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Non-Resident Shareholders In an S Corporation Who Sold their Stock and Treated the Transaction as a “Deemed Asset Sale” Were Properly Assessed New York Income Tax on the New York-Source Aspects of the Sale

The Court of Appeals, in a full-fledged opinion by Judge Rivera, determined non-resident plaintiffs, shareholders in an S corporation who sold their stock and treated the transaction as a “deemed asset sale,” were properly assessed New York income taxes on the New York-source aspects of the sale pursuant to Tax Law 632. The court rejected the argument that the tax assessment violated Article 16 section 3 of the New York Constitution:

Based on the results of [an] audit, defendant New York State Department of Taxation and Finance assessed $167,000 in state income taxes on plaintiffs’ … transaction gains, relying on Tax Law § 632 (a) (2), which was amended in 2010 to provide, in relevant part, that “any gain recognized on [a] deemed asset sale for federal income tax purposes will be treated as New York source income.” Plaintiffs paid the taxes and thereafter demanded refunds, claiming that their corporate-derived income was obtained from the sale of … stock, which is considered intangible personal property and nontaxable.

After defendant rejected the refund demands, plaintiffs filed the instant declaratory judgment action against defendant and the Commissioner of the New York State Department of Taxation and Finance, challenging the tax as unconstitutional … . * * *

…. [T]here is no question that New York State’s Tax Law, including Tax Law § 632 (a) (2), as amended in 2010, contemplates the taxes that defendants assessed on the New York-source portion of plaintiffs’ deemed asset sale gains. * * *

Nothing changes the fact that plaintiffs sold something of value and reaped the benefits from that sale. Article 16, § 3 in no way supports plaintiffs’ attempts to avoid paying state taxes on those gains. Burton v New York State Dept. of Taxation & Fin., 2015 NY Slip Op 05624, CtApp 7-1-15

 

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Property Was Not Transferred Until Escrow Conditions Were Met—Appellant Did Not Own the Building Where Plaintiff Slipped and Fell Because the Escrow Conditions Were Not Met and the Deed Was Not Released from Escrow Until the Day After the Slip and Fall

Reversing Supreme Court, the Second Department determined appellant did not own the property on the day plaintiff slipped and fell. The “preclosing” on the sale of the property to appellant took place on the day of the accident. But the deed was held in escrow until the escrow conditions were met on the day following the accident. Therefore the property was not transferred to the appellant until the day after the accident:

“When a deed is delivered to be held in escrow, the actual transfer of the property does not occur until the condition of the escrow is satisfied and the deed is subsequently delivered to the grantee by the escrow agent”… . Here, the appellant established its prima facie entitlement to judgment as a matter of law by submitting proof that the actual transfer of the property to the appellant did not occur until the conditions of the escrow were satisfied and the deed was thereafter released by the escrow agent on [the day after the accident]. As a result, the appellant demonstrated that it did not own or otherwise control the subject property on the date of the plaintiff’s alleged accident … . Camac v 550 Realty Hgts., LLC, 2015 NY Slip Op 05631, 2nd Dept 7-1-15

 

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Motion to Intervene by Members of a De-Certified Class Should Have Been Granted—Class Members Allowed to Sue In Their Individual Capacities

The Second Department determined the motion to intervene by plaintiffs and 167 residents in a de-certified class action alleging environmental damage resulting from emissions from defendant’s (BNL’s) lab should have been granted. The action began as a class action suit which was dismissed without prejudice. Then, in accordance with CPLR 1013, the individuals in the class brought a motion to intervene accompanied by a complaint which was denied by Supreme Court.  The Second Department held the motion to intervene should have been granted and further held that the statute of limitations had been tolled from the time the class action proceedings were commenced:

… [T]he plaintiffs, along with 167 members of the proposed classes, moved together for leave to allow those 167 proposed class members to intervene in the action as plaintiffs pursuant to CPLR 1013, on the ground that “when a class action is de-certified, putative members of the de-certified class are given the opportunity to intervene into the case because of their allegations of common questions of law and fact.” The plaintiffs and the proposed intervenors (hereinafter collectively the appellants) alleged that the proposed intervenors owned property in the vicinity of BNL in 1996 and after, and presented common questions of law and fact with respect to loss of property values, and the cost of using municipal water instead of well water. They submitted a third amended complaint in support of their motion. * * *

… [T]he causes of action of the proposed intervenors are all based upon common theories of liability and, thus, satisfy the requirement of CPLR 1013 that their causes of action involve common questions of law or fact. Contrary to the Supreme Court’s conclusion, BNL would not be faced with a “plethora of new claims.” Moreover, BNL did not demonstrate that intervention would substantially prejudice any party, or cause undue delay … .

To the extent BNL argues, as an alternate ground for affirmance , that the claims of the proposed intervenors are time-barred, this contention is without merit. The statute of limitations applicable to this toxic tort action is the three-year statute of limitations pursuant to CPLR 214-c, which runs from the date of discovery or the date when the injury should have been discovered through the exercise of due diligence … . In American Pipe & Constr. Co. v Utah (414 US 538, 553), the United States Supreme Court held that, under the federal class action rule, commencement of a class action suit tolls the running of the statute of limitations for all purported members of the class who make timely motions to intervene after the court has found the suit inappropriate for class action status. New York courts have adopted this rule … . Osarczuk v Associated Univs., Inc., 2015 NY Slip Op 05653, 2nd Dept 7-1-15

 

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“Conclusory” Allegation Rear-End Collision Was Caused by the Sudden Stop of the Lead Vehicle Is Not Enough to Defeat Plaintiffs’ Summary Judgment Motion

Reversing Supreme Court, the Second Department determined plaintiffs, who were struck from the rear in a vehicle collision, were entitled to summary judgment. A “conclusory” allegation by the defendant that plaintiffs’ vehicle caused the accident by stopping suddenly was not enough to defeat the motion.  The court explained the relevant law:

“When the driver of an automobile approaches another automobile from the rear, he or she is bound to maintain a reasonably safe rate of speed and control over his vehicle, and to exercise reasonable care to avoid colliding with the other vehicle” … .

“A rear-end collision with a stopped or stopping vehicle creates a prima facie case of negligence against the operator of the rear vehicle, thereby requiring that operator to rebut the inference of negligence by providing a nonnegligent explanation for the collision”‘ … .

A nonnegligent explanation for a rear-end collision may include evidence of a sudden stop of the lead vehicle … . However, “vehicle stops which are foreseeable under the prevailing traffic conditions, even if sudden and frequent, must be anticipated by the driver who follows, since he or she is under a duty to maintain a safe distance between his or her car and the car ahead”… . Moreover, “[a] conclusory assertion by the operator of the following vehicle that the sudden stop of the vehicle caused the accident is insufficient, in and of itself, to provide a nonnegligent explanation” … . Brothers v Bartling, 2015 NY Slip Op 05630, 2nd Dept 7-1-15

 

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Retroactive Application of Tax Law 632 Amendments, Which Clarified that Installment Payments Re: a Deemed Asset Sale Will Be Treated as New York-Source Income, Did Not Violate Plaintiffs’ Due Process Rights

The Court of Appeals, in a full-fledged opinion by Judge Stein, in an action raising many of the same income-tax-law issues raised in Burton v New York State Dept. of Taxation & Fin., 2015 NY Slip Op 05624, CtApp 7-1-15 (summarized directly above), determined plaintiffs’ due process rights were not violated by the retroactive application of Tax Law 632. The case concerned the taxation of installment payments re: a deemed asset sale of stock in an S corporation. The 2010 amendments of Tax Law 632 clarified that the installments will be treated as New York-source income and made the amendments retroactive for 3 1/2 years. The Court of Appeals determined: (1) plaintiffs’ interpretation of the prior law was not reasonable and therefore plaintiffs did not establish reliance on the prior law; (2) the length of the retroactive period was not excessive; and (3),  the amendment (correcting an error and preventing revenue loss) served a valid public purpose. The court explained the nature of the amendments and the analytical criteria for determining the validity of retroactive application:

Prior to its amendment, Tax Law § 632 mandated only that, as relevant here:

“In determining New York source income of a nonresident shareholder of an S corporation . . . there shall be included only the portion derived from or connected with New York sources of such shareholder’s pro rata share of items of S corporation income, loss and deduction entering into his federal adjusted gross income . . .”

The 2010 amendments clarified, among other things, that if the S corporation distributed an installment obligation under 26 USC § 453 (h) (1) (A) or made a deemed asset sale election under 26 USC § 338 (h) (10), “any gain recognized on the receipt of payments from the installment obligation . . . [or] on the deemed asset sale for federal income tax purposes will be treated as New York source income” (L 2010, ch 57, Part C § 2). The amendments were made retroactive to all taxable years beginning on or after January 1, 2007 — which represent those years for which the statute of limitations for seeking a refund or assessing additional tax was still open (L 2010, ch 57, Part C, § 4, amended L 2010, ch 312, Part B, § 1) — thus, effectively creating a 3½ year period of retroactivity. * * *

While “retroactive legislation does have to meet a burden not faced by legislation that has only future effects[,] . . . that burden is met simply by showing that the retroactive application of the legislation is itself justified by a rational legislative purpose” … . In analyzing whether a statute is harsh and oppressive — and, thus, arbitrary and irrational — this Court uses a balancing-of-equities test … :

“The important factors in determining whether a retroactive tax transgresses the constitutional limitation are (1) ‘the taxpayer’s forewarning of a change in the legislation and the reasonableness of . . . reliance on the old law,’ (2) ‘the length of the retroactive period,’ and (3) ‘the public purpose for retroactive application'” … . Caprio v New York State Dept. of Taxation & Fin., 2015 NY Slip Op 05625, CtApp 7-1-15

 

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The Defendants, Lessees of the Property Abutting the Sidewalk, Demonstrated in their Summary Judgment Motion that there Was No Statute or Ordinance Imposing Liability on Lessees for Failure to Clear Snow and Ice from the Sidewalk, But the Defendants Did Not Affirmatively Demonstrate They Did Not Make the Condition More Hazardous by their Snow Removal Efforts—Therefore the Summary Judgment Motion Must Be Denied Without Reference to the Answering Papers

The Second Department determined defendants, who leased the premises abutting a sidewalk in Brooklyn, were not entitled to summary judgment dismissing a “snow and ice” slip and fall complaint. The defendants demonstrated that there was no statute or ordinance imposing tort liability. However the defendants failed to affirmatively demonstrate that their snow removal efforts did not make conditions more hazardous (another example of the need for a defendant bringing a summary judgment motion to address every possible theory of liability):

” The owner or lessee of property abutting a public sidewalk is under no duty to remove ice and snow that naturally accumulates upon the sidewalk unless a statute or ordinance specifically imposes tort liability for failing to do so'” … . “In the absence of a statute or ordinance imposing tort liability on the lessee, it can be held liable only if it, or someone on its behalf, undertook snow and ice removal efforts which made the naturally-occurring conditions more hazardous” … .

Here, the … defendants, as lessees of the property, established that no statute or ordinance imposed tort liability on them (cf. Administrative Code of City of NY 7-210 [applicable to owners of real property]). However, they failed to make a prima facie showing that there were no efforts to clear the sidewalk on the date of the injured plaintiff’s accident or that any snow and ice removal efforts undertaken by them or by persons on their behalf did not exacerbate the hazardous condition which allegedly caused the injured plaintiff to fall … . Forlenza v Miglio, 2015 NY Slip Op 05639, 2nd Dept 7-1-15

 

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Question of Fact Re: Whether Dog Had Exhibited Vicious Propensities Prior to Plaintiff’s Injury Precluded Summary Judgment

The Second Department determined questions of fact about whether the dog exhibited vicious propensities prior to plaintiff’s injury precluded summary judgment in a dog bite case.  The court explained the relevant law, noting that no negligence cause of action for a dog bite exists in New York:

Aside from the limited exception …, regarding a farm animal that strays from the place where it is kept …, which is not at issue here, “New York does not recognize a common-law negligence cause of action to recover damages for injuries caused by a domestic animal” … . Thus, “[t]o recover upon a theory of strict liability in tort for a dog bite or attack, a plaintiff must prove that the dog had vicious propensities and that the owner of the dog . . . knew or should have known of such propensities” … . Vicious propensities include the propensity to do any act that might endanger the safety of the persons and property of others … . “Evidence tending to prove that a dog has vicious propensities includes a prior attack, the dog’s tendency to growl, snap, or bare its teeth, the manner in which the dog was restrained, and a proclivity to act in a way that puts others at risk of harm” … .

Here, the plaintiff failed to establish her prima facie entitlement to judgment as a matter of law on the issue of the defendant’s liability. In support of her motion, the plaintiff submitted her deposition testimony that, although the dog had barked “aggressively” at her prior to the incident, she had never observed the dog attack any person or another pet prior to this incident. The plaintiff also submitted the deposition testimony of a neighbor who, on two separate occasions prior to the instant attack, observed the dog growl, bark, bare its teeth, and jump at a person. Significantly, the neighbor testified that the defendant was present during both of the prior incidents. However, in support of her motion, the plaintiff submitted the deposition testimony of the defendant, who maintained that, prior to the attack on the plaintiff, the dog had never attacked any person or any other dog, and had never acted threateningly toward anyone. The defendant further testified that, although the dog might have barked at times, no one had ever complained to her about the dog or reported to her that they felt threatened by the dog. This evidence demonstrated the existence of triable issues of fact as to whether the dog displayed vicious propensities prior to the plaintiff’s attack, or if it did, whether the defendant was aware of such propensities … . Ostrovsky v Stern, 2015 NY Slip Op 05654, 2nd Dept 7-1-15

 

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Parking Lots Owned by a Federal-Income-Tax-Exempt Charitable Organization Formed to Facilitate Commercial Development Were Not Entitled to a Charitable Exemption from Real Property Taxes—The Parking Lots Were “Used” to Increase Commerce Which Is Not a Charitable Use Under the Real Property Tax Law

The Court of Appeals, in a full-fledged opinion by Judge Pigott, over a two-judge dissent, determined that parking lots owned by “Greater Jamaica” were not entitled to a charitable exemption from real estate taxes.  “Greater Jamaica” is an organization formed for the purpose of facilitating Jamaica’s commercial development.  It is exempt from federal income taxation pursuant to 26 USC 501 (c) (3).  The NYC Department of Finance (DOF) revoked Greater Jamaica’s exemption from real estate taxes which the DOF had previously granted. Supreme Court upheld the revocation. The Appellate Division reversed Supreme Court. And the Court of Appeals reversed the Appellate Division. The Court of Appeals noted that the criteria for a charitable exemption under the IRS code is different from the criteria under Real Property Tax Law (RPTL) 420-a and, although a court may consider the IRS exemption in a RPTL 420-a proceeding, the IRS exemption is not determinative. The Court of Appeals concluded the parking lots were primarily used to facilitate the commercial growth of Jamaica, which was not a charitable purpose under the RPTL:

The City revoked the tax exemption on the ground that it was erroneously awarded in the first instance. It met its burden in this regard by demonstrating that the “use” of the parking facilities was not for “charitable” purposes but rather for economic development, and that the use of the parking facilities were not “incidental to another recognized charitable [*6]purpose.” Specifically, the City’s revocation letter explained that the City reached its determination after reviewing documents submitted to it by Greater Jamaica and case law from this Court. The City also explained why it believed that the status granted Greater Jamaica by the IRS had no bearing on the issue of “charitable use” of the parking facilities under section 420-a. The letter stated that although the parking facilities may have served “an important public purpose and support[ed] development of a community,” those factors did not qualify the facilities for a charitable exemption. Indeed, according to the City’s review of the ownership structure of the lots along with other documentation, it appeared that Jamaica First collected monies that exceeded the carrying, maintenance and depreciation charges attributable to the premises and that Jamaica First utilized those excess proceeds to fund other additional operations, such as the purchase of an additional parking lot. * * *

Although we do not disturb the Appellate Division’s holding that petitioners met the “organized or conducted exclusively for . . . charitable . . . purposes” prong of the tax exemption test, we part company with the Appellate Division relative to its holding that “petitioners demonstrated that the use of their public parking facilities was consistent with their exempt purpose, as expressly noted by the IRS in granting such operation tax exempt status” … . By so holding, the Appellate Division utilized the petitioners’ organizational status’ under Internal Revenue Code (26 USC) § 501 (c) (3) to support its holding that petitioners’ demonstrated that the use of the parking facilities was for an exempt purpose. This was error. …

… [T]he IRS’s definition of what constitutes an exempt “charitable” purpose is exceedingly broad, including, among other things, “the lessening of the burdens of [g]overnment” (26 CFR 1.501 [c] [3]-1 [d] [2]), while the second prong of section 420-a (1) (a) requires a court to review “the actual or physical use of the property when it exempts from taxation property ‘used exclusively for carrying out thereupon one or more’ exempt purposes” … . Thus, our analysis under section 420-a is concerned with the “use” of the parking facilities as a whole, and whether the facilities are “used exclusively for carrying out thereupon one or more of [section 420-a’s] purposes.” * * *

We disagree with petitioners’ assertion that the parking facilities are charitable in and of themselves because they fulfill the primary purpose of economic development. The economic benefit conveyed by below-market rate parking, however, inures to the benefit of private enterprise and cannot be said to further any charitable purpose. It lessens the burden of local businesses, obviating any need for them to make their own parking arrangements for prospective customers. The below-market rates that the facilities charge provide an incentive for the public to patronize those businesses, providing a dual benefit for local business and a benefit to prospective customers of those businesses. While these goals may be laudable, they are not charitable. Matter of Greater Jamaica Dev. Corp. v New York City Tax Commn., 2015 NY Slip Op 05620, CtApp 7-1-15

 

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Constructive Trust Properly Imposed—Sister, Who Was Not Included on the Original Deed Because of Credit Problems, Contributed One-Third of the Downpayment Based Upon a Promise She Would Be Added to the Deed at a Later Time

The Second Department determined a constructive trust was properly imposed on property for which the plaintiff provided one-third of the downpayment.  Plaintiff Reynida Diaz was not included on the original deed with her two sisters because of her credit history. There was an agreement among the sisters that Reynida would be added to the deed at a later time. Defendant sister refused to add Reynida to the deed. The court explained the requirements for a constructive trust:

In general, the imposition of a constructive trust is appropriate in situations when ” property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest'” … . The elements of a constructive trust are (1) a fiduciary or confidential relationship; (2) an express or implied promise; (3) a transfer in reliance on the promise; and (4) unjust enrichment … . A party must establish the elements of a constructive trust by clear and convincing evidence … .

There is no dispute that the first element, a confidential relationship, exists among the sisters …, a fact conceded by the defendant. As to the second element, the testimony of the two plaintiff sisters, the defendant, and a family friend, as well as the documentary evidence, established the existence of an express agreement among the parties at the time the subject property was purchased that Reynida Diaz would be added to the deed at some later date … . The plaintiffs also established the transfer in reliance element in that, at the time of the purchase of the subject property, Reynida Diaz had given the defendant $13,000, the same amount contributed by the defendant and the other plaintiff, in exchange for the promise of being added to the title as a co-owner at a later date … . The fourth element, that the defendant would be unjustly enriched if the constructive trust was not imposed, was also established in that the defendant had received the $13,000 from Reynida Diaz, as well as payments from her toward the monthly mortgage and maintenance of the property equal to the amounts contributed by the defendant and the other plaintiff who was on the deed to the subject property … . Diaz v Diaz, 2015 NY Slip Op 05635, 2nd Dept 7-1-15

 

 

 

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Local Law, Which Regulates the Conduct of Attorneys Who Regularly Engage in (Nonlegal) Activities Traditionally Performed by Debt Collectors, Not Preempted by the Judiciary Law

The Court of Appeals, over a two-judge dissent, answering a certified question from the Second Circuit, determined that New York City’s Local Law 15, which regulates debt-collection practices, including some debt-collection practices used by attorneys, was not preempted by the Judiciary Law. The Local Law only reaches attorneys who regularly engage in activities traditionally performed by debt collectors. The court found no conflict between the Local Law and the Judiciary Law (no “conflict” preemption). And the court found that the Judiciary Law does not evince an intent to preempt the field of regulating nonlegal services performed by attorneys (no “field” preemption):

Local Law 15, enacted in 2009, amended the debt collection legislation in several ways. Significantly, it expanded the definition of “debt collection agency” to “include a buyer of delinquent debt who seeks to collect such debt either directly or through the services of another by, including but not limited to, initiating or using legal processes or other means to collect or attempt to collect such debt” (Administrative Code of City of NY § 20-489 [a]). The amendments continued a limited exemption for attorneys or law firms that were “collecting a debt in such capacity on behalf of and in the name of a client solely through activities that may only be performed by a licensed attorney” (Administrative Code of City of NY § 20-489 [a][5]). The exemption, however, did not cover “any attorney-at-law or law firm or part thereof who regularly engages in activities traditionally performed by debt collectors, including, but not limited to, contacting a debtor through the mail or via telephone with the purpose of collecting a debt or other activities as determined by rule of the commissioner” (Administrative Code of City of NY § 20-489 [a][5]). * * *

Plaintiffs assert both conflict and field preemption in connection with the argument that Local Law 15 is preempted by the Judiciary Law. The Local Law, by its terms, governs the conduct of debt collection agencies. Although attorneys that are acting in a debt collecting capacity may fall within its penumbra, it does not purport to regulate attorneys as such. In fact, it clearly states that it does not pertain to attorneys who are engaged in the practice of law on behalf of a particular client. There is no express conflict between the broad authority accorded to the courts to regulate attorneys under the Judiciary Law and the licensing of individuals as attorneys who are engaged in debt collection activity falling outside of the practice of law and, thus, the Local Law does not impose an additional requirement for attorneys to practice law. Rather, the regulatory schemes can be seen as complementary to, and compatible with, one another. * * *

The courts’ authority to regulate attorney conduct does not evince an intent to preempt the field of regulating nonlegal services rendered by attorneys. “Intent to preempt the field may ‘be implied from the nature of the subject matter being regulated and the purpose and scope of the State legislative scheme, including the need for State-wide uniformity in a given area'” (People v Diack, 24 NY3d 674, 679 [2014] [citations omitted]). Although the courts may have preempted the field of regulating attorney misconduct, that authority does not extend to all nonlegal aspects of attorney behavior, which can be governed by both civil and criminal law, including regulatory proscriptions. To the extent that the courts have exercised some authority over nonlegal services provided by attorneys (see Rules of Professional Conduct 5.7), the regulation in that area is not “so detailed and comprehensive so as to imply that” the field has been preempted … . Eric M. Berman, P.C. v City of New York, 2015 NY Slip Op 05594, CtApp 6-30-15

 

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