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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. 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 October 11, 2018 (covering DTA cases issued October 4)

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This week we have five ALJ Determinations and three Tribunal Decisions.  The Tribunal Decisions are interesting.  The ALJ Determinations…not so much.


Matter of Udayni; Judge: Connolly; Division’s Rep: Linda Farrington; Taxpayer’s Rep: pro se; Article 22;  Matter of Wachaa; Judge: Maloney; Division’s Rep: Charles Fishbaum; Taxpayer’s Rep: pro se; Article 22;  Matter of Ibrahim; Judge: Connolly; Division’s Rep: Christopher O’Brien; Taxpayer’s Rep: pro se; Article 22Matter of Edris; Judge: Galliher; Division’s Rep: Charles Fishbaum; Taxpayer’s Rep: pro se; Article 22Matter of Alwaqedi; Judge: Law; Division’s Rep: Christopher O’Brien; Taxpayer’s Rep: pro se; Article 22.  We don’t have much to say here.  All five cases were dismissed on timeliness grounds.  All five Petitioners represented themselves.  Although there was this interesting footnote early in each of the decisions:  “The petition listed Yehad Abdelaziz as petitioner’s representative.  A response to the notice of intent to dismiss from Mr. Abdelaziz, dated February 1, 2018, was received by the Division of Tax Appeals. Petitioner and Mr. Abdelaziz were notified by letter, dated April 26, 2018, that Mr. Abdelaziz was not qualified to represent petitioner at the Division of Tax Appeals (see 20 NYCRR 3000.2 [a] [2]), and the response from Mr. Abdelaziz was returned attached to that letter.”  And this in a footnote later in each of the decisions:  “Mr. Abdelaziz was granted special permission by the Office of the Director of BCMS to appear and represent petitioner at the conciliation conference held for CMS No. 271966. Mr. Abdelaziz was granted no such permission by the Division of Tax Appeals, and thus remains unqualified to represent petitioner at the Division of Tax Appeals (see Tax Law § 2014 [1]).”  Tax Law § 2014 (1) allows CPAs, public accountants, lawyers and enrolled agents to represent taxpayers at the DTA.  I guess Mr. Abdelaziz was not any of those.


Matter of Kroll Bond Rating Agency, Inc.; Division’s Rep: M. Greg Jones; Taxpayer’s Rep: Peter Faber, Alysse McLoughlin and Kathleen Quinn; Articles 28 and 29.  Petitioner was a securities rating agency.  When the company first started, Petitioner was unsure of whether its services were subject to sales tax.  In 2012, It requested an advisory opinion from the Division regarding the taxability of security rating services.  While it waited for a response, Petitioner included on its invoices the statement “includes any applicable sales taxes.”  But conservatively paid sales tax to the Division on the transactions.  Petitioner backed-into the tax paid by grossing down the customer invoices so that the gross sales reported by Petitioner were equal to the total of receipts from its customers less the sales tax Petitioner paid to the Division.  Petitioner filed a refund claim for the State (but not City) portion of the sales tax it paid to the Division.

In September 2013 the Division issued the requested advisory opinion, concluding Petitioner’s credit rating service was exempt from NYS sales tax but was subject to NYC sales tax.  The Division acknowledged this was a change in its position (historically the Division’s position was that bond rating services were not subject to State or City sales taxes), and as a result, gave vendors until September 1, 2015 to put systems in place to begin collecting tax. 

Petitioner’s refund claim on the State portion of sales tax it paid on sales of securities rating services was denied by the Division on the ground that Petitioner had not first paid back the sales tax to its customers.  Petitioner protested the refund denial at BCMS.  The conciliation order sustained the refund denial.  Petitioner then filed a DTA petition protesting the conciliation order.  Petitioner also filed a second refund claim for the portion of the City sales tax it paid during the period March 1, 2012 through September 12, 2013.  The Division denied that refund claim for the same reason as the first.  Petitioner filed a DTA petition protesting the denial of its second refund claim.  Later, Petitioner requested to amend its DTA petition to reflect the entire amount of City sales tax it had remitted for the period December 1, 2010 through August 31, 2013. 

The ALJ sustained the denial of the refund claim, finding that the Division was correct to require Petitioner to first re-pay the tax to its customers.  Petitioner took an exception.

First, the Tribunal addressed the propriety of the amendment to the ALJ petition to add the refund for the City tax was defective.  The amendment had been tentatively accepted by the ALJ, but the issue was not addressed in the ALJ’s Determination.  The Tribunal found that the amendment would impermissibly expand the scope of the underlying petition to include a refund amount in excess of the amount of the original refund claim.  Reasoning that the document initiating Petitioner’s right to bring a case to BCMS (and then DTA) was the denial of the original refund request, and noting that the additional refund request and the request to amend the petition to add the subsequent refund request both happened after the statutory period for refunds had run, the Tribunal held that the amendment was improper and the request to amend should have been denied.  Amendments are to be freely permitted, but not, so said the Tribunal, if they would result in an expansion of the DTA’s jurisdiction. 

The Tribunal then addressed the Division’s denial of the original refund.  There was no dispute that Petitioner remitted the sales tax that was the basis for its two refund claims.  Petitioner argued it was not required to repay that sales tax to its customers in order to be entitled to the refunds because it didn’t charge its clients sales tax in the first place, but instead paid the sales tax out of its own funds.  After considering a number of factors, including that a) Petitioner set its price on the basis of its competitors’ prices, b) the competitor’s fees didn’t include sales tax, c) Petitioner was forced to keep its prices low to obtain business, d) Petitioner’s invoices did not include a separately stated amount for sales tax, and e) none of its engagement agreements with its clients mentioned sales tax, the Tribunal determined those facts established Petitioner could not have included the cost of the sales tax in its ratings fees.  This finding was made notwithstanding the “includes tax” legend on the customer’s invoices and Petitioner’s “gross down” method of calculating sales tax.

As a result, the Tribunal reversed the determination of the ALJ and held Petitioner met its burden to show it did not collect the tax from its customers and was thus entitled to the refunds it originally claimed.

Matter of Emerald International Holdings, Ltd.; Division’s Rep: Anita Luckina; Taxpayer’s Rep: Otu Obot; Articles 28 and 29.  The case made another comeback at DTA.  In January 2016, ALJ Law denied Petitioner’s motion for summary determination.  In March 2016, the Supervising ALJ denied Petitioner’s motion to have Judge Law recused.  In September 2017 the ALJ’s default Determination in this matter was issued.  In January of this year the Supervising ALJ’s Order denying Petitioner’s motion to vacate the default determination was issued.  In April of this year the Tribunal affirmed the ALJ Determination sustaining the Division’s refund denial for an earlier period.

The Tribunal had before it in this case Petitioner’s exception to the Supervising ALJ’s January Order denying its motion to vacate the September 2017 default determination.  The Tribunal affirmed the Order of the Supervising ALJ.  Petitioner did not appear at the scheduled hearing, did not obtain an adjournment and did not present sufficient evidence to demonstrate it had a meritorious case.  As a result, the Tribunal found the ALJ properly rendered a default determination against Petitioner.  

Hodgson Russ has its names attached to a lot of DTA cases, but pretty soon Emerald International is going to eclipse us. 

Matter of Forest City Enterprises, Inc.; Division’s Rep: Clifford Peterson; Taxpayer’s Rep: Kevin Cooman and Edward Daniel, III; Article 9-A.  We have represented Petitioner before.  So we’re playing this one straight down the fairway with minimal editorializing.

Petitioner was a real estate developer that built a huge mixed-use facility in Yonkers.  In connection with the project Petitioner sought and received Certification as an Empire Zone Enterprise (EZE).  EZE’s that are qualified (QEZEs) are entitled to some pretty valuable tax benefits.  To be a QEZE an EZE had to (among other requirements not relevant here) have an employment number in New York in the tax year at issue greater than the average employment number it had in New York in the five years preceding its certification as an EZE. Petitioner’s average employment number in New York during the five years preceding its certification was zero.  Thus, even one employee during the tax years at issue would have qualified petitioner as a QEZE.

Petitioner created lots of employment.  Unfortunately, most of the employment created was in other entities.  However, Petitioner exercised enough dominion and control over one individual—Mr. Russell—and the relationship between Petitioner and Mr. Russell exhibited enough indicia of employment, that Mr. Russell was found by the ALJ to be a common law employee of Petitioner under the traditional tests applied by the IRS.  In a thorough (70 page) decision, the Tribunal “recognize[d] that several factors discussed in the Administrative Law Judge’s determination would lead to the conclusion that Mr. Russell was a common-law employee of … petitioner, eligible to claim the QEZE credit.”  So far, so good.  However, the Tribunal went on to state that: “[W]e are reminded of our prior decisions in which we held that where a tax benefit is concerned, it is the form chosen by the taxpayer that controls

[citations omitted]. Merely the fact that a taxpayer could have chosen a different form which would have had different tax consequences does not convert a taxable transaction into a nontaxable one [citation omitted]. This rationale applies equally with reference to eligibility for exemptions or credits [citation omitted].”  So the Tribunal reversed the ALJ determination and concluded that Petitioner was bound by the form of the relationship created and not its substance.  In form, Mr. Russell was an employee of a company related to Petitioner and not Petitioner itself.  Ergo, the Tribunal reversed the ALJ and found that Petitioner did not have an employee during the tax year at issue and was thus not a QEZE eligible to claim credits.

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