s general theory of the case seems to be that the notes payable issued by the investors (including Petitioner) to the drilling partnerships and the notes payable issued by the partnerships to the drillers weren’t bona fide debt creating additional basis needed to permit the deduction of all of the intangible drilling costs.  The Division issued a few million dollars of assessments to the Petitioner, so you’d think the Division would have the “bona fide debt” issue nailed down by the time of the hearing.  And indeed, the new auditor did investigate this, but not in a way that makes the Division look very good:   “During 2013, Mr. Fahrenkopf [ed: the new auditor] sent over 100 information document requests (IDRs) to the various partnerships at issue inquiring about the status of the turnkey notes [ed: the notes issued by the drilling partnerships to the drillers]. Based on the responses, Mr. Fahrenkopf concluded that the principal amount of the notes remained outstanding. However, he did not compare the original principal amounts to all the responses he received to determine whether any principal had been paid, because ‘I got three boxes, full boxes of responses. I did not review every single response that was given to me.’” 

There is more.  The Petitioner’s expert witnesses are portrayed as being knowledgeable and credible, while the Division’s expert looks like a former IRS auditor who didn’t have knowledge or experience relevant to the particular issues.

You get the point:  Without overtly calling out the Division, Judge Russo lays out the facts in a way that makes the Division’s conduct, in this case, look pretty icky.  

In her Conclusions of Law, the Judge gave those practicing before the DTA an education on why the burden of proof is so critical.  The assessment for 2002 could be timely only if fraud was present, and, as Judge Russo points out, the burden to prove fraud is on the Division.  The Judge determined that the Division failed to prove fraud.  One theory of fraud was, I guess, that the drilling partnerships charged a fees five times greater than the drillers’ costs, and some of the drillers were owned by the Petitioner’s family.   But the Judge determined that the Division didn’t prove that the drilling fees were five times higher than the drillers’ costs, or that such fees were higher than the industry standard for the type of drillers (“turnkey drillers”) at issue.  The Judge also determined that promoting abusive tax shelters would not necessarily be fraudulent under the circumstances.  And the Judge found that, contrary to the allegations made by the Division, there was no proof that the Petitioner had been participating in abusive tax shelters “for years.”  In this regard, the Judge noted the numerous times that both the IRS and the Division had issued “no change” letters for partnerships promoted by the Petitioner.

In addition to finding the 2002 Notice untimely (i.e., because the Division failed to prove fraud), the Judge canceled the fraud penalties for 2001. 

Regarding whether the 2001 Notice was timely, Judge Russo noted that the Division asserted its timeliness by virtue of the six-year statute of limitations for “abusive tax avoidance transactions,” and that the burden of proving that the investments in the drilling partnerships were not abusive tax avoidance transactions was on the Petitioner.  Ultimately, the Judge found that the Petitioner proved his investments in certain drilling partnerships were not abusive tax avoidance transactions by showing he had paid a portion of the interest or principal on the notes payable used as part of his investment.  But since the Petitioner had not proven interested or principal payments on notes given to five of the drilling partnerships, the Judge found that the 2001 Notice was timely only concerning those five drilling partnerships. 

Bottom line: When the Division had the burden of proof, it lost.  When the Petitioner had the burden of proof, he (mostly) lost. 


Matter of CLM Associates; Division’s Rep: Osborne Jack; Taxpayer’s Rep: Julius Rousseau III and Russell McRory; Articles 28 & 29.  The Tribunal sustained the ALJ’s determination enforcing sales tax on the intercompany transfer of title to loaner cars from the dealership entities to their central management entity (i.e., the Petitioner).  Those transactions were found to be transfers of title and thus taxable if there was consideration.  The Tribunal identified consideration in the managing entity’s tacit acceptance of joint and several liabilities for claims asserted concerning the use of the vehicles by the dealerships.  Note, that tax may have been significantly reduced if there had been expert testimony regarding the value of the joint liability assumed by the Petitioner. 

The Petitioner also argued it should be entitled to trade–in credits for certain transactions in which it received title to a new car upon the release of title to an older loaner back to the dealership to allow the dealer to sell the older loaner.  The Tribunal ruled that the Petitioner failed to sustain its burden of proof on that issue because the Petitioner had consented to the Division’s use of an indirect audit method and there was a lack of contemporaneous documents confirming the trade-in transactions.

However, the Tribunal reversed the ALJ’s determination that the Petitioner was not entitled to a credit for the use tax paid by the dealerships on their use of the loaners, finding that the Division was bound by its concession at the hearing that payment of sales tax by the dealerships on behalf of the Petitioner was acceptable.  Given that the Division was willing to blur the distinction between the parties for certain sales tax payment purposes, it was consistent to blur the distinction between the parties for all sales and use tax payment (and refund) purposes. 

This case presents quite a puzzle.  And I am not certain whether the Petitioner was entitled to a better result.  But a few takeaways are clear:  Whenever one is dealing with moving hard assets between related companies, one should consider the sales tax consequences.  And taxpayers under audit should almost never sign a consent allowing the Division to use an indirect audit method.


Matter of  Campos-Liz; Judge Friedman; Division’s Rep: Christopher O’Brien; Taxpayer’s Rep: pro se; Article 22.  Judge Friedman denied the Petitioner’s application to vacate the default judgment.  The hearing was scheduled for August 22, 2017.  That morning, the Petitioner called and asked for an adjournment.  The Hearing started as scheduled, at which time the Division moved for a default judgment.  The Judge issued a default judgment against the Petitioner on September 14.

The Petitioner filed an application to vacate the default arguing that he had moved to and was working in Florida at the time of the hearing.  But the Petitioner did not allege that he did not receive notice of the hearing, gave no reason for his failure to file a written request for an adjournment more than two weeks before the Hearing (as required by the Hearing Notice), and did not provide any proof that he had a meritorious case.

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