In an interesting case involving the New York City Comptroller’s authority to subpoena general corporation tax records from the New York City Department of Finance, a New York State Supreme Court judge has issued an order holding that the Department of Finance must turn over tax records — including City corporate tax return data — to the Comptroller, pursuant to the Comptroller’s audit authority over City agencies. In ordering disclosure, the judge rejected the Department of Finance’s claim that the general corporation tax (“GCT”) secrecy provisions prohibited it from disclosing the records to the Comptroller. Comptroller of the City of N.Y. v. Dep’t of Fin., No. 160842/2013, 2014 N.Y. Slip Op. 24309 (N.Y. Sup. Ct., N.Y. Cnty. Sept. 29, 2014), released for publication Oct. 7, 2014.

Facts.  The Department of Finance (“Department”) is a New York City Mayoral agency vested with authority over the administration and collection of most New York City taxes, including the GCT.  City Charter § 1504.  City Charter § 93(c) gives the City Comptroller (an elected official separate from the Mayor and Mayoral agencies) the “power to audit all [City] agencies.”  Another section of the Charter gives the Comptroller the “power to audit and investigate all matters relating to or affecting the finances of the city, including without limitation the . . . receipt and expenditure of city funds . . . .”  City Charter § 93(b).

In January 2013, the City Comptroller began an audit of the Department’s GCT collection practices.  Following an unsuccessful attempt to compel the Department to produce GCT records for the five- year period 2008–2012, including tax returns, the Comptroller served the Department with a subpoena.  The subpoena was accompanied by a proposed confidentiality agreement regarding the requested records. The Department, relying on a 1991 Corporation Counsel Opinion, notified the Comptroller that it would not comply with the subpoena.  In that Opinion, the Corporation Counsel had written that, notwithstanding the Comptroller’s clear statutory authority to audit City agencies, the tax secrecy provisions prohibited the disclosure of any confidential tax return information to the Comptroller.

In November 2013, the Comptroller commenced a lawsuit in New York County Supreme Court, seeking to compel the Department to comply with the subpoena. The Comptroller maintained that his audit authority over City agencies entitled him to access agency records that were necessary to carry out that audit function. The Department claimed that the GCT tax secrecy provisions prohibited it from disclosing tax returns and other confidential return information, unless disclosure was “otherwise provided by law,” arguing that such a violation of tax secrecy could subject its employees to criminal penalties. It also took the position that although the tax secrecy provisions permit the disclosure of confidential tax information “as otherwise provided by law,” the State Legislature (which enacted the GCT law in 1966) did not intend to make a local law such as the City Charter an “otherwise provided by law” exception to secrecy.

The Supreme Court judge ruled in favor of the Comptroller, rejecting the Department’s tax secrecy arguments and ordering the Department to turn over the tax return information.  According to the judge, the City Charter provision giving the Comptroller audit authority over City agencies was a “law” that “otherwise provide[s]” for the disclosure of GCT return information, which is an exception to tax secrecy under the GCT law. The judge pointed out that while the Department relied on the rationale contained in the 1991 Corporation Counsel Opinion, “that opinion has no precedential value.”

The judge concluded that denying access to the Comptroller frustrated his ability to exercise his audit authority, on which “the Comptroller . . . is accountable to[] the citizens of the City.”  She noted: “Indeed, it is difficult to imagine how the Comptroller can publish a statement ‘regarding all taxes due and uncollected at the close of [each] fiscal year’ (citation omitted) without obtaining access to the information demanded in the subpoena.”  Also rejected was the Department’s claim that disclosure to the Comptroller would constitute a breach of GCT tax secrecy.  The judge pointed out that the confidentiality agreement proposed by the Comptroller contained numerous protections against disclosure beyond the Comptroller’s office.

Additional Insights

This unusual case illustrates the potential tension between the statutory oversight role of the Comptroller and the Department’s role in administering the GCT (as well as the occasionally tense political relationship between them). While it appears there were bona fide legal arguments on both sides, the Department’s blanket denial of any GCT return information would have undoubtedly hampered the Comptroller’s ability to conduct his audit of the Department’s administration of the tax. Moreover, the Department’s tax secrecy claims were difficult to accept in light of the Comptroller’s confidentiality agreement. We expect that the Department will appeal the judge’s order.