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State and Local Tax Blog

About This Blog

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 May 16, 2019 (covering cases issued May 9)

By on

This week we have one decision and two determinations – which is 1/3 of last week’s DTA output. But we figured we’d stick with last week’s theme of concluding each entry with one of the quotes from the American Film Institute’s “AFI’s 100 Years…100 Movie Quotes” – don’t worry, we’ll start with a new theme next week.   

DECISION

Matter of Doyle (Chris claims “no relation!”); Division’s Rep: Linda A. Farrington; Petitioners’ Rep: Dean Nasca; Article 41 Award for Costs.

During a desk audit, the Division requested additional information from Petitioners regarding the deductions claimed on their 2015 tax return. Petitioners responded to this request with a letter alleging that the request violated their due process rights and that they needed notice of time and place of a field audit so that they could prepare for the “audit process” or else they would file suit alleging violation of their constitutional rights (ed. Wait, Petitioners responded to a mundane request from the Division by threatening to institute a suit claiming unconstitutionality. Are we sure they aren’t related?). The Division responded by stating that no refund would be granted since Petitioners did not submit any additional documentation. Petitioners filed a request for conciliation conference where, for the first time, they provided the additional documentation requested. BCMS issued a consent allowing the entire refund requested on Petitioners’ return. Petitioners then filed a DTA petition seeking an award of costs and fees (many of which Petitioners probably could have avoided if they had just submitted the requested documentation in the first place... but they were clearly offended by the Division’s refusal to perform a field audit).

The ALJ found that Petitioners were not a prevailing party because they had not submitted the requested documentation before BCMS, so the Division was substantially justified in adjusting the refund downward. Petitioners reacted by instituting this exception.

The Tribunal agreed with the ALJ’s analysis that the BCMS consent represented a final judgment and that the Petitioners had prevailed as to the amount in controversy. The Tribunal noted that whether the Division’s conduct is substantially justified is determined based on “all the facts and circumstances” and not just the final outcome, and it found that the Division’s position as of the day it partially-denied Petitioners’ refund was substantially justified. The Division could have inferred that Petitioners’ refusal to provide the requested documentation with their initial response was an indication that the information would never be provided.

As for Petitioners’ argument that desk audits are constitutionally invalid because they deny the “due process” afforded by a field audit, the Tribunal found that Petitioners had the burden to prove that the application of the statute was unconstitutional, and they failed to do so. In the end, the Tribunal denied the application for an award of costs. 

Even though it is rare that we admit it, we are 100% behind this anti-taxpayer decision. And it is not just because the rationale of the ALJ and the Tribunal seem right to us. It is also because insisting that your desk auditor refer your case for a field audit is like going to your dentist for your semi-annual cleaning and demanding a biopsy of your brain tissue: it just doesn’t make any sense.  

“Show me the money!” [#25 from Jerry Maguire]

DETERMINATIONS

Matter of Kalinsky, Judge: Friedman; Division’s Rep: Karry L. Culihan; Petitioner’s Rep: pro se; Driver’s License Suspension Tax Law Sec. 171-v.

This is a horse of a different color: a timeliness case in which the petition was filed too early!

Petitioner filed his request for conciliation conference and his petition on the same day. Both challenged the proposed suspension of Petitioner’s driver license. Petitioner did not indicate that a conciliation conference had been requested on his petition, and, because of this, the petition was acknowledged and sent to the DTA for an answer. BCMS eventually sustained the notice and dismissed Petitioner’s request. Meanwhile, Supervising ALJ Friedman sent a letter to the parties informing them of the BCMS Order and stating his view that when the petition was filed, it was premature. Thereafter, the ALJ issued a Notice of Intent to Dismiss to the parties on the basis that the petition was premature.

The ALJ ultimately dismissed the petition with prejudice. The ALJ determined that the petition was premature because it was filed before the issuance of the conciliation order that would have conferred jurisdiction on the DTA. 

With respect, we are not certain this is the right result. In the absence of a BCMS request, the Notice itself would provide the DTA with jurisdiction, and if the petition had been filed a day before the BCMS request, we imagine that the DTA would exercise its jurisdiction to hear the case.  So why doesn’t the petition take precedence over the simultaneously-filed BCMS request? If the ALJ petition took precedence, then the original Notice (and not the Order) would have given the DTA jurisdiction and the petition would not have been premature.  

Of course, Petitioner could have easily avoided all of this confusion by simply following the procedural rules.

“Well, nobody's perfect.” [#48 from Some Like It Hot]

Matter of Brahim, Judge: Galliher: Division’s Rep: Linda A. Farrington; Petitioners’ Rep: pro se; Article 22.

Petitioners filed their 2014 joint tax return requesting a refund of $993. Petitioner husband (“Petitioner” with no “s”) was an Uber driver, and his schedule C income from wholly-owned Unter LLC included gross receipts of $83,861 and expenses of $60,956, leaving $22,905 of net income. The Division requested substantiation of the claimed dependent, income, and trade or business expenses. Petitioners provided a 1099-K and a 2014 Tax Summary issued to Petitioner by Uber, in addition to credit card statements and bank account statements. The Division accepted the Petitioners’ claim of one dependent, but not the substantiation for income or expenses, and thereafter issued a notice of disallowance of the claimed refund. Petitioners requested a conciliation conference, which resulted in a conciliation order sustaining the notice of disallowance. So Petitioners filed a petition with the DTA. The Division’s amended answer asserted that Petitioners’ substantiation of business expenses was insufficient to support the claimed refund, and the Division asserted (for the first time) a deficiency of $2,466.

A hearing was held where the Division accepted Petitioners’ reported gross receipts and made adjustments to their expenses. Some expenses were completely disallowed, some were adjusted upward, and some were adjusted downward. The Division accepted all those items provided on the Tax Summary issued by Uber. Petitioners conceded several of the decreases, including insurance expense, but many expenses remained at issue, including supplies, meals and entertainment, vehicle repair and maintenance, car payments, gas, and car washes. This resulted in a net tax due of $1,970.

The ALJ began by observing that it is Petitioners’ burden to establish entitlement to all deductions and to substantiate expenses. As such, the ALJ noted, Petitioners are required to maintain adequate records. The Division considered Petitioners’ claimed substantiation of expenses and found it unconvincing in many respects, and the ALJ agreed that the Petitioners failed to prove their entitlement to many of the claimed expense deductions.

Turning then to the Division’s assertion of a deficiency for the first time in its amended answer, the ALJ found that Tax Law § 689 (d)(2)(A) allows the Division to assert a deficiency after the filing of a petition where the taxpayer files for a credit or refund, so long as it is within the Tax Law § 683’s statute of limitations. Since Petitioners’ return was due April 15, 2015, and the Division asserted the deficiency on January 3, 2018 (i.e. the date it filed its amended answer), it was deemed timely. The ALJ acknowledged that the burden of proof switches to the Division if the Division asserts an increase in a Notice of Deficiency post-petition. However, in this case, there was never a Notice of Deficiency; instead, the case was initiated when the Division issued a refund denial. So the ALJ determined that the burden to overcome the deficiency asserted post-petition remained with Petitioners. Petitioners were unable to prove their entitlement to all of the claimed expenses, so most of the deficiency was sustained.

Summary: Happy couple files return claiming a refund. It’s denied. So they file a petition, and for their trouble, not only is the refund denial sustained, but they get stuck with a $1,970 assessment. 

Epilogue: We expect somebody is going to be sleeping on the couch for a while.

“You talking to me?” [#10 Taxi Driver]

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