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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.  

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

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This week we have two ALJ Determinations and one Tribunal Decision.  There was also an Order dated March 22nd that leaked on to the website.  Our standard practice is to wait a week after the issue date to report on determinations and decisions, so the parties have time to read and digest them before we start tossing our grenades.  But since this one is “only” an order, we’ll blab about it.

ALJ DETERMINATIONS
 
Matter of Accidental Husband Intermediary, Inc.; Judge: Gardiner; Division’s Rep: Robert Tompkins, Diana Vance; Taxpayer’s Rep: Glenn Newman; Article 9-A. I thought this was going to be a much more interesting case based on Petitioner’s name.  But it turns out that Petitioner was just the production company for a really bad movie called “The Accidental Husband.”  How bad you ask?  Well, it starred Uma Thurman (super-cool actress, Quentin Tarantino’s supposed muse), Colin Firth (won the academy award for “The King’s Speech”) and Jeffrey Dean Morgan (I AM NEGAN!), and it still garnered a paltry 6% on Rotten Tomatoes.  I’d be enthralled watching one or more of those three actors read me the instructions to program my TV remote.  So, the movie must have been really, really, really horrible.

Anyway, New York State awarded Petitioner a wheel-barrow ($1.2 million) of refundable film production credits that could be claimed on Petitioner’s 2007 and 2008 New York returns.  Because the certification for the credits wasn’t ready when the original 2007 return was filed, the credit claim was not claimed with that original return.  Petitioner requested and received a $600,000 credit on its 2008 return.  And then…years passed…and in June 2012, Petitioner filed an amended 2007 return claiming the other half of the credits.  The Division denied the 2007 credits because of the statute of limitations.  Petitioner’s challenge ensued.

Petitioner argued that the amended return was filed on or about January 22, 2009.  The Judge found that Petitioner’s proof of filing lacking and that the Division’s records did not show any receipt of the amended 2007 return prior to June 18, 2012.

Petitioner argued that its 2008 claim for refund should be treated as an informal refund claim for 2007.  The Judge disagreed, finding that “the 2008 NYS tax return did not contain any notations or language that could be construed as claiming a refund for the tax year 2007.” 

Petitioner argued that the Commissioner should exercise her discretion under the special refund authority in Tax Law § 1097(d) to grant the credit.  But the Judge found the special discretionary authority was exercisable only under circumstances in which the taxpayer had erroneously paid (or the Division had erroneously collected) the amounts at issue.  Since this case involved unpaid refundable credits, there was no erroneous collection or payment that would allow the Commissioner to exercise her authority.

Ultimately, both the movie and the petition were panned.

Matter of ERW Enterprises, et. ux.; Judge: Galliher; Division’s Rep: Brian Evans; Taxpayer’s Rep: Jeffrey Reina; Article 20.  Remember the case (Matter of Snyder) about the 22-year-old kid who was assessed a $1.26 million penalty for transporting intrastate $164,000 of unstamped Native American cigarettes from one Native American reservation to another?  This case involved the assessment of the same penalty against the seller of the cigarettes and the related company to which the delivery truck was registered.

Judge Galliher wrote a long determination, here are the most important points:

1.  It is generally legal for agents (i.e., stamping agents licensed with the Division) to hold and transport un-stamped cigarettes.  Common and contract carriers hired by agents are likewise permitted to transport cigarettes in New York if they are unstamped.  Petitioner Eric White d/b/a ERW Wholesale was not a stamping agent. Petitioner ERW Enterprises was not a stamping agent.  They owned or transported unstamped cigarettes in New York.  That was illegal. 

2.  That the Division agreed to forebear enforcement of the law for certain Native American-to-Native American transactions was noted, but irrelevant since the failure to enforce the law is not a waiver of the law.

3.  The Division has the discretion to impose the penalty at the highest level without taking into account any mitigating circumstances. 

4.  The DTA does not have the authority to determine whether a law permitting a $150 per carton fine is unconstitutionally-excessive on its face. The penalties (which were ten times the value of the cigarettes) were not, as applied in this case, excessive fines under the Eighth Amendment. 

5.  The search of the truck was to verify the safety of the load and the contents; it was not an invalid search and seizure under the Fourth Amendment.

This is a 49-page determination, and there is a lot of analysis here.  Some of it I find spot-on.  Some of it I find disconcerting.  But at least the 22-year-old kid didn’t get stuck with the $1 million+ penalty.

Moms: Please don’t let your kids grow up to sell, store or transport cigarettes in New York.
 
TRIBUNAL DECISION
 
Matter of NRG Energy, Inc.; Division’s Rep: David Markey; Taxpayer’s Rep: Daniel Hurteau and Jena Rotheim; Article 9-A.  Petitioner argued it should be permitted to claim QEZE credits for the 2009 year based on the Court of Appeals decision in James Square, which held that de-certifications resulting from new tests added to the law in April 2009 constituted an improper retroactive tax law change.  At the ALJ level, the Judge determined that the changes, as applied to the 2009 tax year, were not applied retroactively.  So the ALJ denied Petitioner its 2009 credits.  On Exception, the Tribunal reversed that decision, finding that  “the application of the 2009 amendments in the present case attached ‘new legal consequences’ to actions of petitioner that occurred prior to the enactment of the 2009 amendments”, and was thus retroactive.  The Tribunal opined that retroactive application of a law change may be permissible if it passes the balancing test contained in Replan Development.  Under that test, a court determines constitutionality of a retroactive application of a statutory change by balancing three factors: the length of the retroactivity, the public purpose for the statutory change, and the reasonableness and depth of the petitioner’s reliance on the prior law.  The Tribunal remanded the case back to the ALJ for application of the Replan test. 

ALJ ORDER

Matter of Woodner; Judge: Connolly; Division’s Rep: Charles Fishbaum; Taxpayer’s Rep: Michael Rosensaft; Article 22.  This order was in response to the Division’s motion for preclusion.  The Division assessed tax based, apparently, on what appeared to it to be a transactional train that resulted in a disguised sale under Code § 707.  Following its Second Amended Answer, the Division requested a Bill of Particulars seeking identification of the “substantial business purpose” for the transactions described in six paragraphs of the Petition.  For most of the paragraphs, Petitioner provided a terse response that the transaction furthered Petitioner’s business of investing in real property.  For a couple of the paragraphs, Petitioner responds that the question of “substantial business purpose” was irrelevant since the paragraphs themselves described the tax consequences or the tax reporting of certain transactions, and not the transactions themselves.  The Division found the responses lacking in sufficient detail and moved for an order precluding Petitioner from offering evidence on those points.

Judge Connolly, who is quickly gaining a reputation as a process maven, denied the Division’s motion.  In doing so, he found that Bills of Particulars are to be used only to clarify the pleadings and not to promote disclosure of evidence.  The Judge acknowledged the fine line between clarification and factual disclosure and noted that discovery is limited at the DTA.  The Judge found against Petitioner on many of her arguments but ultimately ruled that the Bill of Particulars provided by Petitioner satisfactorily amplified the pleadings, and therefore denied the Division’s motion for a preclusion order.

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