The New York State Tax Appeals Tribunal affirmed the decision of an Administrative Law Judge and found that an individual taxpayer was bound by the stipulated result of a sales tax matter involving responsible officer liability, and that the individual was liable for additional personal income tax arising from constructive dividends based upon the findings in the sales tax matter. Matter of Mohammad and Roosha Javed, DTA No. 825127 (N.Y.S. Tax App. Trib., Sept. 10, 2015).

Facts and Decision Below. A sales tax audit of a corporation, 492 Fast Food, Inc., for the period September 1, 2004 through February 28, 2007, resulted in an increase in sales of the corporation and an assessment of additional New York sales and use tax due. Petitioner Mohammad Javed, one of the corporation’s owners, was assessed for a portion of the tax assessment, plus penalty and interest, as a responsible officer. The personal income tax returns filed by Mr. Javed and his wife were then also audited, and the increased entire net income of the corporation was deemed to be a constructive dividend to the shareholders. Mr. Javed was initially believed to be a 50% shareholder, and therefore 50% of the constructive dividend was treated as additional income to him, resulting in an assessment of personal income tax.

Mr. Javed had filed a petition with the Division of Tax Appeals contesting the responsible officer assessment for sales and use tax. That proceeding was resolved by a stipulation of discontinuance in which tax was reduced from approximately $43,000 to $27,000. Mr. Javed’s request for review of the order of discontinuance was denied by the Administrative Law Judge, and his exception in the sales tax case was denied by the Tax Appeals Tribunal. Matter of Mohammad Javed, DTA No. 823219 (N.Y.S. Tax App. Trib., Oct. 6, 2011).

Mr. Javed requested a conciliation conference with regard to the assessment of personal income tax, and the amount of tax was reduced, based on two adjustments: one to reflect a proportionate reduction of the deemed constructive dividend based on the reduced amount of sales tax stipulated to be due, and another to reflect the fact that Mr. Javed’s interest was only 25%, not 50%. Mr. Javed then petitioned to the Division of Tax Appeals, and the assessment amount was further reduced by allowing expenses related to the deemed increased sales, and by an adjustment of credits.

The ALJ upheld the remaining assessment, finding that the additional corporate income had been agreed to by Mr. Javed, and that he had failed to prove by clear and convincing evidence that the deficiency was erroneous.

Tribunal Decision. On exception, Mr. Javed argued that the additional amounts of tax were erroneous, relying on a letter from one of the corporation’s suppliers and on evidence that his financial situation during the period at issue “precludes a finding of additional income.” He also argued that he was not bound by the stipulation in the responsible officer sales tax matter.

The Tribunal upheld the ALJ decision, but on a ground never discussed below. First, the Tribunal agreed with Mr. Javed that he was not automatically bound by the stipulation in the sales tax matter, any more than an allegedly responsible officer is bound by an agreement made by a corporation in a sales tax matter. However, the Tribunal then went on to determine that the principle of collateral estoppel governs, and that it requires a ruling in favor of the Department.

Under the doctrine of collateral estoppel, a decision in a previous proceeding will be binding if the party seeking estoppel can establish that the party against whom estoppel is sought had a fair opportunity to litigate, that the issues are identical, and that they must necessarily have been decided in the prior proceeding. Once that burden is met, the party opposing collateral estoppel must then establish the absence of a full and fair opportunity to litigate the issue in the prior action.

Here, the Tribunal acknowledged that neither party raised the issue of collateral estoppel before the ALJ, and so the issue was never addressed in the determination. Nonetheless, while noting that there might be a benefit to a remand, the Tribunal found that collateral estoppel clearly applied, and therefore Mr. Javed was barred by its decision upholding the stipulation in the sales tax case. It determined that the issues in the sales tax proceeding and the income tax proceeding are exactly the same; that the parties had a “full and fair opportunity to litigate”; and that the parties were identical (with the exception of Mrs. Javed, who was involved solely as a result of being included in a joint return). The Tribunal also found that the methodology used by the Department was valid and proper.

The Tribunal rejected Mr. Javed’s argument that the letter from a supplier established that the assessment was erroneous, noting that the letter itself disavowed the accuracy of the information it contained for purposes of being a complete record of purchases. The Javeds’ evidence concerning their personal financial position was also found insufficient, since the Tribunal determined the evidence was only assertions without supporting documents. Therefore, the assessment was upheld.

Additional Insights

The Tribunal decision cites no case in support of its application of the doctrine of collateral estoppel in a case in which neither party raised the issue and the judge below never considered it. That seems an unusual step, since the CPLR, which generally applies to matters in the Division of Tax Appeals, provides in Rule 3211(e) that a claim based on collateral estoppel is waived unless raised in a responsive pleading or in a motion before the pleading is filed. In this case, it does not appear that the Department raised collateral estoppel at any time. The language quoted from the cases relied upon by the Tribunal setting forth the basis for the collateral estoppel doctrine clearly delineates the burden to be carried by the party asserting it, and the response necessary from the party opposing it, which arises only if the initial burden is carried. See Kuriansky v. Professional Care, 158 A.D.2d 897 (3d Dep’t, 1990) (granting collateral estoppel based on a criminal plea in a prior proceeding); Matter of Sterling Bancorp, DTA No. 806271 (N.Y.S. Tax App. Trib., Nov. 18, 1993) (denying the application of collateral estoppel, finding it unclear that either the issues were identical or that there was a full and fair opportunity to litigate). Here, with neither party arguing for the application of collateral estoppel, the Tribunal apparently made its own determination not only to apply the doctrine, but also that all elements had been met and that no further interest would be served by a remand to allow briefing on the issue of application of collateral estoppel.