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State and Local Tax Blog

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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 March 25, 2021 (reporting on DTA cases issued March 11 and 18)

Greetings constant reader. The TiNY editorial staff is healthy, in the course of being vaccinated, and looking forward to things loosening up so we can actually appear before the DTA in the near future. Well . . . at least two of us are. I am actually wondering how a Judge will react to my request for an adjournment based on my inability to fit into any of my suits. Is that reasonable cause? I sure as heck hope so. Because I sure as heck have that problem right now.

TMI? There is no such thing at TiNY.

This week we have eight determinations on which to report.

Matter of Sow and Camara; Judge Behuniak; Division’s Rep.: Amy Seidenstock; Petitioners’ Rep.: pro se; Article 22 (by Emma Savino)

The Judge found that the Division proved both its standard mailing procedures and that they were followed when it mailed the Notice of Deficiency to Petitioners at their last known address on October 21, 2019. Therefore, the BCMS request filed by Petitioners on February 11, 2020 was late by a few weeks, so the Judge granted the Division’s motion for summary determination on timeliness grounds.

Matter of Kalo and Hasko; Supervising ALJ Friedman; Division’s Rep.: Christopher O’Brien; Petitioners’ Rep.: pro se; Article 22 (by Emma Savino)

The Judge found that the Division proved both its standard mailing procedures and that they were followed when it mailed the Conciliation Order sustaining the Notice to Petitioners and their representative (who was not qualified to represent them at the DTA) at their last known addresses on August 2, 2019. Therefore, the petition filed on April 7, 2020 was late. Accordingly, the Judge dismissed the petition.

Matter of Priester; Supervising ALJ Friedman; Division’s Rep.: Colleen McMahon; Petitioner’s Rep.: pro se; Article 22 (by Emma Savino)

The Division issued Petitioner two Notices of Deficiency dated July 3, 2019 and a Notice and Demand related to one of the Notices of Deficiency dated October 21, 2019. Petitioner’s petition protested the assessments related to both Notices of Deficiency, but he attached only one of the Notices of Deficiency and the Notice and Demand. The petition did not have a USPS mark, but was received on February 26, 2020.

The Judge found that the Division proved both its standard mailing procedures and that they were followed when it mailed the Notices of Deficiency to Petitioner at his last known address on July 3, 2019. Therefore, the petition received on February 26, 2020 was late. The Judge also noted that Notice and Demands do not give rise to hearing rights. Accordingly, the Judge dismissed the petition.

Matter of Misrahi and Misrahi-Elting; Judge Behuniak; Division’s Rep.: Stephanie Lane; Petitioners’ Rep.: Richard Gabor; Article 22 (by Chris Doyle)

Petitioners (brother and sister) owned all of the shares of Sushell Corp., which was a federal and New York  S corporation. Petitioners were audited for 2014 and 2015. In 2015, Sushell, in connection with a refinancing transaction, incurred indebtedness secured by the real property it owned. The reason for the refinancing, according to Petitioners, was so Sushell would have sufficient funds to loan to Petitioner/sister so she could buy out a partner in another business enterprise in which she was involved. Funding corporate distributions with corporate debt must have been a recurring theme in that there were significant “loans to shareholders” on the books of Sushell for each of the years 2007-2016, and in only three of the years in that ten-year period did the loan to shareholders account balance decrease (indicating a repayment). The refinance debt came due in 2020. Shortly before that happened, Petitioner/brother repaid all of the outstanding shareholder debts so that Sushell would have enough money to pay off the refinancing. Petitioner/brother’s repayment occurred four days before the hearing. (Ed.:  Coincidence? Probably not.)

The Judge found that Petitioners failed to satisfy their burden of proving that the loans to shareholders were not constructive dividends. The Judge considered a number of factors, among them: (1)  Petitioners together controlled 100% of the shares of Sushell; (2) the failure to follow business formalities indicated a lack of a definite repayment obligation; (3)  loans were made in proportion to the percentage interests of the respective shareholders; (4)  there was a history of refinancing to fund distributions to shareholders; (5) the loans to the shareholders did not require the payment of interest at a market rate; and (6) the distributions were initially booked as shareholder “draws” and thereafter reclassified as “loans” through a year-end closing adjustment.

The Judge abated penalties, principally due to the fact that the parties’ returns consistently treated the distributions as loans, and the loans were eventually repaid. These facts indicated to the Judge that Petitioners acted with good faith and reasonable cause.

Matter of M&M Pio Restaurant, LLC; Supervising ALJ Friedman; Division’s Rep.: Eric Gee; Petitioner’s Rep.: Jhonatan Mondragon; Articles 28 and 29 (by Chris Doyle)

The Division proved both its standard mailing practices and that they were followed when it mailed, to Petitioner’s last known address (with a copy to the last known address of its representative), the Conciliation Order in this matter on December 27, 2019. Thus, the petition filed on June 5, 2020 was a couple of months late. The Judge, therefore, dismissed the petition in response to the DTA’s Notice of Intent to Dismiss.

Matter of Stamatelos; Supervising ALJ Friedman; Division’s Rep.: Adam Roberts; Petitioner’s Rep.: pro se; Articles 28 and 29 (by Joe Endres)

There’s nothing particularly noteworthy about this “timy.” From the $1,329.48 of tax at issue, to the boring recitation of the Division’s mailing procedures, to Petitioner’s failure to respond to the notice of intent to dismiss the petition, this case is the DTA equivalent of the high school voodoo economics lecture in Ferris Bueller’s Day Off:  The Division provided evidence of its standard mailing procedures and that those procedures were followed in this case. As a result, the ALJ decided to do what with this petition? Anyone . . . . . . . . ? Anyone . . . . . . .? Dismiss it.

Matter of Yungasi, Inc.; Judge Behuniak; Division’s Rep.: Mary Humphrey; Petitioner’s Rep. Afame Onwuka; Articles 28 and 29 (by Joe Endres)

The most noteworthy aspect of this case is the speed with which it moved through the administrative appeals system. Petitioner filed an application to register for a sales tax certificate of authority on January 14, 2021. The Division issued a notice of proposed refusal to issue the certificate on January 25, 2021 indicating that Petitioner had unpaid New York State withholding tax debts consisting of both assessments subject to collection and unfiled tax returns. At the hearing, Petitioner, represented by its COO and president, conceded that it owed the liability, but, somewhat vaguely claimed that Wells Fargo Bank should be liable for the debts due to its failure to honor a contract with Petitioner. The ALJ found that “[a]lthough petitioner may have separate legal rights to seek redress against a third party if said party inappropriately limited petitioner’s access to its funds to pay tax debts, such circumstances do not absolve petitioner from the consequences of failing to timely pay its liabilities to the Division.” In other words, the ALJ’s reasoning can be summed up by another one of my favorite movie quotes: “Hey, my name’s Paul and this is between y’all.” Extra credit for the first of our twelve (or so) readers to email me with the correct movie – no using Google or any other electronic search engine!

Matter of Flair Beverages Corp.; Judge Connolly; Division’s Rep.: Stephanie Scalzo; Petitioner’s Rep. Isaac Sternheim; Articles 28 and 29 (by Joe Endres)

This case presents a pretty interesting saga that pits an “old-school” way of doing business against the Division’s modern, technology-based methods for finding audit targets and conducting audits. Here, Petitioner operated a “cash and carry” alcoholic beverage wholesale business. Considering that I’m not that “old-school” myself, I was grateful when the Judge explained that this meant Petitioner “does not make deliveries, does not accept credit cards or checks, and maintains no accounts receivable.”

TiNY Sidebar: Mr. Doyle is so “old-school” that not only did he immediately know what “cash and carry” meant, he also regaled the TiNY editorial staff with recollections from the 70s when older cars didn’t have seat belts, and you could “cash and carry” a six-pack from a drive-through window on your way home from work!! This Gen X’er is amazed any Boomer survived into adulthood!

Ok, back to the case. Well, this “old-school” way of doing business ran into some issues with the Division’s “new-school” reliance on information technology. The Tax Law requires alcoholic beverage wholesalers to file annual electronic informational returns detailing their nontaxable sales through the Tax Department’s website. The Judge noted that “the Division uses the sales information reported on the information returns to determine the purchases of the sales tax vendors to whom the wholesaler sold the product in order to help it determine the accuracy of the taxable sales reported by the vendors.” In other words, the Division uses this information to find vendors who are purchasing more product than they claim to be selling.

I’m not going to detail the long saga of the history of these informational returns and myriad problems Petitioner experienced when trying to implement some type of tracking mechanism, though I found it to be an interesting read. Suffice to note that Petitioner went a long time without filing its informational returns and that the Division used this as the basis for revoking its sales tax certificate of authority.

Petitioner’s main argument against revocation centered on the fact that it did not “willfully” evade the requirement. Petitioner argued that it spent tens of thousands of dollars attempting to put systems in place to allow compliance, and it noted the especially high compliance burden placed on the business due to its high volume of sales. The Judge, however, relied on Court of Appeals case law to interpret “willful” to mean “knowingly, deliberately and voluntarily” and “something more than accidental” inaction. The Judge concluded that given the large volume of business conducted by Petitioner, and the more than 10 years during which Petitioner knew of the requirement but did nothing, Petitioner’s actions were willful and thus the revocation of its certificate of authority was a proper remedy.

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