TiNY Report for May 17, 2018 (covering DTA cases from May 10)

This week we have 3 Tribunal Decisions. 

Matter of Quinones; Division’s Rep: Jennifer Hink-Brennan; Taxpayer’s Rep: unknown; Article 22.  The Tribunal found the ALJ’s Determination was properly mailed to Petitioner.  Petitioner filed her Exception to the ALJ’s Determination 3 days past the deadline, so the Tribunal found the Exception was not timely filed.  On the Tribunal’s own motion, it dismissed Petitioner’s Exception.  The Tribunal did not require proof of mailing of the ALJ Determination—at least there was no mention of proof of mailing in the decision.

Matter of GKK 2 Herald LLC; Division’s Rep: Tobias Lake; Taxpayer’s Rep: Irwin Slomka, Thomas McGovern, and Kara Kraman; Article 31.  Your author took a particular interest in this case, as it involved the New York Real Estate Transfer Tax (“RETT”).  Generally, when ownership of real property is conveyed, NY imposes tax on the transfer.  In New York, a transfer of controlling interest (50% or more) in an entity that has an interest in NY property is taxable, but only to the extent there is no mere change of identity/beneficial ownership.  

Prior to the period at issue Petitioner and SLG 2 Herald LLC (“SLG”) acquired real property in New York City.  Petitioner had a 45% tenants-in-common interest in the property and SLG had a 55% tenants-in-common interest in the property.  Proper RETT was paid on the initial acquisition.  A few years later, Petitioner and SLG formed 2 Herald Owner LLC (“Owner LLC”).  Petitioner and SLG contributed their respective 45% and 55% interests in the property to Owner LLC, in return for respective 45% and 55% membership interests in Owner LLC.  Later the same day, Petitioner sold its 45% membership interest in Owner LLC to SLG for $111 million.  So, there were three transactions:  (1) Petitioner’s exchange of interests with Owner LLC, (2) SLG’s exchange of interests with Owner LLC, and (3) Petitioner’s sale of its 45% membership interest in Owner LLC to SLG.  The ALJ ruled that the three transactions weren’t separately subject to the transfer tax and refrained from aggregating SLG’s upon-formation acquisition of its 55% interest in Owner LLC with its acquisition of the 45% interest from petitioner.  Thus, the ALJ canceled the Division’s notice asserting tax on the 45% acquisition.

On exception, the Tribunal first noted it did not defer to the Division’s interpretation of the law, but instead agreed with the ALJ that the issue was a matter of statutory construction.  Next, the Tribunal analyzed the transactions under the RETT rules.  The Tribunal agreed with the ALJ that none of the three transactions, when considered separately, were subject to RETT.  Transactions 1 and 2 were mere changes of identity (i.e., Petitioner still had a 45% interest in the property after the exchange and same with SLG’s interest).  Transaction 3 was a transfer of a non-controlling minority interest, since it was less than 50%. 

The Division argued, however, that the 3 transactions under the step transaction doctrine would result in RETT liability.  The Division had not raised the step transaction previously.  On exception, you can raise new legal issues but not new factual ones.  Petitioner argued that analyzing the transactions under the step transaction doctrine would raise new factual issues, and the Tribunal agreed.  The step transaction doctrine involves analysis of the interdependence test and the end-result test.  The Tribunal found that, because the Division hadn’t raised this argument earlier, Petitioner did not have the opportunity to offer evidence of: the independent significance of the individual transactions, other comparable transactions, or its intent with respect to the transactions.  So, the Tribunal determined the Division improperly raised the step transaction issue and declined to consider it.   

And then . . . the Tribunal aggregated the transactions anyway.  Regulation 575.6(d) requires multiple transfers of interests that occur within 3 years to be aggregated for purposes of RETT.  The Tribunal noted the ALJ had raised the question of whether the Division exceeded its authority when it promulgated that regulation.  Petitioner also raised that issue on exception, but because Petitioner averred at oral argument that the regulation’s meaning, and not its validity, was at issue, the Tribunal did not address it.  The Tribunal noted the purpose of the aggregation rule is to prevent parties from divvying up interest transfers (so they’re all less than 50%) just to avoid RETT, and here tax minimization appeared to be at least one reason the transactions were structured as they were.  The two transactions the Division wanted aggregated were Transactions 2 and 3.  The Tribunal concluded that, under the regulations the Division properly aggregated Transactions 2 and 3, and that the remaining 45% transfer of interest was subject to RETT  (Transaction 2 remained exempt from RETT as a mere change of identity even under the aggregation rule). 

Matter of XO Communications Services, LLC; Division’s Rep: Robert Maslyn; Taxpayer’s Rep: John Van Allen; Articles 28 and 29.  Petitioner was a national provider of telecommunication services to businesses, wholesalers, and governmental entities.  Petitioner purchased electricity and argued it was qualified for the resale exclusion because the electricity was resold as a component part of the telecommunications services sold to its customers.  After analyzing the meaning of the relevant statutes and regulations, the Tribunal determined that sales of electricity are in fact subject to sales tax and not included in the exemption for sales for resale.  Petitioner argued electricity was analogous to the food packaging in Matter of Burger King, however, the Tribunal agreed with the ALJ that the case was not relevant because electricity is not tangible personal property (in any context other than for purposes of Tax Law § 1105(b)).  Petitioner then argued the Division’s rejection of its refund claim resulted in impermissible multiple taxation. After review of Petitioner’s analysis of case law, the Tribunal determined Petitioner’s analysis was incorrect and rejected Petitioner’s argument—essentially acknowledging that multiple layers of sales taxation may be permitted under certain circumstances.  Finally, Petitioner argued the ALJ was wrong in determining Petitioner didn’t provide enough evidence to support its refund claim, i.e. the amount of electricity that was “resold.”  But the Tribunal agreed with the ALJ that the record was insufficient to show the actual amounts of electricity purchased to provide the services Petitioner sold.  So, the Tribunal determined on multiple grounds that Petitioner’s sales tax refund claim was properly denied.

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