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Termination of Participation in Affordable Housing Program Is Not a Taxable Transfer

In a full-fledged opinion by Justice Cohen, the Second Department determined that when a residential housing cooperative amends its certificate of incorporation as part of a voluntary dissolution, reconstitution, and termination of participation in the Mitchell-Lama housing program (Private Housing Finance Law section 10 et seq, an affordable housing program established in 1955) there is no transfer or conveyance of real property or an interest in real property and, therefore, no taxable event occurs under Tax Law section 1201(b) (i.e., no real property transfer tax [RPTT] is due).  This opinion replaced the opinion in Trump Vil. Section 3, Inc v City of New York, 100 AD3d 170, which is recalled and vacated. Trump Vil Section 3, Inc v City of New York, 2013 NY Slip Op 05894, 2nd Dept 9-18-13

 

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No Investment Tax Credit for Company which Delivered Natural Gas, as Opposed to Processing or Manufacturing a Product

The Third Department upheld the NYS Tax Appeals Tribunal’s determination that the petitioner, Brooklyn Union Gas Company, was not entitled to an investment tax credit (ITC) because it was in the business of delivering natural gas, not producing or processing a product as those terms are construed for an ITC under the Tax Law:

The record amply supports, for purposes of our limited review, the Tribunal’s determination that petitioners’ integrated system  was  primarily one  of  distribution and  delivery  rather than processing or manufacturing.  The  vast  majority  of petitioners’ 11,000-mile system, both  in terms  of size and  cost, is comprised of pipes and  mains  through  which  natural gas  flows.  No material change occurs to the natural gas while in the pipes and mains, as these serve as the primary means for delivering the product. Viewing the system as a whole, the modifications made by petitioners to the gas  –  while important –  do  not  result in a significant change  in the product.  Matter of Brooklyn Union Gas Company v NYS Tax Appeals Tribunal, 514825, 3rd Dept, 6-6-13

 

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Failure to Contest Referral of Support-Arrearages to Tax Department Precluded Further Court Action

The Third Department determined plaintiff’s failure to administratively challenge the referral of his support-arrearages case to the Department of Taxation and Finance and the subsequent issuance of a tax warrant (pursuant to provisions of the Social Services Law) barred his action against the Department in Supreme Court.  Plaintiff was seeking a declaratory judgment and injunctive relief after the Department seized his vehicles to satisfy the judgment for support arrearages.  Koziol v State of New York…, 514767, 3rd Dept, 6-6-13

 

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Retroactive Tax Credit Restrictions Violated Due Process

The Court of Appeals, in a full-fledged opinion by Chief Judge Lippman, determined that the retroactive changes in the Empire Zones Program (restricting the availability of tax credits) did not, as the appellate divisions held, violate the Takings Clause, but did violate the Due Process Clause:  The Court wrote:

The purported taking here is plaintiffs’ obligation to pay tax to the State in the absence of a valid tax credit. However, “[t]he mere imposition of an obligation to pay money . . . does not give rise to a claim under the Takings Clause of the Fifth Amendment” …. Federal courts have held that “[f]or retroactive taxation to be a taking, it must be ‘so arbitrary as to constrain to the conclusion that it was not the exertion of taxation'”…. The retroactive tax liability imposed in the present case cannot be characterized as so flagrant as to constitute the confiscation of property under the Takings Clause. Plaintiffs had no guarantee that they would ever recoup their business investments through the receipt of tax credits, and the New York Constitution provides that tax exemptions are freely repealable (NY Const, art XVI, § 1).  *  *  *

We now turn to that other question: whether plaintiffs’ due process rights were infringed by the statute utilizing the three factors articulated in Replan. In terms of “the taxpayer’s forewarning of a change in the legislation and the reasonableness of his reliance on the old law” (Replan, 70 NY2d at 456), the plaintiffs had no warning and no opportunity at anytime in 2008 to alter their behavior in anticipation of the impact of the 2009 Amendments. * * *The second factor, the length of the period of retroactivity, also benefits plaintiffs. * * * Regardless of whether the period of retroactivity is deemed to span 16 or 32 months, the length of retroactivity should be considered excessive and weighs against the State. * * *   On the third factor, dispositive in this case, the State fails to set forth a valid public purpose for the retroactive application of the 2009 Amendments. The legislature did not have an important public purpose to make the law retroactive.  James Square Associates LP et al v Mullen …, Nos 87, 88, 89, 90, 91, CtApp, 6-4-13

 

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“Hose Company” Not Entitled to Payment of Tax Monies to Fire Department

The Third Department determined that a “hose company” was not part of the fire department and thus was not entitled to the payment of tax monies slated for the fire department:

The members of Citizens Hose are not trained to perform interior or exterior firefighting and, on the rare occasions when they are paged to assist the fire department, the few members who respond are limited to performing auxiliary services such as coiling hoses, directing traffic and  cleaning equipment. The evidence at trial established that whenever  the fire department  requires assistance in actually fighting a fire, it makes  a mutual aid call to volunteer fire companies in surrounding communities. Citizens Hose is not part of the mutual aid call system.  Krol … v Porter, 516002, 3rd Dept, 5-30-13

 

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Discovery Demands Overbroad

In affirming Supreme Court’s determination that petitioner’s discovery demands in a property tax assessment matter were overbroad, the Second Department wrote:

…[T]he document demands, even limited to those concerning tax years 2008/2009, 2010/2011, and 2011/2012, were of an overbroad and burdensome nature. Although CPLR 3101(a) provides for “full disclosure of all matter material and necessary in the prosecution or defense of an action,” unlimited disclosure is not required, and supervision of disclosure is generally left to the Supreme Court’s broad discretion… . While documents related to the actions of the Board of Assessment Review for the Town of Babylon are relevant to this hybrid proceeding and action alleging statutory and constitutional violations, the Supreme Court properly determined that the “sweeping demands” of the notice of discovery and inspection were overbroad and burdensome …. “Where discovery demands are overbroad, the appropriate remedy is to vacate the entire demand rather than to prune it'” … .  In the Matter of Greenfield v Board of Assessment Review…, 2013 NY Slip Op 03480, 2nd Dept, 5-15-13

 

 

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Class Certification in Landlord-Tenant Action Upheld

The First Department upheld Supreme Court’s grant of class certification in an action alleging defendant landlord charged market rents while accepting J-51 [tax incentive] benefits.  The First Department wrote:

The issues of when defendant received J-51 benefits, whether defendant deregulated apartments while receiving those benefits, which tenants resided in those apartments during those time periods, and whether defendant wrongfully charged market rents while accepting J-51 benefits are common issues that “predominate,” thereby meeting the commonality requirement of CPLR 902(a)(2)… . The need to conduct individualized damages inquiries does not obviate the utility of the class mechanism for this action, given the predominant common issues of liability … .

Defendant’s counterclaim for rent arrears does not cause plaintiff to be an atypical member of the class. Her claim is typical of the claims of all class members in that each flows from defendant’s alleged unlawful deregulation of apartments while receiving J-51 benefits … . “[T]hat the underlying facts of each individual plaintiff’s claim vary, or that [defendant’s] defenses vary, does not preclude class certification” …. Defendant’s counterclaim does not materially add to the complexity or difficulty of resolving plaintiff’s individual claim, and defendant’s suggestion that plaintiff might be inclined to settle her case to evade liability on the counterclaim is speculative.  Bordern v 400 East 55th Street Associates, LP, 2013 NY Slip Op 02815, 1st Dept, 4-25-13

 

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Empire Zone Status Can Be Revoked; No Vested or Actionable Right

The petitioner, the owner of a shopping mall, was certified as an empire zone business enterprise in 2002, and was thereby afforded certain tax benefits.  In 2009 the Empire Zone Designation Board revoked petitioner’s certification.  On appeal from an Article 78 proceeding, the Third Department affirmed the lower court’s determination that the respondents were not estopped from revoking the empire zone status because tax legislation is not a governmental promise:

Because “tax legislation is not a governmental promise,  [taxpayers  have]  no  vested  or  actionable right . . . to the benefit of a tax statute or regulation” … .   A claim of estoppel may only be asserted against a government agency in the rarest of situations and may not be invoked to prevent an agency from discharging its statutory duties … .  After the Legislature amended the Empire Zones Act, the Board discharged its statutory duty to review appeals of the … decisions to decertify empire zone business enterprises (see General Municipal Law §  959  [w]). Under these circumstances, where petitioner did not have  a vested right to continue receiving tax credits and  the Board  was  fulfilling its duty under the law, the court properly held that estoppel may not be invoked.  Matter of Greece Town Mall, LP v New York State, et al, 515207, Third Dept 4-25-13

 

“Indirect Audit” to Determine Cash Receipts in Restaurant Okay

The audit division of the Department of Taxation and Finance found the petitioner’s cash sales receipts inadequate to perform an audit.  The audit division therefore used a one-day “indirect audit” to estimate what petitioner’s cash sales were (a one-day observation of the operation of the restaurant).  In upholding the method used by the audit division to determine under-reporting of cash receipts, the Third Department wrote:

Where,  as here, a  taxpayer fails to maintain sufficient records, the Division may  resort to an  indirect audit and  the taxpayer challenging such an  audit has  the “burden of  establishing by  clear and  convincing evidence  that the audit method or tax assessment [was] erroneous” … .   Although  a  longer audit period might have produced a more accurate representation of petitioner’s business activity, nonetheless petitioner failed to meet  its heavy  burden of establishing the unreasonableness or inaccuracy of the length used and method employed by the Division in its indirect audit under  the circumstances … .  Matter of Hwang v Tax Appeals Tribunal …, 512991, 3rd Dept 4-11-13

 

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Internet Tax Held Constitutional

In a full-fledged opinion by Judge Lippman, the Court of Appeals determined the Internet Tax (Tax Law 1101(b)(8)(vi) was constitutional on its face and did not violate either the Commerce Clause or the Due Process Clause.  The plaintiffs in the action, Overstock.com and Amazon.com, sued the New York State Department of Taxation and Finance.  The activities found to be legitimately taxable in New York were described by the Court as follows:

Amazon offers an “Associates Program” through which third parties agree to place links on their own websites that, when clicked, direct users to Amazon’s website. The Associates are compensated on a commission basis. They receive a percentage of the revenue from sales generated when a customer clicks on the Associate’s link and completes a purchase from the Amazon site. The operating agreement governing this arrangement states that the Associates are independent contractors and that there is no employment relationship between the parties. Thousands of entities enrolled in the Associates Program have provided a New York address in connection with their applications.

Plaintiff Overstock.com is a Delaware corporation with its principal place of business in Utah. Overstock likewise sells its merchandise solely through the Internet and does not maintain any office, employees or property in New York. Similar to Amazon, Overstock had an “Affiliates” program through which third parties would place links for Overstock.com on their own websites. When a customer clicked on the link, he or she was immediately directed to Overstock.com, and if the customer completed a purchase, the Affiliate received a commission. According to the parties’ Master Agreement, the Affliates were independent contractors without the authority to obligate or bind Overstock.

Judge Smith dissented and would have found the statute unconstitutional under the Commerce Clause.  Overstock.com, et al, v NYS Department of Taxation and Finance, et al, 33, CtApp 3-28-13

 

 

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