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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 2, 2019 (covering DTA cases issued April 25)

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We’re back at it after a week with no cases posted by the DTA. We were taking bets on whether the person in charge of posting them was on vacation like everyone else (and not us). Anyway, we only have one determination and one order despite the week off. The order is on timeliness, but at least it is kind of interesting, so we go into more detail than usual – so buckle up!

Determination

Matter of Minevich ; Judge: Russo; Division’s Rep: Colleen M. McMahon; Petitioner’s Rep: Pro Se; Article 22.

Petitioner was a payroll auditor for an accounting firm – so he likely did a better job than many of the other pro se Petitioners we see. Nonetheless, the case didn’t go well for him. But I’m getting ahead of myself.

Petitioner filed his 2015 New York State personal income tax return and reported wages of $64,395 and itemized deductions of $29,946. At issue were his itemized deductions, which were comprised of $7,100 of gifts to charity and $20,887 of unreimbursed employee expenses. Petitioner conceded that he was not entitled to some of these employee expenses including $8,170 of home office computer, telephone and internet expenses, but he maintained that he was entitled to the vehicle, parking fees, tolls, and transportation expenses, along with the charitable deduction.

At audit, the Division requested additional documentation from Petitioner to substantiate the deductions, and Petitioner provided most of it. Notably, with regard to the charitable donations, he provided part of Form 8283 listing bags of clothing donated to the Salvation Army and receipts from the Salvation Army which indicated that petitioner donated 11 bags of clothing (clearly our Petitioner has high-end taste since the value of the used clothes in the bags totaled $7,100), receipts from his car insurance, parking receipts, purchase documents for his vehicle, vehicle rental receipts, EZpass statements, time and expense reports from his employer, and an earnings statement showing travel reimbursement. After providing several rounds of documentation, the Division issued to Petitioner a notice of adjustment which allowed $2,150 for his non-cash donations and disallowed his car expenses.

Petitioner argued that he was entitled to deduct the transportation expenses for travelling from his home to temporary field audit locations away from his regular job, and that because the actual amount was larger than the amount reimbursed by his employer, he could deduct the excess. He also argued that the Division should not have decreased the value of his charitable donation because he provided a description of the donated items and their fair market value. The Division, on the other hand, argued that Petitioner had not fully substantiated his commuting expenses, and, in any case, these expenses were not deductible because he was travelling within his commuting area. The Division also argued Petitioner valued his charitable contribution over fair market value.

The ALJ noted that ordinary and necessary expenses incurred during the taxable year in carrying on a trade or business may be deducted, and that claimed unreimbursed employee business expenses are miscellaneous itemized deductions, which are allowed only to the extent that they exceed 2% of the taxpayers AGI. Most of Petitioner’s claimed refund was for mileage that he claimed he incurred for work purposes.The ALJ stated that a taxpayer cannot deduct the cost of commuting between home and work, but may deduct travel expenses if the taxpayer is going between his residence and a temporary work location outside the area where he lives and works. The ALJ also found that a taxpayer may not deduct travel expenses unless the taxpayer traveled to: (1) a work location away from his regular work location, or (2) any work location if his residence is his principal place of business within the meaning of § 280A(c)(1)(A) of the IRC.The ALJ found that if Petitioner properly substantiated his expenses, he would be entitled to the deduction because his regular work location was in Hauppague and he frequently travelled to work locations away from his regular work location.  

But Petitioner failed to provide adequate substantiation.There was no way to determine the number of miles Petitioner was travelling to his other work locations because his expense reports only contained the name of the work location (if only there was a widely-available computer program that one could use to determine the distance between to street addresses - maybe I’ll develop such a program and call it “TiNY Maps”). Petitioner also claimed that he used his vehicle 96.5% of the time for business, which was then contradicted by his own testimony and EZpass records which showed that he was only using it 55.66% of the time for business. Since Petitioner did not “meet the strict substantiation requirements of IRC § 274(d)” the expenses were disallowed.

With regard to the charitable donation, the required substantiation depends on the size of the contribution and whether it’s cash or property. For non cash contributions valued at over $250, the taxpayer must obtain written acknowledgement from the donation recipient and a description of the property.The required substantiation is more rigorous when the claimed value exceeds $5,000 in the aggregate and requires the property have a “qualified appraisal.” Here, Petitioner only provided receipts from the Salvation Army which stated the number of bags of clothing and a spreadsheet that he prepared with the items and their fair market value, which wasn’t acknowledged by an official at the Salvation Army. The ALJ found this insufficient because Petitioner claimed over $5,000 and didn’t file Section B of Form 8283, provide an acknowledgement form, and obtain a qualified appraisal. So the ALJ ultimately denied his Petition and sustained the notice of deficiency.

Order

Matters of Peak Security Plus, Inc. and Osula; Judge: Connolly; Division’s Rep: Justine Clarke Caplan; Petitioner’s Rep: Emmanuel Osula; Article 28 and 29.

Petitioner Peak Security Plus, Inc. (“Peak”) was audited and assessed sales tax due plus interest and penalty, and it was issued a notice of determination dated May 2, 2016. Petitioner Emmanuel Osula (“Osula”)  was assessed the same amount due as a responsible person of Peak and issued a notice of determination dated May 4, 2016. Richard Kestenbaum filed a BCMS request for Peak on July 27, 2016, and identified himself as Peak’s “representative.” Osula also filed a BCMS request for Peak on July 28, 2016, and identified Edward Owie, CPA, as Peak’s representative.

BCMS issued a letter to Osula stating that because Peak had filed a BCMS request, the notice of deficiency against Osula was considered to be protest and that a conciliation conference was to be held on October 17, 2016. Neither Peak nor Osula appeared personally or by representative at the conference, so BCMS issued Peak and Osula conciliation default orders on November 4, 2016. Peak filed its petition challenging the default order on April 10, 2018 and Osula filed his on May 24, 2018. The supervising ALJ issued both Peak and Osula notices of intent to dismiss because the petitions appeared untimely. The Division requested an extension and both parties were granted an extension to October 18, 2018. The Division submitted two timely responses to the notices of intent to dismiss. Osula submitted his response on behalf of Peak on November 1, 2018, and it was returned to him as untimely without consideration. The ALJ thereafter returned the Division’s submissions because it described attachments that the submissions did not actually contain, so the ALJ gave both parties an additional 30 days to respond. Osula’s response denied that he or Peak received a copy of the conciliation order, and it alleged that he and Peak moved to a new address during the audit, which the Division should have known because it conducted part of its audit at the new address. The Division’s response was a corrected response to the notice of intent to dismiss, and it included proof of mailing of the BCMS Order. 

The ALJ found that the Division had met its burden of establishing proper mailing of the conciliation default order on November 4, 2016 to Peak as it was mailed to its last known address.The ALJ rejected Osula’s argument that the Division should have known that their address had changed because the letter that he submitted was not sworn evidence, and the Division was entitled to send the order to the address that it did because it was the address used on the BCMS request.

However, the ALJ noted that the 90 day period for filling a petition is tolled if the taxpayer’s representative is not served with the notice. The Division’s affirmation assumed that Mr. Kestenbaum  was Peak’s representative and ignored the second BCMS request which was signed by Osula and identified Mr. Owie as Peak’s representative, despite the fact that the Division submitted both requests with its response to the notice of intent to dismiss. The Division did not explain why it chose one representative over the other, nor did it provide Mr. Kestenbaum’s BCMS request in the same condition in which it was filed, as it did not include the power of attorney. This raised the question of fact as to whether Mr. Owie’s BCMS request had a power of attorney which rescinded Mr. Kestenbaum’s authority because on Mr. Owie’s BCMS request it said “See POA”, which the Division also did not provide.

However, regardless of the dual BCMS request, the ALJ found that Division had not sufficiently proven that the conciliation default order was properly mailed to the correct address for Mr. Kestenbaum because it did not include the suite number that he provided on BCMS request.The Division apparently used the address on the power of attorney, but, as the ALJ noted, a power of attorney is not an application and thus the Division may not use it for the last known address. Because there was no proof that Mr. Kestenbaum received the order, the ALJ rescinded the notice of intent issued to Peak.

With regard to Osula, the Judge found that the Division met its burden of establishing that it properly mailed the conciliation order to his last known address, as provided on his last filed income tax return, and so his petition was untimely. However, because Osula was only assessed as a responsible person, and since the protest of the corporation was timely, Osula’s protest was also deemed timely filed, and thus the Judge found Osula also had a right to a hearing. 

In sum, both the notices of intent to dismiss were rescinded and the Division was ordered to file answers.  

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