TiNY Report for March 19, 2020 (reporting on DTA cases issued March 12)

To our twelve or so regular readers: 

We hope this finds you healthy and safe. 

As best as we can ascertain [sound of us knocking on a wooden desk] our SALT team is in good shape and being productive, most from the safety of their homes. We have SALT lawyers in our Buffalo, New York City, Albany, and Palm Beach Offices. Twelve of our SALT lawyers are Buffalo-based. This week, four of us have been coming into the office because: (1) we felt we’d be much more productive here than at home, (2) our skeletal staff needs someone to talk to when questions arise, (3) we need someone to track any notices that arrive by regular mail, and (4) there’s office supplies, IT equipment and, of course, toilet paper here that need protection. The quiet is surreal. Those of us in the office hope/think our risk of contracting/spreading the virus is minimal since our floor is pretty much devoid of other humans. But although we’re smart about taxes, epidemiology is not in our wheelhouse – so we’ll see. 

There’s a lot that looks different today than a week ago. In addition to the office solitude, rush hour no longer exists: There were about the same number of cars on the road this morning as there were dollars in my 401(k) account this morning . . . so, not a lot. Even though it is tax season, the phone is not ringing off of the hook from CPAs looking for free New York tax advice. Another shocker: it looks like I don’t have to file my federal income tax return and pay any federal taxes until July 15! 

It’s as if I’m in that really (really-really) horrible Ashton Kutcher movie from 2000, except it’s called “Dude, Where’s My Reality?”  

Thank goodness for the DTA, which introduced some bacon-eggs-and-greasy-home-fries normalcy to this post-apocalyptic hangover when it posted two Decisions, two Determinations and an ALJ Order. Thank you so much, DTA, for this brief detour to the mundane. A little return to the routine is just what the doctor ordered. But when this is all over, DTA, remind me to talk to you about the potential health benefits of electronic filing of petitions, answers, briefs, etc.  

DECISIONS

Matter of Stanton; Division’s Rep: Christopher O’Brien; Taxpayer’s Rep: David Nameniuk; Article 22 (by Chris Doyle) 

Petitioner owned 81.8% of Refractron Technologies, which was an S corporation and a certified Empire Zone entity, during the tax years at issue. Petitioner claimed investment tax credits (“ITC”) with respect to his share of Refractron’s purchases of manufacturing equipment. It was found that Petitioner took an IRC § 179 deduction with respect to some of the equipment on which the ITC was claimed, and some of the equipment claimed as ITC-qualified had a useful life of less than four years. For the equipment having a useful life of less than four years, the Division denied the ITCs outright. For the properties for which the IRC § 179 deduction was claimed, the Division reduced the federal tax basis of such properties to zero, and thus adjusted the ITC attributable to them to zero. The ALJ agreed with the Division’s adjustments in both instances: According to the ALJ, equipment for which an IRC § 179 deduction was claimed was not “depreciable,” and, therefore, the ITC should not apply ([ed.] See below, I think this is debatable); and the statute explicitly excluded from the ITC equipment with a useful life of less than four years.

At the Tribunal, Petitioner conceded the Division’s adjustments, but argued that he mistakenly claimed the IRC § 179 deductions and sought permission to file amended returns reversing the IRC § 179 deductions claimed. Petitioner also claimed he was unaware of the due date of his reply brief to the ALJ in which he first sought to raise the “oops-I-mistakenly-claimed-the-IRC § 179-deduction” argument, and therefore asked the Tribunal to remand the matter back to the ALJ to consider the issue.

The Tribunal found that Petitioner’s concession of the substantive issues resolved the matter.  With respect to Petitioner’s complaint that the ALJ should have considered Petitioner’s late-filed reply brief, the Tribunal found that ALJs have broad discretion to set time limits for briefs, and given that Petitioner’s Reply brief was more than three weeks late, it was within the ALJ’s discretion to reject it. And the Tribunal found that Petitioner’s Motion to Reopen Record for Reargument was properly dismissed by the Supervising ALJ. As for Petitioner’s request that the matter be remanded to the ALJ for an order allowing Petitioner to file amended federal income tax returns negating the IRC § 179 deductions, the Tribunal found that, as an institution of limited jurisdiction, it did not have the ability to adjudicate the issue in the absence of a written notice. I expect that the Tribunal also feels it does not have the subject matter jurisdiction to require anyone to file an amended federal return. 

To summarize: Petitioner put a lot of bottles up on the fence, but the Tribunal shot all of them down.

Matter of Walsh; Division’s Rep: Christopher O’Brien; Taxpayer’s Rep: David Nameniuk; Article 22 (by Chris Doyle) 

Petitioners in this case owned most of the rest of the shares of Refractron Technologies (see Matter of Stanton, above). They were represented by the same accountant, who made the same concessions and the same arguments. It would have been an incredible surprise if the Tribunal ruled differently, and it did not. Petitioner, on all accounts, lost.

Maybe these cases were iron-clad losers, but I was disappointed that Petitioners conceded the IRC § 179 substantive issue. I would have enjoyed seeing the Tribunal address the ALJ’s determination that equipment for which an IRC § 179 deduction is claimed is automatically disqualified from the ITC. The ALJ’s position, that the equipment was not “depreciable” because its basis was zero as a result of the IRC § 179 deduction, is subject to attack based on the language of IRC § 179, which allows the deduction ONLY if (among other requirements) the equipment is tangible property “to which IRC section 168 applies” and is “section 1245 property.” Property subject to IRC Section 168 is commonly thought of as “depreciable,” and the Code explicitly defines “section 1245 property” as “any property which is or has been property of a character subject to the allowance for depreciation.” By my reading of the Code, it is axiomatic that property for which an IRC § 179 deduction has been properly claimed is “depreciable.” 

DETERMINATIONS

Matter of New T&L Beer & Soda, Inc.; Judge Law; Division’s Reps: Adam Roberts and Eric Gee; Taxpayer’s Rep: Sang Sim; Articles 28 and 29 (by Joe Endres) 

This case started with a sales and use tax audit of Loupat Enterprises, Ltd. (“Loupat”), a wholesale and retail beer and soda business. Loupat’s sales tax returns were prepared based upon an assumption that 80% of its sales were wholesale (i.e., nontaxable sales for resale) and 20% were retail (i.e., typically-taxable sales to end users). The case did not indicate on what facts this assumption was based – not a great starting position for a taxpayer that has the burden of proof. After being unable to reconcile Loupat’s sales tax returns to its records for two more-recent quarters, the auditor applied an indirect audit method based on an IRS publication providing financial ratios for retail and wholesale businesses in the beer, wine, and distilled beverage industry. Based on these general external figures, the auditor determined that the business owed $431,167 in additional sales tax. 

During the pendency of the audit, Loupat sold its assets for $700,000 to Petitioner. A bulk sale notification was executed by Petitioner to notify the Division of the sale. In turn, the Division sent Petitioner a Notice of Claim instructing Petitioner not to pay monies to Loupat (and to instead place the monies in escrow) until the Division issued a bulk sales notice of release.  These bulk sale notice and escrow requirements are designed to protect both the Division’s ability to collect against outstanding tax liabilities before the seller absconds with the sale proceeds, as well as to inoculate the purchaser from the seller’s liability. Though the determination does not explicitly state how Petitioner failed to take advantage of the bulk sale notice protections, Petitioner did not dispute that it failed to comply with the bulk sale requirements. By failing to do so, Petitioner became responsible for Loupat’s sales tax debt, in an amount not to exceed the purchase price. 

Interestingly, after Loupat protested its $431,167 assessment, Loupat and the Division executed a stipulation reducing the tax liability to $98,000—less than 23% of the original assessed liability. The Division acknowledged that Loupat’s settlement also reduced Petitioner’s liability to the same degree. 

Finally, Petitioner protested the remaining assessment, arguing that it should be cancelled because it could not determine how the remaining $98,000 was determined by the Division.  The Judge rejected this argument asserting that it was Petitioner’s obligation to show by clear and convincing evidence that the original audit methodology and resulting assessment were erroneous. Because Petitioner failed to present any evidence contesting the original audit methodology, the ALJ sustained Petitioner’s adjusted liability. Apparently the Judge did not think that the Division’s reduction of more than 75% of the original liability constituted evidence that the original assessment methodology was flawed or the assessment was erroneous. The method missed the mark by more than a factor of three and it wasn’t fundamentally flawed?  That seems a bit counterintuitive to me.  

For a full review of New York’s bulk sales rules and the protections available to business asset purchasers, take a look at this previous article I authored with Tim Noonan. 

Matter of Bruno; Judge DiFiore; Division’s Rep: Colleen McMahon; Taxpayers’ Rep: pro se; Article 22 (by Emma Savino)

You may remember this case as the debut of the “timy-squared,” but if you don’t have a working knowledge of every TiNY Report (don’t worry we don’t expect you to) you can read what we wrote about the Judge’s prior Order here.

Petitioners filed their petition on August 8, 2018. The petition protested: (1) a Notice of Deficiency dated February 24, 2014; (2) a Notice of Additional Tax Due dated January 31, 2018 and (3) a Notice and Demand dated March 12, 2018. On March 8, 2019, the DTA issued a Notice of Intent to Dismiss on timeliness grounds. In her prior Order, the Judge dismissed the petition to the extent it challenged the Notice of Additional Tax Due and the Notice and Demand since those notices don’t confer jurisdiction on the DTA. But the Judge let the petition of the Notice of Deficiency proceed because the Division did not submit proof of the Notice‘s mailing.

And now here we are just where we expected to be: the Division made a motion for summary determination on timeliness grounds with respect to the Notice of Deficiency. The Judge determined that the Division proved both its standard mailing practices and that they were followed when it mailed the Notice to Petitioner’s last known address on February 24, 2014. Since the petition was not filed until August 8, 2018, about 4 years too late, the Judge dismissed the petition with respect to the Notice as untimely.  And, only because this week Chris has insisted on references to bad and barely-relevant movies, I offer:  “[This] conflict is not so bad. Jennifer-Angelina is worse.” [“Bruno” 2009].

ALJ ORDER

Matter of McElroy; Judge Behuniak; Division’s Rep: Michael Trajbar; Taxpayer’s Rep: pro se; Article 22 (by Emma Savino)

The Division issued 23 Notices of Deficiency to Petitioner, which I’ll cannily refer to as the 1999 Notices, the 2003 Notices, the January 18, 2008 Notices, and the Other 2008 and 2009 Notices based on their respective dates. Petitioner filed his BCMS request protesting the Notices on July 15, 2019 (Can you guess where this is headed?). BCMS issued a conciliation order on August 16, 2019 dismissing the request as untimely. Petitioner then filed a timely petition protesting the conciliation order on August 20, 2019, and the Division moved to dismiss on timeliness grounds.

The Judge determined that the Division proved both its standard mailing practices and that they were followed when it mailed the 2003 Notices to Petitioner’s last known address on May 5, 2003. Since Petitioner’s BCMS request was (over a decade) late, the Judge dismissed the petition with respect to the 2003 Notices.

The Division did not submit any proof of mailing for the 1999 Notices, so the Judge allowed the matter to proceed with respect to these notices.

As for the January 18, 2008 Notices, the Notices indicated that copies of eight of them were mailed to Petitioner’s representative. While the Division proved both its standard mailing practices and that they were followed when it mailed the January 18, 2008 Notices to Petitioner at his last known address, it did not address the mailing of the Notices to his representative. And since the Tribunal has held that the 90-day period for filing a petition is tolled if the taxpayer’s representative is not served with the Notice, the Judge determined that a question of fact remained as to whether Petitioner’s representative was properly served.

Since neither Petitioner nor the Division submitted a copy of the power of attorney for Petitioner’s representative, it was unclear whether the power of attorney remained in effect when the Division sent the Other 2008 and 2009 Notices. So the Judge determined there was also an issue of material fact with respect to the Other 2008 and 2009 Notices.

Ultimately, the Judge granted the Division’s motion for summary determination with respect to the 2003 Notices, and denied it for the remaining Notices and allowed the matter to proceed with respect to those Notices (but see Matter of Bruno, above – the Division may always re-raise the timeliness issue).