Source: https://nytaxattorney.com/2014/08/04/from-federal-courts-nys-courts-nys-tax-tribunals-august-2014/
Timestamp: 2019-04-22 12:50:03+00:00

Document:
A unanimous Court of Appeals, reversing, dismissed the long-held interpretation by the Department of Taxation of Tax Law §605[b][b], in a dispute adjudicated first at the administrative level in the Division of Tax Appeals, later affirmed on exception to the Tax Appeals Tribunal and then affirmed in an Article 78 proceeding by a divided appellate panel in the Third Department. Matter of John Gaied v. NYS Tax Appeals Tribunal, 2014 NY Slip Op. 1101. The statutory interpretation at issue involved the asserted imposition by New York of income tax on commuters (or those present in New York for more than 183 days) who also “maintain a permanent place of abode” in New York. The high New York State Court — without extensive discussion — observed that the erroneous interpretation of the lower administrative tax tribunals found no support in the statute or regulations, and consequently lacked a rational basis.
[w]here a taxpayer has a property right to the subject premises, it is neither necessary nor appropriate to look beyond the physical aspects of the dwelling to inquire into the taxpayers’ subjective use of the premises.
[c]onstrained to confirm, since [the court’s] review is limited and the Tribunal’s determination was amply supported by the record. (101 AD3d 1492 [3d Dept 2012]).
Perhaps presciently and ominously for the Department, the majority in the Appellate Division opinion (there were two dissents) conceded that a “contrary conclusion would have been reasonable based upon the evidence presented.” Determined, Mr. Gaied appealed as of right to the Court of Appeals, pursuant to CPLR 5601(a). [Under CPLR 5601(a), an appeal as of right may be taken from an order of the Appellate Division where there is a dissent by at least two justices on a question of law in favor of the party taking the appeal.] Losing at the Court of Appeals would have effectively ended the appeal process for the taxpayer, unless a petition for certiorari were granted by the Supreme Court, a relatively uncommon occurrence in tax cases.
The Court then observed that the Tax Appeals Tribunal had interpreted the word ““maintain” in such a manner that, for purposes of the statute, the taxpayer need not have resided there. A unanimous Court held that this interpretation had “no rational basis.” Both the legislative history and the regulations supported the view that in order to maintain a permanent place of abode in New York, the taxpayer “must, himself, have a residential interest in the property.” The Court properly declined to speculate as to the amount of time that a nonresident would be required to spend in the New York residence — or to elaborate upon any other factor justifying the conclusion that a taxpayer “maintained” a permanent place of abode in New York — since that issue was not before the Court. However, given the tenor of the language of the Court, it might appear reasonable to infer that a nonresident taxpayer spending only a de minimus amount of time in a dwelling maintained in New York might not thereby become subject to New York income tax.
The First Department, reversing the trial court, held that the retroactive application of a tax law defining New York source income as including an item that had not previously been New York source income violated Due Process, since the taxpayer had reasonably relied on the old law in structuring the transaction and a substantial amount of time had elapsed. Caprio v. NYS DTF, 2014 NY Slip Op 02399. Plaintiffs, a married couple and Florida residents, were former owners of a company transacting business in New York. The corporation had elected S-status for federal and New York purposes. In 2007 plaintiffs sold their stock for $20 million under an installment agreement. The parties to the sale made an election pursuant to IRC §338(h)(10) to treat the stock sale as an asset sale, followed by a complete liquidation. Plaintiffs reported capital gain of over $18 million on their 2007 federal return, but reported no gain on their 2007 nonresident New York return.
Meanwhile, in 2009 the Division of Tax Appeals determined in Matter of Mintz (2009 WL 1657395) that gains from the sale of stock held by a nonresident were not New York source income. Following Mintz, Tax Law §632(a)(2) was amended to provide that gain recognized on receipt of payments from an installment obligation distributed by an S corporation would be treated as New York source income. In February 2011, the Department of Taxation (DTF) issued a notice of deficiency and assessed $775,000 in tax and interest. Plaintiffs sued, claiming an unconstitutional violation of Due Process by reason of the retroactive application of the new law. DTF moved for summary judgment dismissing the Complaint. Plaintiffs cross-moved for summary judgment declaring the retroactive application of the statute unconstitutional. The trial court granted summary judgment to DTF and dismissed the suit. On appeal, the First Department declared that the retroactive application of the statute was unconstitutional, and enjoined the Department from enforcing the notice of deficiency.
The Court noted preliminarily that its review of factual matters determined by the Tax Court was “particularly narrow when the issue is one of value” and that the conclusion of the Tax Court must be upheld if supported by “substantial evidence.” The Court then recited the familiar precept that the fair market value of property is based upon a hypothetical willing buyer–willing seller rule. The Court acknowledged that while encumbrances on real property generally reduce value, the grant of a conservation easement may, according to the regulations, increase the value. In the instant case, the appraisal the taxpayer obtained failed to take into account the particular facts and circumstances. The appraiser merely opined as to an IRS “accepted range” of percentages, which was inadequate. The IRS, on the other hand, analyzed “the particular terms of the easement, zoning laws, and regulations” and concluded that the grant of the easement did not materially affect the value of the property. Ironically, the witness proffered by the taxpayer — the Chairman of the Fort Greene Association — testified that the Fort Greene Historic District was an “economic engine,” from which the Tax Court had properly concluded that the preservation of the façade was a benefit, rather than a detriment, to the property.
The case underscores the importance of obtaining a qualified appraisal. Ironically, even if the taxpayer had been armed with a qualified appraisal, she would probably not have emerged victorious. Courts have been skeptical of deductions taken for conservation easements for good reason. It is difficult to perceive how promising not to destroy the faççade of an historic building could reduce its value. The problem almost strays into an epistemological area: Yes, the façade has value, and yes, the gift of the faççade would logically reduce the value of the building. However, if the façade remains attached to building, is it even possible that a gift had been made?
This entry was posted in Federal Tax Litigation, IRS Matters, New York State Income Tax, New York State Tax Litigation, NYS Dept. of Tax'n & Finance, NYS DTF Matters, NYS Residency, NYS Tax Litigation, Tax News & Comment and tagged article 78 tax appeals, caprio v. nys dtf, Conservation Easement, Gaied, matter of tamagni, NYS residency test, nys tax legislation, retroactive tax legislation, schneidelman v. com'r, tax appeals tribunal, Tax Law 605(b)(1)(B). Bookmark the permalink.

References: §605
 v. 
 v. 
 §338
 §632
 v. 
 v.