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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 Thursday, February 14, 2019 (covering DTA cases issued February 7)

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This Valentine’s Day saw the DTA post four ALJ Determinations.  Nothing says “I love you” like four ALJ Determinations when not a single one involves timeliness!

ALJ DETERMINATIONS

Matter of Kumar; Judge: Friedman; Division’s Rep: Christopher O’Brien; Taxpayer’s Rep: pro se; Article 22

Petitioner submitted a petition signed by his daughter, attached to which was a Consolidated Statement of Tax Liabilities; but which included no statutory notices.  The DTA sent a letter asking Petitioner to submit the statutory notices to which the Consolidated Statement referred.  Petitioner did not submit the statutory notices.  The DTA then sent a Notice of Intent to Dismiss, to which Petitioner did not respond.   Supervising ALJ Friedman dismissed the case because the DTA doesn’t have jurisdiction to question the validity of Consolidated Statements, and because either Petitioner or the Petitioner’s duly-appointed representative needed to sign the petition – Petitioner’s daughter’s signature just didn’t cut it.  No real surprises here.

Matter of McManus; Judge: Maloney; Division’s Rep: Peter Ostwald; Taxpayer’s Rep: pro se; Article 22.  This is a rare pro se residency case. 

Petitioner filed a 2009 part-year resident married filing separate return claiming that he moved into New York on December 30.  He checked the box indicating that he did not maintain living quarters in New York, but then listed a Bronxville address for the purpose of allocating his income.  For the same year, Kaori McManus, Petitioner’s spouse, filed a part-year resident return claiming she moved out of New York on June 28 and spent 221 days in New York.  During the residency audit, Petitioner claimed he had homes in New York, Connecticut, and Missouri.  Petitioner also claimed that he had been a Connecticut domiciliary since 2002, but had not filed Connecticut resident income tax returns until 2009.  Petitioner’s children attended New York schools, and much of Petitioner’s employment was in New York City in years other than 2009 (when he was employed in Missouri).  The auditor’s day count, based on credit card statements, flight records, EZPass statements,  and cell phone records, placed Petitioner in New York for 156 days and in Connecticut for 146 days in 2009.  The auditor determined that Petitioner failed to prove a change in domicile from New York to Connecticut.

Petitioner, a financial professional, worked in New York for most of his career, but he lost his job at Banc of America Securities in April 2008.  He found a replacement position in Missouri in September 2008.  Then, his new employer became a victim of the Great Recession, and he started looking for his next new job back in New York City.  He started in his new position in New York City in April 2010.  At the time of the hearing, Petitioner still worked in New York City.

It seems clear that, as between the Connecticut and Bronxville homes, the nicer one was in Connecticut.  The family spent most weekends and holidays there.  And it seems like most of Petitioner’s near and dear items were in the Connecticut home (airplanes, and—I kid you not—a Copper Beech tree).  Petitioner described the Bronxville home as a convenience because of its access to excellent schools for his two daughters and its proximity to his New York City employers, LaGuardia Airport, and other attractions.  But even though he claimed Connecticut as home,  Petitioner voted in New York (at least through 2009), had cars registered in New York (and not in Connecticut), and was a member of a New York Country Club.  And Petitioner was a little vague as to when, exactly, he changed his domicile to Connecticut.   

Based on the record, the Judge concluded that Petitioner had not proven a change of domicile to Connecticut.  

Matter of Taveras; Judge: Gardiner; Division’s Rep: Adam Roberts; Taxpayer’s Rep: pro se; Articles 28 and 29

This is related to the Division’s audit of a convenience store owned indirectly (i.e. through a wholly-owned corporation) by Petitioner. 

In June 2013, a Tax Technician within the Division sent a letter saying that the business was under audit.  The audit was triggered by a discrepancy between information received by the Division from the business’s suppliers and the business’s sales tax reports.  One might surmise that the business had reported more purchases than sales.  The initial letter included a Proposed Statement of Audit Adjustment with work papers.  I guess the letter must have said something like “Hey, we’re starting an audit.  Now we’re done. Your bill is attached!”  The Division sent another Proposed Statement of Audit Adjustment in September 2013.  Next the case was re-assigned from the Technician to an actual auditor who sent a letter to the business in November 2013 asking the business to respond “as to how the matter will be resolved.”  Then, in April 2014, the Division issued its Notice of Determination to Petitioner.  Curiously, the audit log did not indicate anywhere that the auditor prepared a Notice for Petitioner as a responsible officer.  More curious:  “There are seven detailed notations in the log after receipt of petitioner’s request for conciliation conference. At the end of the log, it has an area to account for time spent on the audit for field, office and assist. The number 0.00 is indicated in each column. The log totals the number of hours worked on the file. The log indicates 0.00.” 

The Judge granted Petitioner’s petition, finding that the Notice was based on estimates and an indirect method which, under the circumstances, lacked a rational basis.  In so finding, the Judge reminded that resorting to an indirect audit method is permitted only when a review of the taxpayer’s records indicates that they provide an inadequate basis for a detailed audit.  In addition, a prerequisite to a thorough review of the taxpayer’s records is an explicit and detailed request by the Division for the taxpayer’s books and records. The Judge found that the Division’s June 2013 letter constituted an explicit request for records since it asked for 10 items.  However, since the hearing record was devoid of any information regarding whether the information was received or reviewed, the Judge found that the Division was prohibited from resorting to the indirect method used to estimate the taxes owed in this case.  

Forgive my conjecture, but I expect that this pro se Petitioner is not a tax professional, and I expect that he did not plead or argue the case like a tax professional would.  Normally, a tax professional would lay out a legal analysis in a written brief that a judge could follow to support his or her determination.  Again, I could be wrong, but I expect that this Petitioner did not provide such a road map.  And this would have made the Judge’s job here much more difficult.  In light of this, I commend Judge Gardiner for going the extra mile to arrive at what seems like the correct result.  

Matter of Taxel; Judge: Gardiner; Division’s Rep: Tobias Lake; Taxpayer’s Rep: Roger Blane; Article 22

Following the Division’s motion to dismiss, the Judge summarily determined that Petitioners were not entitled to an Empire Zone real property tax credit (RPTC) in excess of that permitted by the Division on audit.

Petitioners were owners of an S-corporation that, in turn, owned real property in the Hauppauge Empire Zone (First moment of incredulity: Hauppauge needed an Empire Zone?  Were the Starbucks and Mercedes dealership having trouble making ends meet?).  The S-corporation entered into a payment-in-lieu-of-tax (PILOT) agreement with the local IDA permitting the S corporation to make PILOT payments instead of real property tax payments.  Petitioners then claimed RPTCs for their shares of the PILOT payments made by the S-corporation.   The amounts claimed were in the $350,000 to $390,000 range for each of the four years at issue.  On audit, the Division applied the PILOT cap discussed below to reduce the RPTCs to $104,000 to $158,000 for the years at issue (Second moment of incredulity: this suggests that the PILOTs were more than double of what the real property taxes should have been.  This smells fishy).  

Under the RPTC, shareholders of S-corporations that are Qualified Empire Zone Enterprises (QEZEs) are entitled to a credit equal to their pro rata shares of the eligible real property taxes paid multiplied by two factors that aren’t relevant in this case. Eligible real property taxes include the real property taxes paid by the QEZE for real estate that the QEZE owns in the Empire Zones.  When PILOT payments are made instead of real property tax payments, the RPTC is still available.  However, PILOT payments are subject to a cap which is the product derived by multiplying the undepreciated basis of the real property for federal income tax purposes by the estimated effective full value tax rate in effect where the property is located.  The cap is intended to prohibit PILOTs that are in excess of the real property taxes that would have otherwise been paid.  Here, the Division applied the cap to downward-adjust Petitioners’ RPTC.

In their petition, Petitioners argued that the estimated effective full value tax rate was computed incorrectly because the equalization rate calculated by the State’s Office of Real Property Tax Services (ORPTS) was based on inappropriate market values and comparables.  However, the Judge observed that only a municipality has the right to challenge ORPTS computation of equalization rates, and individual taxpayers have no such rights.  Accordingly, the Judge granted summary judgement in favor of the Division.

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