A New York State Administrative Law Judge has partially granted and partially denied a motion by the Department of Taxation and Finance challenging a subpoena issued at the request of the petitioners, who were seeking documents in support of their request that the Department exercise its special refund authority in a residency matter. Matter of Christopher Sheehan and Gunda Sabel-Sheehan, DTA No. 827290 (N.Y.S. Div. of Tax App., Oct. 19, 2017).

Facts. The petitioners, Mr. Sheehan and Ms. SabelSheehan, filed New York resident income tax returns for the years 2004 through 2012, indicating that they resided at an address in Larchmont, New York. They had formerly maintained a New York City apartment that they relinquished in 2003, and had no living quarters in New York City from 2004 through 2012. In May 2014, they filed amended resident returns for 2010 through 2012, requesting refunds of New York City personal income tax for 2010 through 2012, and these refunds were granted by the Department in September 2014, with interest. In November 2014, they filed amended New York State returns for the years 2004 through 2009, again claiming refunds of all New York City personal income tax, stating that they had mistakenly continued to pay tax as if they were residents of New York City after they ceased being New York City residents in 2003. The Department disallowed the refunds for 2004 through 2007 on the grounds that the refund claims were time-barred.

Mr. Sheehan and Ms. Sabel-Sheehan filed a petition before the Division of Tax Appeals arguing that the Department had incorrectly denied the refund claims, and that it had arbitrarily refused to exercise its special refund authority under Tax Law 697(d), which grants the Department the power to issue refunds "without regard to any period of limitations" where there are no issues of fact or law, and where tax was erroneously or illegally collected or paid under a mistake of facts.

In preparation for a hearing, the petitioners requested that the ALJ issue a subpoena directing the Department to produce statistics regarding requests made to the Department for it to exercise its special refund authority during the last 10 years; redacted copies of applications for 697(d) relief that were granted during the last 10 years; and copies of memoranda, legal opinions, or other correspondence referring to the Department's interpretation of 697(d) or the scope of its authority under the statute.

[T]he ALJ found that it was the Department, as the party challenging the subpoena, that had the burden to demonstrate the utter irrelevancy of the demands, and that the Department had failed to meet that burden.

The Department moved to have the subpoena withdrawn or modified, arguing that the statistical information does not exist; that the secrecy provisions of 697(e) bar the disclosure of other returns and opinions of counsel; and that the request for legal opinions, correspondence, and opinions of counsel is excessive, overbroad, and does not identify the requested items with sufficient specificity. The Department also requested in camera inspection by the ALJ of the documents if the subpoena were not withdrawn. In response, the petitioners argued that the requested documents were relevant and material to their claims.

The Decision. The ALJ found, first, that the standard for determining whether to vacate or modify a subpoena is whether the requested documents "are utterly irrelevant to any proper inquiry." With regard to the request for statistics, the ALJ found that the requested documents were not utterly irrelevant. While the Department argued that the statistics were not in any existing document, and that it was not under an obligation to create records, the ALJ found that no evidence had been submitted to establish that allegation, and it had only been stated in an unsworn letter. Since the documents were found to be relevant, the ALJ held that it was incumbent on the Department to either produce the records or provide an affidavit attesting the records did not exist if that were the case.

With regard to the request for copies of all applications for 697(d) relief, redacted to remove confidential taxpayer information, the ALJ agreed with the Department that the tax secrecy provisions prohibit disclosure of such documents, since the use of taxpayers' returns or return information is strictly prohibited. Because the request did not fall under any of the exceptions from the statute, and because the ALJ determined that the statute did not allow even a redacted copy of a return to be disclosed, the part of the subpoena that requested redacted copies of applications for 697(d) relief was withdrawn.

With regard to the portion of the subpoena requesting memoranda, legal opinions, and correspondence referring to the Department's interpretation of 697(d), the ALJ found that it was the Department, as the party challenging the subpoena, that had the burden to demonstrate the utter irrelevancy of the demands, and that the Department had failed to meet that burden. The ALJ did agree that the request was unduly burdensome in that it did not include a time period, and therefore limited the request to the past 10 years.

Finally, with regard to the Department's arguments that any opinions of counsel are protected by secrecy laws and the attorney-client privilege, the ALJ disagreed and found, citing People v. Sprint Communications, 148 A.D.3d 471 (1st Dep't, 2017), that the Department's legal opinions are not shielded by the tax secrecy provisions. The ALJ also found that there was no indication that the opinions contained information from taxpayers' returns and, to the extent such information was contained, it could be redacted before production. The ALJ granted the Department's request that the documents be produced for in camera inspection before the hearing, and required the Department to produce a privilege log "detailing with specificity" any documents it claimed were privileged.

Additional Insights

Due to the strict requirements of taxpayer secrecy, it is very difficult to obtain documents from the Department that would reveal information concerning other taxpayers, and the ALJ's decision here reflects that strong policy to protect confidential information. However, when a subpoena requests opinions of counsel or similar documents, the concerns are different, since such opinions would not necessarily include confidential information, and the ALJ recognized that any such information could be redacted to protect the taxpayers who were involved. Here, opinions of counsel may well help to delineate the standards used by the Department in exercising its discretion under 697(d) to determine when a refund should be permitted despite the expiration of the statute of limitations, and what criteria are used to determine if money has been erroneously or illegally collected based on a mistake of facts, which would allow relief under the statute.