TiNY Report for March 15, 2018 (covering DTA cases from March 8)

This week we have two ALJ Determinations, three Tribunal Decisions, and one Order from DTA.

DETERMINATIONS

Matter of Aly; Judge: Law; Division’s Rep: Charles Fishbaum; Taxpayer’s Rep: pro se; Article 22.  The Division met its burden to establish its standard mailing procedures and that they were followed to mail the Notices of Deficiency to Petitioner’s last known address.  Petitioner mailed his BCMS requests after the 90-day periods of limitation passed, so they were deemed untimely-filed.  The Judge granted the Division’s motion for summary determination.

Matter of Weiner; Judge: Gardiner; Division’s Rep: Charles Fishbaum; Taxpayer’s Rep: pro se; Article 22.  Petitioner and his deceased wife, Ruthellyn, received pension benefits from the NYS Teachers’ Retirement System.  A class-action lawsuit resulted in Petitioner receiving a retroactive upward adjustment to all monthly benefits paid to him.  The new, retroactive payments included interest on the payments.  Petitioner received forms 1099-INT for the 2011 tax year in the amounts of $8,811.39 and $13,587.95 (total $22,399.34), which represented the interest payments on the recalculated pension benefits.  Petitioners reported the interest amounts of $22,399.34 as New York subtractions excludable from taxable income.  The Division issued the Notice of Deficiency, which adjusted Petitioner’s taxable income to include the interest income amounts.  BCMS sustained the Notice.  Petitioner argued the $22,399.34 should not be deemed interest income because if it had been originally included in his pension benefits calculation it would not have been taxable.  However, the Judge determined that Petitioner’s argument contradicted the evidence in the record, and the $22,399.34 was, indeed, interest income.  Interest income is not generally excludable from NYS taxable income.  The Judge sustained the Notice and denied Petitioners’ claim for refund. 

TRIBUNAL DECISIONS

Matter of Jacobi; Division’s Rep: Linda Farrington; Taxpayer’s Rep: Randall Andreozzi and Tiffany Bell; Proposed Driver License Suspension Referral under Tax Law § 171-v.  Petitioner made an offer in compromise to the Division in an attempt to set up a payment plan to pay off the underlying tax liabilities.  Petitioner made a number of monthly payments while the offer was pending.  The Division ultimately rejected Petitioner’s offer.  Petitioner argued the Division unreasonably rejected the offer in compromise without considering Petitioner’s ability to pay.  The Tribunal agreed with the ALJ that a rejected offer in compromise does not satisfy the statutory requirement of making payment arrangements satisfactory to the commissioner to avoid a driver’s license suspension referral.  The Tribunal noted that there is no process under Tax Law § 171-v that allows a taxpayer to challenge the Commissioner’s decision to reject an offer in compromise or a proposed payment arrangement.  A suspension notice can only be challenged by six specific statutory defenses, none of which Petitioner alleged.  The Tribunal noted that Petitioner challenged the Division’s denial of his offer in compromise proposal rather than request relief provided for under § 171-v .  An offer in compromise of a fixed an final liability is a collection activity of the Division, and DTA lacks statutory authority to review collection activities.  Petitioner also alleged a denial of due process as a result of the suspension referral and argued he must be given a meaningful opportunity to be heard on the Division’s rejection.  The Tribunal also rejected that argument.  The Tribunal affirmed the ALJ’s determination to sustain the Notice suspending Petitioner’s driver’s license.

Matter of New Cingular Wireless PCS LLC; Division’s Rep: Robert Maslyn; Taxpayer’s Rep: Margaret Wilson; Articles 28 & 29.  This Tribunal decision was an Order on Remand as a result of the NYS Appellate Division, Third Department’s decision modifying the Tribunal’s decision.  The Tribunal:  1) reversed the ALJ’s Order denying Petitioner’s motion to reopen the record, 2) granted Petitioner’s motion to reopen the record, and 3) admitted into evidence an affidavit regarding the funding of an escrow by Petitioner.  On the issue of whether Petitioner’s funding of a pre-refund escrow account in compliance with certain agreements would constitute repayment to Petitioner’s customers of improperly collected taxes, the Tribunal remanded the question to the ALJ because the ALJ never addressed that question.  The ALJ’s determination dismissed the case by granting the Division’s motion for summary determination, i.e. determined there were no triable issues of fact based on the legal conclusion that Petitioner had not made any repayment to its customers of the tax erroneously collected.  However, the admission into evidence of the affidavit regarding the escrow funding raised material and triable issues of fact.  There remained at issue of the exact refund amount.  The Tribunal thus nullified the ALJ’s Determination, denied the Division’s motion for summary determination, and ordered the matter be scheduled for a hearing. 

Matter of Murphy; Division’s Rep: Jennifer Hink-Brennan; Taxpayer’s Rep: pro se; Article 22.  JJF Associates LLC (“JJF Associates”) sold real property in NYC for $5,500,000 to an unrelated entity.  JJF Associates was an LLC treated as a partnership for tax purposes.  JJF Associates realized a gain of $2,268,774 on the sale of the property and reported that gain on its 2006 NYS partnership return.  Mr. Murphy signed the partnership return as a general partner.  At the time of the sale, JJF Associates was owned 99% by JJF Realty Employees Stock Ownership and Plan Trust (“JJF ESOP”) and 1% by Triune Foundation, Inc. (“Triune”).  Mr. Murphy was the trustee of JJF ESOP, and Petitioners were the sole participants and beneficiaries of JJF ESOP.  Mr. Murphy was the president of Triune.  According to Petitioners, JJF ESOP was a tax-exempt pension trust established for the benefit of the employees of JJF Realty Management, Inc. (“JJF Realty”).  Petitioners claimed they were employees of JJF Realty.  Petitioners were the president and secretary and the only members of the board of directors of JJF Realty, and there were no other officers or employees as of 2006.  JJF Realty’s purpose was to own and operate the property that was sold.  JJF Realty was wholly owned by JJF ESOP.  In 2009, JJF Associates was audited.  The audit was closed with no additional tax due from JJF Associates.  In 2010, JJF ESOP was audited.  The Division closed that audit concluding that JJF Realty did not have any employees, JJF ESOP was not eligible for tax-exempt status, and that the income derived by JJF ESOP from its interest in JJF Associates was taxable to Petitioners as the participants and beneficiaries of JJF ESOP.  As a result of those audits, the Division audited Petitioners’ 2006 and 2007 personal income tax returns.

The Tribunal first determined there were no statute of limitations issues because Petitioners signed a waiver to extend the statute of limitations.  Though Mr. Murphy attempted to revoke the agreement, the Tribunal noted the revocation was of no consequence.  Petitioners’ argued the Notice of Deficiency lacked a rational basis.  The Tribunal noted the basis for the Notice was the previous audit determination that Petitioners were not employees of JJF Realty and thus ineligible participants of JJF ESOP.  The Tribunal found the Notice had a rational basis because Petitioners argued the Notice was based on erroneous audit findings, not that it was irrational. 

The Tribunal then addressed Petitioners’ preemption claim.  The gain from the sale of the property resulted in long term capital gain under IRC § 1231 and was reported as such on JJF Associates’ partnership return.  The full amount of the gain was reported on its 99%-member JJF ESOP’s K-1 and as a result was passed through to JJF ESOP.  Generally, liability for income tax also passes through to an LLC member.  However, an ESOP trust qualified under IRC § 401(a) is exempt from tax under IRC § 501(a).  Responsibility for tax on qualified ESOP trust’s income falls to the trust’s beneficiaries because distributions from the trust are taxable to the distribute in the year of distribution.  An ESOP trust qualified under IRC § 401(a) is an employee benefit plan as defined under ERISA law (Employee Retirement Income Security Act of 1974).  That entity would fall within the scope of the ERISA preemption clause, which states that ERISA’s provisions trump any other State laws to the extent they “relate to” any employee benefit plan.  The Tribunal discussed the meaning of ERISA’s preemption provision, and held that it is not unlimited, so there’s no preemption unless the state law in issue affects an ERISA plan “in more than a tenuous, remote or peripheral way.”  The Tribunal relied on Ingersoll-Rand Co. v. McClendon in its analysis, a case where the Court held preemption was appropriate.  In Ingersoll-Rand, a former employee claimed wrongful discharge under Texas state law against his former employer.  The employee claimed he was fired because the employer was avoiding contributing to or paying benefits under a plan covered by ERISA.  The Court held that an ERISA plan must exist and the employer must have had a pension-defeating motive in terminating the employment, and thus the existence of a pension plan was a critical factor in establishing liability.  Thus, there would be no cause of action if there was no plan.  The Court held that because the cause of action related not just to pension benefits but to the essence of the pension plan itself, i.e. an ERISA plan, preemption of the employee’s state law cause of action was appropriate. 

The Tribunal determined that Ingersoll-Rand strongly supported a finding in favor of preemption here.  Because Petitioners sought to prove JJF ESOP was qualified under IRC § 401(a), this DTA proceeding related to the “essence” of JJF ESOP, the questionable ERISA plan, and therefore related to ERISA.  The Tribunal noted that from a policy perspective, it was inconsistent with the preemption clause’s “goal of uniformity” for DTA to determine whether a trust is qualified under IRC § 401(a).  The Tribunal noted it agreed with the ALJ that a taxpayer’s mere claim that an ERISA plan exists should not give rise to preemption.  However, the Tribunal held that the record contained sufficient evidence of the existence of JJF ESOP.  As a result, such a level of proof was sufficient to prevent abuse.  At the same time, the Tribunal held that DTA would not develop its own rules regarding the qualification of a trust under IRC § 401(a).  Ultimately, the Tribunal was preempted from addressing the issue of whether JJF ESOP was a qualified trust under IRC § 401(a), and because Petitioners presented prima facie evidence of JJF ESOP’s existence, it canceled the Notice of Deficiency.

ALJ ORDER

Matter of Puleo; Judge: Law; Division’s Rep: Ellen Roach; Taxpayer’s Rep: Dean Nasca; Award of Costs under Tax Law § 3030.  Petitioner was granted costs pursuant to Tax Law § 3030.  Petitioner claimed itemized deductions on her (and her late husband’s) 2014 NYS personal income tax return and claimed a refund.  The Division disallowed the itemized deductions and adjusted the refund claimed by allowing the standard deduction instead.  Petitioner went to BCMS.  As a result, Petitioner signed a consent where the Division rescinded its refund denial and agreed to refund the balance of the refund originally claimed but later denied.  Because the consent that was entered into at BCMS granted Petitioner the full refund claimed, the Judge held Petitioner prevailed with respect to the amount in controversy and the set of issues presented.  The Division offered nothing to explain its basis for disallowing Petitioner’s claimed itemized deductions.  The Judge determined there was nothing in the record that showed the Division’s justification for proposing to deny deductions without first requesting substantiation from Petitioner.  The Judge held:  “The Division’s attempt at justifying its actions by alleging that petitioner never responded to the Division’s request for substantiation is disingenuous.  The statement of account adjustment denying a portion of petitioner’s refund claim was issued a mere three days after the correspondence proposing to deny the same was issued . . . . The Division’s actions in this case can hardly be seen as reasonable.”  The Judge determined Petitioner was the prevailing party.  Petitioner also met the net worth requirement (having a net worth less than $2 million).  The Division also argued that costs and fees were not recoverable because no statutory notice was issued.  However, the Judge rejected that argument because the statement of account adjustment denying Petitioner’s refund claim clearly gave rise to a right to a hearing.  The Judge denied Petitioner’s request for an award of damages, however, because DTA has no jurisdiction to award damages or impose sanctions against a party.  The Judge awarded costs to the extent of the amount charged by Petitioner’s representative.           

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