In the August 2017 issue of New York Tax Insights, we reported on a decision by an Administrative Law Judge canceling penalties imposed by the Department of Taxation and Finance under the cigarette and tobacco products tax against an employee of a Native American– owned cigarette wholesaler for possessing or transporting unstamped cigarettes. The same ALJ has now issued an Order awarding attorney fees to the taxpayer as the prevailing party. Matter of Shawn E. Snyder, DTA No. 825785 (N.Y.S. Div. of Tax App., Jan. 11, 2018).

Earlier Decision. In June 2017, the ALJ held that Shawn Snyder, an employee of a tobacco wholesaler located on a Seneca Nation reservation in upstate New York, who was found to be in possession of unstamped cigarettes, resulting in penalties totaling nearly $1.3 million, qualified for an exemption from penalties. The ALJ held that, since the employer was a contract carrier engaged in lawfully transporting unstamped cigarettes, even though not licensed by New York State, and inasmuch as Mr. Snyder was acting within the scope of his employment for the carrier, he qualified for the exemption, and the penalties against him were canceled.

Issue. The Department did not appeal the decision, and thereafter the taxpayer filed an application for administrative and litigation costs, including attorney fees, under Tax Law § 3030. That provision allows for the recovery by the “prevailing party” of “reasonable administrative” and “reasonable litigation” costs incurred after the issuance of a statutory notice or other document that provides a right to an administrative hearing. In order to be considered a “prevailing party,” the taxpayer must “substantially prevail[]” with respect to the amount in controversy or the most significant issue(s) in the case and, in the case of an individual, have a net worth not exceeding $2 million. No fees are awarded if the Department proves that its position was “substantially justified.” The Department opposed the awarding of attorney fees on various grounds, including that its position was “substantially justified” and that the costs sought were not shown to be “reasonable.” ALJ Order. The ALJ concluded that the taxpayer substantially prevailed and that the Department did not meet its burden of proving that its position was substantially justified. The ALJ pointed out that the evidence clearly showed that the employer was a contract carrier lawfully transporting unstamped cigarettes, and that the taxpayer was an employee acting within the scope of his employment at the time the cigarettes were seized by the Department. The amount of the penalty (approximately $1.3 million) was also found to be “grossly disproportionate” to the value of the unstamped cigarettes (approximately $164,000). Therefore, the ALJ concluded that Mr. Snyder was entitled to reasonable costs, with the ALJ accepting the number of hours worked by the taxpayer’s attorneys, but limiting the hourly rate to the rate set by statute, in the absence of special circumstances warranting an increase here. 

ADDITIONAL INSIGHTS

It is unusual to see the awarding of attorney fees in cases before the Division of Tax Appeals, and with good reason, since the Department should not be faced with paying attorney fees where it takes good-faith positions in cases where it does not ultimately prevail, in the same way that penalties should not be imposed where taxpayers take good-faith reporting positions on their returns. Here, however, the ALJ concluded that the facts and law were so straightforward that it was appropriate to award attorney fees to the taxpayer.