Tax Law Archives - New York Appellate Digest

ALTHOUGH A HEAT PUMP SYSTEM DRAWS HEAT FROM SOLAR ENERGY STORED IN THE GROUND, IT IS NOT A QUALIFIED SOLAR ENERGY SYSTEM WITHIN THE MEANING OF THE TAX LAW FOR PURPOSES OF ELIGIBILITY FOR A $5000 TAX CREDIT (THIRD DEPT).

The Third Department determined that a heat pump system, although it draws heat from solar energy stored in the ground, is not a qualified solar energy system within the meaning of Tax Law 606 (g-1). Therefore, as the Tax Tribunal found, petitioners were not entitled to a $5000 tax credit for the heat pump system:

… [S]olar energy system equipment is defined as “an arrangement or combination of components utilizing solar radiation, which, when installed in a residence, produces energy designed to provide heating, cooling, hot water or electricity for use in such residence” … . Here, the Tribunal limited the applicability of the tax credit to those systems that “directly” utilize solar radiation, an interpretation which petitioners assert is too narrow, …

… [W]e do not agree with petitioners’ assertion that the plain language of the statute unambiguously includes ground source heat pump systems simply because they utilize solar energy … . As the record reveals, heat harvested by a ground source heat pump system is not, strictly speaking, “solar radiation” since it is being radiated from the ground after being absorbed by the crust. Thus, although a broad reading of the phrase “utilize[es] solar radiation” could certainly include the system at issue, an interpretation excluding indirect utilization of solar energy is not unreasonable. Further, we find that the fact that the system removes heat from indoor air during the warm summer months and moves it to the ground, thereby not utilizing solar radiation, presents another reason to exclude the system from the purview of the tax credit … . Matter of Suozzi v Tax Appeals Trib. of the State of N.Y., 2020 NY Slip Op 00193, Third Dept 1-9-20

January 9, 2020/by Bruce Freeman

Tax Law

CHANGE IN TAX LAW RESULTING IN THE REMOVAL OF PETITIONER LAW FIRM’S CERTIFICATION AS A QUALIFIED EMPIRE ZONE ENTERPRISE ENTITLED TO TAX CREDITS SHOULD NOT HAVE BEEN APPLIED RETROACTIVELY (THIRD DEPT).

The Third Department, reversing Supreme Court, determined the amendments to the Economic Development Zones Act of 2009 should not have been applied retroactively to petitioners, MSLMSH (a law firm and related parties), to remove petitioners’ certification as a qualified empire zone enterprise (QEZE) entitled to tax credits based upon the location of the business in Syracuse:

… [R]esolution of this issue hinges upon examining the three factors articulated by the Court of Appeals in Matter of Replan Dev. v Department of Hous. Preserv. & Dev. of City of N.Y. (70 NY2d 451, 456 [1987] …) — specifically, a taxpayer’s forewarning of the change in law and the reasonableness of his or her reliance on the old law, the length of the retroactive period and the public purpose of the retroactive application.

… [T]he record reflects that MSLMSH was considering various places to relocate, but ultimately executed the 15-year lease in 2001 to remain in downtown Syracuse. MSLMSH also invested approximately $800,000 in equipment and furnishings. Around that time, MSLMSH was undergoing a corporate restructuring and reorganization, which led to the formation of Mackenzie Hughes in 2002. Mackenzie Hughes assumed many assets of MSLMSH, including the lease, and became QEZE certified in 2003. The testimony from the hearing further reflects that the expenditures and investments were made in reliance on receiving QEZE credits, and Mackenzie Hughes continued to operate its business with the QEZE certification until it was decertified in 2009. Based on the foregoing, we conclude that the partner petitioners’ reliance on the old law was reasonable. Nor do we find merit in the Commissioner’s assertion that the actions taken by MSLMSH prior to Mackenzie Hughes obtaining its QEZE certification were too attenuated to constitute justifiable reliance by the partner petitioners. Inasmuch as this factor weighs in favor of petitioners … and viewing all factors holistically, we conclude that the retroactive application of the 2009 amendments in this case was improper … . Matter of Mackenzie Hughes LLP v New York State Tax Appeals Trib., 2019 NY Slip Op 09337, Third Dept 12-26-19

December 26, 2019/by Bruce Freeman

Civil Procedure, Landlord-Tenant, Municipal Law, Tax Law

COURT OF APPEALS 2009 RULING THAT LANDLORDS RECEIVING J-51 TAX BENEFITS CANNOT DEREGULATE NEW YORK CITY APARTMENTS APPLIES RETROACTIVELY IN THIS CLASS ACTION FOR RENT OVERCHARGES BROUGHT BY TENANTS; THE CLASS, HOWEVER, SHOULD NOT HAVE BEEN EXPANDED AFTER THE ACTION WAS COMMENCED (FIRST DEPT).

The First Department, in a full-fledged opinion by Justice Richter too comprehensive to fairly summarize here, modifying Supreme Court, determined that the class action by tenants in defendant’s large housing complex properly sought repayment of rent overcharges. The complaint alleged the landlord, under New York City rent control and stabilization law, and pursuant to a 2009 Court of Appeals case (Roberts v Tishman, 13 NY3d 270), could not deregulate apartments while receiving so-called “J-51” tax benefits. The landlord argued unsuccessfully that the Roberts decision did not apply retroactively. The First Department remanded the case for recalculation of the overcharges and further held that Supreme Court should not have expanded the class. With regard to the expansion of the class, the court wrote:

CPLR 902 provides that a class action “may be altered or amended before the decision on the merits.” However, that provision also states that “[an] action may be maintained as a class action only if the court finds that the prerequisites under [CPLR] 901 have been satisfied.” Those requirements are generally referred to as “numerosity, commonality, typicality, adequacy of representation and superiority” (City of New York v Maul, 14 NY3d 499, 508 [2010]). CPLR 902 further requires the court to consider a range of factors before certifying a class.

Here, the motion court improvidently exercised its discretion in expanding the class. The court’s order failed to analyze whether class action status was warranted based on the criteria set forth in CPLR 901 and CPLR 902. Conducting that analysis ourselves, we find that the redefined class represents such a fundamental change in the theory of plaintiffs’ case that expansion of the class would be improper. When the class was originally certified, plaintiffs maintained, and the court agreed, that its members were tenants who received deregulated leases while the complex was receiving J-51 benefits. The expanded class, however, would include tenants who never lived in the complex during defendant’s receipt of J-51 benefits, and who received regulated leases for their tenancies. Thus, the legal issues for this group of tenants are separate and distinct from those of the original class. Dugan v London Terrace Gardens, L.P., 2019 NY Slip Op 06578, First Dept 9-17-19

September 17, 2019/by Bruce Freeman

Debtor-Creditor, Municipal Law, Tax Law

FAILURE TO PAY TAXES UNDER PROTEST PRECLUDES AN ACTION TO RECOVER THE PAYMENTS WHEN THE RELEVANT TAX RULE IS INVALIDATED (SECOND DEPT).

The Second Department determined plaintiff’s putative class action to have Nassau County disgorge fees collected pursuant to the Nassau County Administrative Code for tax map certification letters issued by the County Clerk for real estate closings was properly dismissed. It is not explicitly stated, but apparently the taxing rule under which the fees were collected had been invalidated at some point:

“The settled law is that the payment of a tax or fee cannot be recovered subsequent to the invalidation of the taxing statute or rule, unless the taxpayer can demonstrate that the payment was involuntary” … . Where the payment is “necessary to avoid threatened interference with present liberty of person or immediate possession of property, the failure to formally protest will be excused” … . “Further, where the payment of a tax or fee is based on a material mistake of fact, the payment may be recovered even if it was made without protest” … .

Here, it is undisputed that the plaintiff did not pay the fees under protest. Falk v Nassau County, 2019 NY Slip Op 06202, Second Dept 8-21-19

August 21, 2019/by Bruce Freeman

Administrative Law, Tax Law

INFORMATION PROVIDED TO A SUPERMARKET CHAIN ABOUT COMPETITORS’ PRICES IS NOT “PERSONAL AND INDIVIDUAL” WITHIN THE MEANING OF TAX LAW 1105, THEREFORE THE REPORTS OF THAT INFORMATION ARE SUBJECT TO SALES TAX (CT APP).

The Court of Appeals, in a full-fledged opinion by Judge Feinman, over a concurrence and two dissenting opinions, reversing the Appellate Division, determined that a supermarket chain, Wegmans, which pays an outfit, RetailData, for information about competitors’ prices, must pay sales tax for that information. Wegmans argued the information was “personal and individual” and therefore not taxable under Tax Law 1105:

Tax Law § 1105 (c) (1) imposes a sales tax on certain information services, “but exclud[es] the furnishing of information which is personal or individual in nature and which is not or may not be substantially incorporated in reports furnished to other persons.” * *

The information that RetailData compiled and the reports it furnished to Wegmans derived from a non-confidential and widely-accessible source, the supermarket shelves of Wegmans’s competitors. There is nothing about the information itself that is personal or individual in nature. RetailData simply collected the prices of products at grocery stores and compiled that information into reports which it furnished to Wegmans. The Tribunal rationally concluded that the information RetailData furnished to Wegmans was not personal or individual in nature because it was collected from prices on supermarket shelves, which are publicly available, widely-accessible, and not confidential. Moreover, in these circumstances, it was rational for the Tribunal to determine that RetailData’s customization of the publicly-available information it collected from supermarket shelves into a report format did not render the furnished information personal or individual in nature … . Matter of Wegmans Food Mkts., Inc. v Tax Appeals Trib. of the State of N.Y., 2019 NY Slip Op 05184, CtApp 6-27-19

June 27, 2019/by Bruce Freeman

Labor Law-Construction Law, Tax Law

CLASSIFICATION OF THE PROPERTY AS COMMERCIAL IN TAX FILINGS DID NOT PRECLUDE THE APPLICABILITY OF THE ONE-OR-TWO-FAMILY HOME EXEMPTION TO LABOR LAW 240 (1) (FOURTH DEPT).

The Fourth Department, reversing (modifying) Supreme Court, determined that defendant’s (Artifact’s) motion for summary judgment on the Labor Law 240 (1) cause of action should have been granted. The one-or-two-family home exemption applied, even though the property was classified as commercial in tax filings:

Contrary to plaintiff’s contention, Artifact’s classification of the property as commercial in certain tax filings does not estop it from relying upon the exemption in this action … . The Internal Revenue Code’s definition of a residential property is considerably narrower than the scope of the one- or two-family home exemption to liability under section 240 (1) … , and, as such, Artifact’s tax declarations are not ” logically incompatible’ ” with its current reliance upon that exemption … . Wood v Artifact Props., LLC, 2019 NY Slip Op 01030, Fourth Dept 2-8-19

February 8, 2019/by Bruce Freeman

Family Law, Tax Law

SUPPORT MAGISTRATE DID NOT HAVE JURISDICTION TO REDUCE FATHER’S CHILD SUPPORT BY DISTRIBUTING A TAX REFUND (FOURTH DEPT).

The Fourth Department determined the Support Magistrate did not have jurisdiction to reduce father’s child support by distributing a tax refund:

We agree with the mother, however, that the court erred in denying her … objection to that part of the Support Magistrate’s order that, in effect, distributed half of the parties’ tax refund to the father by reducing his child support obligation by that amount. We have previously stated that “the jurisdiction of Family Court is generally limited to matters pertaining to child support and custody . . . , and tax deductions or exemptions are not an element of support”… . “[T]he father’s entitlement to claim the child[ren] as [] dependent[s] for income tax purposes is not an element of support set forth in Family Court Act article 4, and thus the court lacks jurisdiction” to distribute the parties’ tax refund … . Therefore, … we remit the matter to Family Court to recalculate the father’s child support obligation without regard to the parties’ income tax refund. Matter of Bashir v Brunner, 2019 NY Slip Op 00746, Fourth Dept 2-1-19

February 1, 2019/by Bruce Freeman

Debtor-Creditor, Tax Law

OIL AND GAS INVESTMENT SCHEME PROPERLY FOUND TO BE AN ABUSIVE TAX AVOIDANCE TRANSACTION (THIRD DEPT).

The Third Department, in a full-fledged opinion by Justice Pritzker, affirmed the Tax Appeals Tribunal’s determination that petitioner’s complex gas and oil drilling investment scheme constituted an abusive tax avoidance transaction. Therefore the notice of deficiency, penalties and interest assessed by the Department of Taxation and Finance were appropriate. The opinion is fact-specific and too complicated to fairly summarize here. The following quotation from the opinion is provided to demonstrate the nature of the issues:

The Tribunal’s determination that the overall financing structure artificially inflated the actual capital contributions of the Belle Isle partners [the petitioner oil and gas drilling company], allowing large tax deductions based upon IDCs [intangible drilling costs] derived through the inflated turnkey contract, is rationally based and supported by substantial evidence … . Beginning with the Belle Isle financing structure, particularly Sznajderman’s [petitioner general partner’s] subscription note, it is clear that Belle Isle did not have an intent to create a true debtor-creditor relationship as to 85% of the face value of the note. Specifically, while the face value of the subscription note was $540,000, the additional collateral agreement had the practical effect of satisfying the principal of said note by Sznajderman’s payment of only 15% of the face value, which was to be used by SS & T, the so-called creditor, to purchase bonds. Importantly, these bonds were not collateral; rather, they were ostensibly used to pay off the principal of the subscription note in 25 years. …

Further, Sznajderman’s payment of interest during the first year did not legitimize the debt because interest after the first year, which was designed to be paid from Sznajderman’s net operating proceeds, was only paid sporadically, despite such proceeds being available. We agree with the Tribunal that, based upon this sporadic collection of interest, it is highly unlikely that Belle Isle would attempt to collect “its partners’ very large interest accruals when the subscription notes mature.” … . As such, we find that substantial evidence supports the Tribunal’s conclusion that, while Sznajderman’s investment had economic substance in general, … the subscription note, to the extent of 85% of its face value, was artificially inflated and, as such, did not establish true debt and most certainly elevated form over substance … . Matter of Sznajderman v Tax Appeals Trib. of the State of N.Y., 2019 NY Slip Op 00007, Third Dept 1-3-19

January 3, 2019/by Bruce Freeman

Debtor-Creditor, Municipal Law, Tax Law

ONCE THE CITY TAX LIENS HAD BEEN ASSIGNED PAYMENT TO THE CITY, INSTEAD OF THE LIENHOLDER, IS NOT APPLIED TO THE DEBT (FIRST DEPT).

The First Department, reversing Supreme Court, determined the tax and sewer charges paid to the city by defendant after defendant had been notified that the tax liens had been assigned could not be applied to the debt:

Plaintiffs are the lawful assignees of certain City of New York water and sewer tax liens against property owned by defendant. The City complied fully with the provisions of Administrative Code of City of NY § 11-320, which requires, inter alia, that four notices of the sale of the liens be sent to the property owner at specified intervals before the sale and that another notice be sent 30 days after the sale … . The City’s four pre-sale notices informed defendant of the debt, of the impending sale, and of defendant’s obligation to pay the City, if at all, by August 1, 2011. The notices also informed defendant that, after the sale, it should make payment arrangements with the new lienholder’s representative.

Defendant did not pay the amounts owed by August 1, 2011. On the day after the tax liens were assigned to plaintiffs, defendant made payments to the City. The payments were not credited against defendant’s debt, because, once the assignment had taken place, payments had to be made to plaintiffs … .

Contrary to defendant’s argument, there is no tension between the Administrative Code’s provisions for tax liens and tax sales and the law generally governing payments of an assigned debt. Once a debtor has notice that the debt has been assigned, or has been put “on inquiry” as to an assignment of the debt, payments to the assignor (the original creditor) are not applied to the debt … . NYCTL 1998-2 Trust v 70 Orchard LLC, 2018 NY Slip Op 09004, First Dept 12-27-18

December 27, 2018/by Bruce Freeman

Employment Law, Fraud, Insurance Law, Tax Law

IN THIS QUI TAM (WHISTLEBLOWER) ACTION THE COMPLAINT SUFFICIENTLY ALLEGED DEFENDANT CAPTIVE INSURANCE COMPANY FILED FALSE TAX RETURNS AND TERMINATED THE WHISTLEBLOWER FOR RAISING HIS CONCERNS WITH HIS SUPERIORS (FIRST DEPT).

The First Department, in a full-fledged opinion by Justice Manzanet-Daniels, determined a qui tam (whistleblower) action alleging a captive insurance company (Moody's) violated the New York False Claims Act (NYFCA) by filing false tax returns properly survived the motion to dismiss. The court further held that the relator's retaliation claim, alleging unlawful termination of employment for raising questions about Moody's taxes, also properly survived the motion to dismiss. Captive insurance company's receive favorable tax treatment only if they meet certain criteria:

While the typical NYFCA claim involves the State paying out money on account of a false claim, a “reverse false claim” occurs when someone uses a false record to conceal or avoid an obligation to pay the government … . A defendant knowingly makes a false claim under the NYFCA if the defendant had “actual knowledge” of the falsity of the claim or acted “in deliberate ignorance” or “reckless disregard” of its truth or falsity (State Finance Law § 188[3][a]).

The motion court correctly found that the complaint sufficiently alleges that Moody's “tax treatment of MAC was aggressive, risky, and/or abusive due to its sham nature,” and that Moody's knowingly submitted false claims. * * *

The complaint sufficiently alleges that defendants had knowledge of relator's protected activity and that they retaliated against him because of his protected activity. Relator alleges that he repeatedly complained about MAC's noncompliance with the tax laws to Moody's tax department as well as to his superiors … . Anonymous v Anonymous, 2018 NY Slip Op 05963, First Dept 8-30-18

INSURANCE LAW (IN THIS QUI TAM (WHISTLEBLOWER) ACTION THE COMPLAINT SUFFICIENTLY ALLEGED DEFENDANT CAPTIVE INSURANCE COMPANY FILED FALSE TAX RETURNS AND TERMINATED THE WHISTLEBLOWER FOR RAISING HIS CONCERNS WITH HIS SUPERIORS (FIRST DEPT))/CAPTIVE INSURANCE COMPANIES (IN THIS QUI TAM (WHISTLEBLOWER) ACTION THE COMPLAINT SUFFICIENTLY ALLEGED DEFENDANT CAPTIVE INSURANCE COMPANY FILED FALSE TAX RETURNS AND TERMINATED THE WHISTLEBLOWER FOR RAISING HIS CONCERNS WITH HIS SUPERIORS (FIRST DEPT))/TAX LAW (INSURANCE LAW, IN THIS QUI TAM (WHISTLEBLOWER) ACTION THE COMPLAINT SUFFICIENTLY ALLEGED DEFENDANT CAPTIVE INSURANCE COMPANY FILED FALSE TAX RETURNS AND TERMINATED THE WHISTLEBLOWER FOR RAISING HIS CONCERNS WITH HIS SUPERIORS (FIRST DEPT))/FRAUD (INSURANCE LAW, TAX LAW, IN THIS QUI TAM (WHISTLEBLOWER) ACTION THE COMPLAINT SUFFICIENTLY ALLEGED DEFENDANT CAPTIVE INSURANCE COMPANY FILED FALSE TAX RETURNS AND TERMINATED THE WHISTLEBLOWER FOR RAISING HIS CONCERNS WITH HIS SUPERIORS (FIRST DEPT))/EMPLOYMENT LAW (IN THIS QUI TAM (WHISTLEBLOWER) ACTION THE COMPLAINT SUFFICIENTLY ALLEGED DEFENDANT CAPTIVE INSURANCE COMPANY FILED FALSE TAX RETURNS AND TERMINATED THE WHISTLEBLOWER FOR RAISING HIS CONCERNS WITH HIS SUPERIORS (FIRST DEPT))/QUI TAM (IN THIS QUI TAM (WHISTLEBLOWER) ACTION THE COMPLAINT SUFFICIENTLY ALLEGED DEFENDANT CAPTIVE INSURANCE COMPANY FILED FALSE TAX RETURNS AND TERMINATED THE WHISTLEBLOWER FOR RAISING HIS CONCERNS WITH HIS SUPERIORS (FIRST DEPT))/WHISTLEBLOWER (IN THIS QUI TAM (WHISTLEBLOWER) ACTION THE COMPLAINT SUFFICIENTLY ALLEGED DEFENDANT CAPTIVE INSURANCE COMPANY FILED FALSE TAX RETURNS AND TERMINATED THE WHISTLEBLOWER FOR RAISING HIS CONCERNS WITH HIS SUPERIORS (FIRST DEPT))

August 30, 2018/by Bruce Freeman