In Matter of Bombardier Mass Transit Corp., DTA No. 822999 (N.Y.S. Tax App. Trib, June 7, 2012), the New York State Tax Appeals Tribunal affirmed the decision of an Administrative Law Judge holding that the petitioner was permitted to claim qualified empire zone enterprise (“QEZE”) credits for real property taxes.
As discussed in the May 2011 issue of New York Tax Insights, the taxpayer, Bombardier Mass Transit Corp., had claimed entitlement to QEZE credits for real property taxes based on a payment in lieu of taxes (“PILOT”) agreement. The Department of Taxation and Finance argued that the petitioner failed to meet the requirement under the statute that it had made payments in lieu of taxes “pursuant to a written agreement entered into between the QEZE and the state, municipal corporation, or public benefit corporation.” Tax Law § 15 (former[e]). Bombardier was relying on an agreement dated May 1, 1998 (the “PILOT 3” agreement), under which it assumed all rights and obligations of its parent to various properties in Plattsburgh, New York, and agreed to perform all of the obligations of its parent, including payment in lieu of taxes owed under previously existing agreements.
The ALJ found that Bombardier had met its burden of proving that PILOT 3 was a written agreement under the statute, and rejected all the Department’s challenges, which included arguments that a copy of the agreement had not been produced until relatively late in the audit, that it did not specifically enough incorporate earlier agreements and descriptions of the properties, and that the petitioner’s witness lacked personal knowledge of agreements that had been entered into before that time. Specifically, the ALJ had found the challenged witness’s testimony “credible and helpful” and noted that “relevant and probative hearsay is admissible in an administrative proceeding.” The ALJ found all of the terms in the PILOT 3 agreement clear enough to establish that the petitioner had agreed to make all of the payments in lieu of tax that its parent and predecessor had previously been obligated to make, and was entitled to the credits.
The Tribunal affirmed the ALJ’s decision in all respects, finding that Bombardier had established its position through clear and convincing evidence. Under the statute, in order to claim the credit, Bombardier was required to prove it was a QEZE during the relevant period and that it made payments in lieu of taxes pursuant to a written agreement with an eligible entity. Bombardier satisfied that burden by reference to the terms of PILOT 3, which incorporated prior agreements and met the written agreement required by the statute. Despite acknowledging that tax credits are “a particularized species of exemption from taxation” and thus governed by the rule that statutory exemptions are construed against the taxpayer, the Tribunal found that the Department could not impose an interpretation “so ‘narrow and literal as to defeat [the] settled purpose’ of the exemption.” The Tribunal held that the Department’s arguments were based on an overly narrow interpretation of the statute, and rejected those arguments because they would “substantially reduce the latitude afforded to QEZEs and eligible entities in structuring their written PILOT agreements.”
Additional Insights. Establishing entitlement to tax exemptions brings a higher-than-usual burden, since it is a basic principle of statutory interpretation that tax exemptions are construed strictly against taxpayers. Here the Tribunal recognized that, despite the higher burden, the narrow interpretation of the requirements urged by the Department defeated the very purpose for which the exemption was intended—to provide benefits to QEZEs and encourage them to make investments in New York State, as Bombardier did by opening a railcar manufacturing plant in the City of Plattsburgh, which the Tribunal specifically found attracted jobs and business to the area. This was exactly the purpose for which the Empire Zones Program was intended.