A New York State Administrative Law Judge has held in eight separate decisions that several owners of limited partnership interests could not claim refunds for credits under the State’s Qualified Empire Zone Enterprise (“QEZE”) program for real property taxes, even though the Department’s retroactive application of amendments to the statute denying the credits had been found unconstitutional due to the claims were not being timely asserted. Matter of Dorothy Krause F/B/O Angela Krause et al., DTA Nos. 826752-826759 (N.Y.S. Div. of Tax App., Feb. 4, 2016).

Facts. Each of the petitioners in the eight related matters (referred to as the “Owners”) owned an interest in 450 South Salina Street Partnership (“450 South Salina”) as a beneficiary of the Alfred F. Krause Family Benefit Trust (the “Trust”). 450 South Salina owns and operates real property in Syracuse, New York, and invested more than $4.2 million to acquire and renovate the property. 450 South Salina filed a New York State Partnership Return for 2008, claiming a QEZE credit for real property taxes of approximately $142,000. The return included a New York Partner’s Schedule K-1 for the Trust, allocating to the Trust a portion of the QEZE credit for real property taxes. 

In April 2009, the New York Legislature enacted modifications to the law governing QEZE-certified businesses, requiring all such businesses to verify that they qualified for continued certification under new criteria, in order to receive benefits for years beginning on or after January 1, 2008. The Department issued technical advice requiring individuals claiming credits through a passthrough entity, such as a partnership, to file an EZ Retention Certificate with their tax returns claiming a QEZE Credit for tax years beginning after January 1, 2008. Legislative Changes to the Empire Zone Program, TSB-M-09(4)I, TSB-M-09(5)C (Dep’t of Taxation & Fin., Apr. 15, 2009). In April 2009, the Department also modified its Form IT-606, Claim for QEZE Credit for Real Property Taxes, for the 2008 year, to include a new instruction requiring the attachment of a retention certificate. 

In June 2009, the Department of Economic Development revoked the certification of 450 South Salina, claiming it did not provide economic returns greater in value than the tax benefits it received. 450 South Salina appealed the Notice of Decertification, and a copy of that appeal was provided to the Assistant Deputy Commissioner of the Department of Taxation and Finance. In its appeal, 450 South Salina argued that the amendment to the Tax Law was unconstitutional and that continued certification was warranted. The appeal was denied by the Empire Zone Designation Board in the fall of 2009.

Each Owner filed New York State personal income tax returns for 2008, at a time after TSB-M-09(4)I was issued, and after 450 South Salina received notice of revocation. Each Owner believed he or she was legally barred from claiming the QEZE credit.

In 2013, as discussed in the July 2013 issue of New York Tax Insights, the Court of Appeals held in James Square Associates L.P. v. Mullen, 21 N.Y.3d 233 (2013), that the Department’s retroactive application of the 2009 amendments was unconstitutional, and that revocations of certifications made retroactive to January 1, 2008, were void. 

In 2013, the Owners all filed amended New York State personal income tax returns for 2008, claiming the QEZE credits for real property taxes. All the claims were disallowed, on the grounds that the amended returns were untimely. 

ALJ Decision. The ALJ upheld the Department’s denial of the refunds, finding that the amended tax returns were all filed after the expiration of the three-year statute for claiming refunds. While recognizing that informal claims for refunds might be sufficient, here the ALJ rejected the arguments of the Owners that they had provided informal refund claims, either by filing a partnership return with a Schedule K-1 showing distributions to them, or by providing a copy of the appeal of 450 South Salina’s Notice of Decertification to an official of the Department. The ALJ held that neither submission amounted to an informal refund claim, relying on a federal case, Rothman v. United States, 75-2 U.S.T. C. (CCH) ¶ 9720 (D. N.J. 1975), which found that a protest by a partnership is not considered an informal claim for a refund by a partner. 

The Owners argued that they had been prevented from filing returns claiming the QEZE credit by TSB-M-09(4)I and the enactment of the new statute, and that any such claims for credits would have involved filing a false or fraudulent return. The ALJ found that argument “without merit,” since a taxpayer may file a protective claim to protect an interest as long as the claim fully discloses the facts, nature and basis for the protective claim. The ALJ also rejected the argument that the denial of the refunds violated the constitutional requirement for “meaningful, backward-looking relief” for constitutional violations, as set forth by the U.S. Supreme Court in McKesson Corp. v. Division of Alcoholic Beverages & Tobacco, 496 U.S. 18 (1990), finding that New York’s system of allowing timely claims for refund satisfies the Due Process Clause.

Additional Insights

These cases highlight the importance of filing timely claims for refund on a protective basis whenever a taxpayer believes a statute is being improperly applied. Litigation challenging the Department’s position can take many years to resolve, particularly when a constitutional issue is involved, and, even when a statute is ultimately declared unconstitutional, New York law includes no provision for a blanket extension of the ordinary statute of limitations while issues are being litigated or when a statute is found to be unconstitutional. Taxpayers who decide to wait while litigation in a “lead case” proceeds should be sure to protect their interests with timely refund claims.