Court Opinion

ID: 2809739
Source: CourtListenerOpinion
Date Created: 2015-06-18 14:13:16.125788+00
Date Added: 2024-06-11T12:11:49.178518
License: Public Domain

State of New York
                   Supreme Court, Appellate Division
                      Third Judicial Department
Decided and Entered: June 18, 2015                     519512
________________________________

In the Matter of DAVID AYOUB
   et al.,
                    Petitioners,
      v
                                            MEMORANDUM AND JUDGMENT
TAX APPEALS TRIBUNAL OF THE
   STATE OF NEW YORK et al.,
                    Respondents.
________________________________

Calendar Date:   April 28, 2015

Before:   Peters, P.J., Lahtinen, McCarthy and Rose, JJ.

                             __________

      Centolella Lynn D'Elia & Temes, LLC, Syracuse (Timothy M.
Lynn of counsel), for petitioners.

      Eric T. Schneiderman, Attorney General, Albany (Robert M.
Goldfarb of counsel), for Commissioner of Taxation and Finance,
respondent.

                             __________

Peters, P.J.

      Proceeding pursuant to CPLR article 78 (initiated in this
Court pursuant to Tax Law § 2016) to review a determination of
respondent Tax Appeals Tribunal which sustained notices of
deficiency of personal income tax imposed under Tax Law article
22.

      This proceeding concerns petitioners' entitlement to
Qualified Empire Zone Enterprise (hereinafter QEZE) tax reduction
credits and refundable Empire Zone (hereinafter EZ) wage credits
flowing from their membership interests in an accounting practice
operating under the name Bowers & Company, CPAs, PLLC
                              -2-                519512

(hereinafter MGD/Bowers) for the 2006, 2007 and 2008 tax years.
The Tax Law provides for tax reduction credits against personal
income tax for a member of a partnership that is certified as a
QEZE (see Tax Law §§ 16 [a]; 606 [cc]). A QEZE is defined as
"[a] business enterprise" that is certified under General
Municipal Law article 18-B and meets the employment test (Tax Law
§ 14 [a]). For purposes of the QEZE tax reduction credit, the
date that the business enterprise is first certified is
significant. As to a business enterprise first certified between
August 1, 2002 and March 31, 2005 with a base period of zero
taxable years, the employment test is met only if the enterprise
qualifies as a "new business" (Tax Law § 14 [b] [1]; [j] [2]).
In contrast, a business enterprise first certified prior to
August 1, 2002 need not qualify as a new business to meet the
employment test (see Tax Law § 14 [b] [1]).1

      MGD/Bowers was originally formed as a single-member New
York limited liability company as part of a plan to combine the
operations of two Syracuse-based accounting firms – Dermody,
Burke & Brown, Certified Public Accountants, P.C. (hereinafter
DBB) and Pasquale & Bowers LLP. The single-member PLLC obtained
certification as a QEZE under General Municipal Law article 18-B
in July 2002 and, thereafter, a certificate of amendment of the
articles of organization was filed changing the name of that
entity to Dermody, Burke & Brown, Certified Public Accountants,
PLLC (hereinafter Dermody PLLC). In January 2003, Dermody PLLC
began operations and 20 members were admitted to the practice, 14
of whom had been shareholders of DBB and the other six of whom
had been partners at Pasquale & Bowers.

      In July 2004, the members of Dermody PLLC entered into a
separation agreement wherein the practice separated in a similar
proportion to how it had been formed. Pursuant to that

    1
        The question regarding the applicable date of
certification is relevant only with regard to petitioners' claims
for QEZE tax reduction credits, as claims for refunds of EZ wage
credits are subject to the new business requirement regardless of
the date of certification (see Tax Law § 606 [a] [10] [A]; [k]
[5]).
                              -3-                519512

agreement, the former shareholders of DBB had their membership
interests in Dermody PLLC redeemed and formed a new entity,
leaving only the former partners of Pasquale & Bowers as members.
The separation agreement further provided that the redemptions of
the membership interests were, for tax purposes, intended to be
treated as an assets-over form division of a partnership whereby
one of the resulting partnerships is a continuation of the former
partnership. Accordingly, notwithstanding its retention of the
corporate form, the post-separation Dermody PLLC – as the
resulting partnership whose members had less than a 50% interest
in the capital and profits of the prior partnership – became a
new partnership for federal tax purposes (see Internal Revenue
Code [26 USC] § 708 [b] [2] [B]; 26 CFR 1.708-1 [d] [1]). A
certificate of amendment to the entity's articles of organization
was again filed changing its name to MGD/Bowers. MGD/Bowers
applied for and was granted certification as a QEZE in August
2004.

      Following an audit of petitioners' personal income tax
returns for the 2006, 2007 and 2008 tax years, the Division of
Taxation and Finance determined that petitioners were not
entitled to the claimed QEZE tax reduction credits and refundable
EZ wage tax credits and issued notices of deficiency assessing
additional personal income tax due, plus interest. After a
hearing, an Administrative Law Judge sustained the notices of
deficiency with certain modifications not relevant here,
concluding that MGD/Bowers was a business enterprise first
certified as a QEZE in August 2004, not July 2002, and did not
qualify as a new business pursuant to Tax Law § 14 (j). That
determination was affirmed by respondent Tax Appeals Tribunal,
and this CPLR article 78 proceeding ensued.

      The parties' primary disagreement here centers on whether
the term business enterprise under Tax Law § 14 (a) refers to the
taxable entity or the legal entity. The Tax Law does not define
business enterprise, and this Court will "defer to the
governmental agency charged with the responsibility for
administration of [a] statute in those cases where interpretation
or application involves knowledge and understanding of underlying
operational practices" (Matter of New York State Superfund
Coalition, Inc. v New York State Dept. of Envtl. Conservation, 18
                              -4-                519512

NY3d 289, 296 [2011] [internal quotation marks and citation
omitted]; accord Matter of County of Albany v Hudson Riv.-Black
Riv. Regulating Dist., 97 AD3d 61, 66-67 [2012], lv denied 19
NY3d 816 [2012]; see Matter of Kent v Cuomo, 124 AD3d 1185, 1186
[2015]). While, as a general rule, courts will not defer to
administrative agencies in matters of pure statutory
interpretation, where, as here, the question is "'one of specific
application of a broad statutory term in a proceeding in which
the agency administering the statute must determine it
initially,'" deference is appropriate (Matter of Easylink Servs.
Intl., Inc. v New York State Tax Appeals Trib., 101 AD3d 1180,
1182 [2012], lv denied 21 NY3d 858 [2013], quoting Matter of
American Tel. & Tel. Co. v State Tax Commn., 61 NY2d 393, 400
[1984]; see Matter of Lyell Mt. Read Bus. Ctr. LLC v Empire Zone
Designation Bd., ___ AD3d ___, ___, 2015 NY Slip Op 03906, *7
[2015]; Matter of Stevenson v New York State Tax Appeals Trib.,
106 AD3d 1146, 1147 [2013]). To prevail over the Tribunal's
construction of the statute, petitioners must establish that
their "interpretation of the statute is not only plausible, but
also that it is the only reasonable construction" (Matter of
Stevenson v New York State Tax Appeals Trib., 106 AD3d at 1147
[internal quotation marks and citations omitted]; see Matter of
Charter Dev. Co., L.L.C. v City of Buffalo, 6 NY3d 578, 582
[2006]; Matter of 677 New Loudon Corp. v State of N.Y. Tax
Appeals Trib., 85 AD3d 1341, 1342 [2011], affd 19 NY3d 1058
[2012], cert denied ___ US ___, 134 S Ct 422 [2013]).

      In our view, it cannot be said that the Tribunal acted
irrationally in construing the term business enterprise in
accordance with an entity's classification for state and federal
income tax purposes. As the Tribunal noted, the Tax Law does not
allow for QEZE tax reduction credits based upon membership in a
limited liability company (hereinafter LLC), such as MGD/Bowers,
because such an entity is not recognized for income tax reporting
(see Tax Law §§ 16 [a]; 606 [cc]; 26 CFR 301.7701-3 [a]).
Rather, an LLC is only recognized in accordance with how its
members elect to be treated for state and federal tax purposes,
i.e., either as a corporation or a partnership (see Tax Law § 601
[f]). The Tribunal thus logically concluded that Empire Zone
attributes – such as a QEZE certification – do not follow the LLC
entity, but rather are obtainable only through the reporting
                              -5-                519512

classification chosen by the LLC, and that the question of
whether MGD/Bowers should be considered the same business
enterprise as that which existed prior to the separation of
Dermody PLLC is therefore dependent upon whether it is considered
the same partnership for income tax purposes. As noted, when
Dermody PLLC separated into two separate partnerships in July
2004, MGD/Bowers became a new partnership for tax purposes and,
accordingly, was considered a separate and distinct business
enterprise from that certified as a QEZE in July 2002. As the
Tribunal rationally determined that MGD/Bowers, as it existed
during the tax years at issue, was first certified as a QEZE
between August 1, 2002 and March 31, 2005, petitioners'
entitlement to the claimed credits hinged on whether MGD/Bowers
qualified as a new business under Tax Law § 14.2

      A new business is one that is not "substantially similar in
operation and in ownership" to a taxable or previously taxable
business entity (Tax Law § 14 [j] [2]). There can be no dispute
that, during the 2006, 2007 and 2008 tax years at issue, the
post-separation MGD/Bowers was substantially similar in ownership
to Pasquale & Bowers, as both entities consisted of the very same
members. With regard to its operations, while testimony was
presented regarding several changes that were undertaken
following the merger of Pasquale & Bowers and DBB, the
Administrative Law Judge took particular note of the fact that
MGD/Bowers' client base following the breakup of Dermody PLLC was
the same as that of Pasquale & Bowers. Moreover, petitioners
failed to demonstrate that any such changes in operation were
made before or during the tax years at issue, as opposed to some

    2
        Petitioners also assert that, even if the August 2004
certification controls their claims for QEZE tax reduction
credits, MGD/Bowers is still not required to qualify as a new
business in order to meet the employment test because it has a
base period of more than zero years (see Tax Law § 14 [c]). As
the Tribunal properly concluded, however, inasmuch as MGD/Bowers
was deemed a newly formed partnership upon the separation of
Dermody PLLC in 2004, it could not rely upon the tax attributes
of the prior, distinct partnership to which its members no longer
belonged.
                              -6-                  519512

later point in time. Mindful that statutes providing for tax
credits are construed narrowly and that the burden of proving
entitlement to such credits rests with the taxpayer (see Matter
of Piccolo v New York State Tax Appeals Trib., 108 AD3d 107,
111-112 [2013]), we conclude that the Tribunal's finding that
MGD/Bowers was substantially similar to Pasquale & Bowers is
"rationally based upon and supported by substantial evidence"
(Matter of Ingle v Tax Appeals Trib. of the Dept. of Taxation &
Fin. of the State of N.Y., 110 AD3d 1392, 1393 [2013] [internal
quotation marks and citations omitted]; accord Matter of Luongo v
Tax Appeals Trib. of the State of N.Y., 117 AD3d 1286, 1289
[2014]; see Matter of Hwang v Tax Appeals Trib. of the State of
N.Y., 105 AD3d 1151, 1152 [2013]; Matter of Salh v Tax Appeals
Trib. of the State of N.Y., 99 AD3d 1124, 1125 [2012], lv denied
20 NY3d 863 [2013]). Accordingly, its determination that
petitioners were not entitled to the claimed QEZE tax reduction
credits and refundable EZ wage credits must be confirmed.

      Petitioners' remaining contentions, to the extent not
specifically addressed herein, have been reviewed and found to be
lacking in merit.

     Lahtinen, McCarthy and Rose, JJ., concur.

      ADJUDGED that the determination is confirmed, without
costs, and petition dismissed.

                             ENTER:

                             Robert D. Mayberger
                             Clerk of the Court