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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 September 21, 2017 (covering DTA cases issued on September 14, 2017)

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The TiNY Report did not go out as scheduled last Friday, and the world didn’t notice.  We got jammed-up with client work at the end of last week and then the DTA unloaded a dump truck of cases on us.  Clients come first.  We feel bad that both of our readers had to spend the weekend wondering if there was any output from the DTA last week.  As it turns out, there were six ALJ Determinations and Four Tribunal Decisions, but no Orders. 

Determinations

Matter of Abramowitz; Judge Bennett; Division’s Rep: Robert Maslyn; Taxpayer’s Rep: Isaac Sternheim; Articles 28 & 29.  The Judge granted the Division’s summary determination motion on timeliness grounds, finding that the Division proved both its standard mailing practice and that it was followed in this instance.  The Petitioner did not respond to the motion.  ‘Nough said.

Matter of Sacko; Judge Russo; Division’s Rep: Jennifer Hink-Brennan; Taxpayer’s Rep: Pro se; Article 22.  Second verse same as the first.  The Judge granted the Division’s summary determination motion on timeliness grounds finding that the Division proved both its standard mailing practice and that it was followed in this instance.  The Petitioner did not respond to the motion. 

Matter of Greenfield; Judges Friedman (for the hearing) and Galliher (for the Determination); Division’s Rep: Christopher O’Brien; Taxpayer’s Rep: Saul Deutsch; Article 22.  This is a pretty thin determination, so I need to guess at some of it.  But it looks as if the Petitioner claimed that a portion of the compensation he received from his employer was a management fee and that he was entitled to deduct certain expenses on his schedule C for performing management services.  It also looks like he forgot to include income from brokerage transactions and a few other items.  Document requests during the audit were largely ignored.  But a bunch of documents were submitted into evidence at the hearing by the Petitioner.  It appears that neither a foundation was laid nor an explanation provided for any of the additional documents proffered at the Hearing.  Oh, and the Petitioner’s Rep sent the last brief in late and the Judge returned it un-read.  In a short determination, the Judge sustained the notice.  I know, we were shocked too.

Matter of Ley; Judge Gardiner; Division’s Rep: Hannelore Smith; Taxpayer’s Rep: Jacob Oksman; Article 8 driver license suspension.  Inability to pay is not one of the six compulsory defenses.  And the Judge found that the State’s process for suspending licenses does not deny the taxpayer his Constitutional rights.  So the Judge granted summary determination on behalf of the Division. 

Matter of Nastasi; Judge Russo; Division’s Rep: Kileen Davies; Taxpayer’s Rep: Joseph Gulant; Article 8 driver license suspension.  Kinda like the Ley case (above) without the Constitutional issue.  But the same result ensued.

Matter of Jones, Petrella, Swift and Zemsky; Judge Law; Division’s Rep: Tobias Lake; Taxpayer’s Rep: Kevin Cooman and Edward Daniel; Article 22.  Upon Petitioners’ motion for summary determination, it was determined that Buffalo “sewer rents” were not “eligible real property taxes” under Tax Law § 15(e) because they were not assessed by the City of Buffalo, and the Buffalo Sewer Authority is not a “taxing jurisdiction.”  Petitioner’s motion was denied, and it looks as if Howard Zemsky (who, not for nothin’, is the Commissioner of Economic Development in New York) won’t get his real property tax credit for the sewer rents.  I know, crappy deal.  Oh yeah, we are not above “potty humor”.

Decisions

Matter of Bayerische Beamtenkrankenkasse AG; Division’s Rep: Clifford Peterson and Ellen Roach; Taxpayer’s Rep: Arthur Rosen and Alysse Grossman; Article 33.  Wow.  This was a tough decision to wade through even for a seasoned tax professional.  It interprets the nigh-on impenetrable (and infrequently interpreted) details of the Article 33 franchise tax on insurance corporations, and the Tribunal’s decision peels the onion layer by layer, and then throws in some international law razzle-dazzle at the end of the decision. 

Petitioner was a foreign non-life insurer not authorized to be in the insurance business in New York.  The Tribunal found that the clear and unambiguous language of the statute meant that neither the premiums tax nor the “cap” on the Article 33 tax would apply to unauthorized non-life insurers like Petitioner for years beginning after 2002.  There are suggestions in the decision (footnote 7 if you want to fact-check me) that, prior to a 2012 TSB-M, the Division’s policy was to apply the cap even to unauthorized non-life insurers.  But it appears that Petitioner did not argue that the Division could not change this policy retroactively.  As the premiums tax did not apply, the Tribunal found that the tax under Tax Law § 1501 would apply.  More specifically, the Tribunal found that the entire net income (ENI)  base would pertain to Petitioner.  According to the Tribunal, for a non-US insurer, ENI starts with federal effectively connected income (ECI).  Petitioner’s ECI resulted from its ownership of interests in US partnerships investing in real estate, primarily in New York.  The Tribunal noted that unlike pre-2015 Article 9-A, Article 33 does not have a modification that pivots to worldwide income for non-US corporations, so that Petitioner’s non-US income was properly excluded from ENI.  Under Article 33, ENI is allocated to New York by adding 90% of an insurers premiums factor to 10% of its wage factor.  The Tribunal found that Petitioner had no premiums factor in the US, and ultimately it was determined that the Division had proven that use of the Article 33 apportionment regime resulted in an allocation “out of all appropriate proportion to the business transacted” in New York.  In addition, the Tribunal confirmed that the use by the Division of the Article 9-A apportionment regime (tweaked to take into account only those factors contributing to the production of ECI) was designed to obtain a fair and proper allocation.  HOWEVER, the Tribunal also found that it had jurisdiction to consider Petitioner’s argument (made for the first time at the Tribunal) that the Division’s interpretation of Article 33 resulted in discrimination in violation of the US-Germany Tax Treaty.  And the Tribunal eventually found that the Division’s approach “as applied” to Petitioner violated the Treaty’s non-discrimination provisions and canceled the Notice.

Landschaftliche Brandkasse Hannover; Division’s Rep: Clifford Peterson and Ellen Roach; Taxpayer’s Rep: Arthur Rosen and Alysse Grossman; Article 33.  See Matter of Bayerische Beamtenkrankenkasse AG, above.

Titan Elevator & Lift, LLC; Division’s Rep: Lori Antolick; Taxpayer’s Rep: Ken Novick; Articles 28 & 29.  Petitioner sold lifts, dumbwaiters and elevators, some of which were probably used to assist the infirm.  Petitioner argued that its purchases were not subject to tax because they were re-sold and because those sold to assist persons with infirmities should be treated as exempt prosthetic devices.  The Petitioner did not provide much detail with respect to the different products sold at the hearing, and during the audit Petitioner did not provide enough records (so the Tribunal and ALJ found) for the Division to complete a proper audit.  The Tribunal applied the narrow standard used for exemptions to determine that Petitioner had not proven its entitlement to the prosthetic device exemption.  In addition the Tribunal found that Petitioner failed to prove that any of its purchases were otherwise exempt or that penalties should be abated.

Whole Foods Market Group, Inc.; Division’s Rep: Jennifer Baldwin; Taxpayer’s Rep: Michael Zargari; Article 9-A.  The issue was whether Petitioner was required to include its intangible holding company (IHC) affiliate in its New York combined return.  The years at issue were post-2006, so the mandatory combination rule for corporations engaging in substantial intercorporate transactions was in play. Petitioner argued that the royalty addback statutory scheme also in place at the time meant that the deductions for the intercompany transactions at issue had been modified out of Petitioner’s ENI and therefore shouldn’t have been counted for purposes of determining whether substantial intercorporate transactions existed.  But the Tribunal found that substantial intercorporate transactions were present nonetheless based on the clear and unambiguous language of the statute.  The Tribunal abated penalties, however, finding that some sloppy language in a TSB-M (i.e. that the receipts to be considered in determining the existence of substantial intercorporate transactions were those entering into ENI) made Petitioner’s filing position reasonable.

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