Three recent decisions highlight procedural rules in the Division of Tax Appeals that should be kept in mind by anyone who is intending to contest a tax determination.

First, in Matter of Royal Fried Chicken of New York, Inc, DTA Nos. 822557 and 822601 (N.Y.S. Tax App. Trib., Dec. 30, 2010), the Tribunal held that an exception to the decision of an Administrative Law Judge, although filed within the period to appeal, was not in proper form. It did not contain a statement of findings of fact and conclusion of law with which the petitioners disagreed, or a statement of requested alternative findings, and the petitioners failed to respond to a Notice of Intent to Dismiss Exception. Therefore, the Tribunal concluded that a timely and proper petition had not been filed, and it dismissed the exception with prejudice.

In Matter of Marc S. Sznajderman and Jeannette Sznajderman, DTA No. 823177 (N.Y.S. Div. of Tax App., Jan. 6, 2010), an ALJ held that the Division of Tax Appeals had no jurisdiction to entertain the case because the petitioners had agreed to participate in a Tax Shelter Voluntary Compliance Initiative (“VCI”). The Department had issued a Notice of Deficiency to the petitioners asserting tax, interest and penalties for 2001, including a penalty for failing to participate in an earlier VCI that had been offered to taxpayers who participated in certain transactions regarded by the Department as “tax avoidance transactions.” See New York Dept. of Taxation & Fin. Publication No. 672 (Aug. 8, 2008). After receiving the Notice, petitioners initially requested a conference in the Bureau of Conciliation and Mediation Services. They then elected to participate in the VCI, under the option that allowed them to retain their right to file a claim for credit or refund for amounts paid. When they were notified by the Department that their VCI application could not be accepted if they had any open administrative proceedings, they withdrew their request for a conciliation conference contingent upon their acceptance into the VCI program. They were accepted into the VCI. Several months later, they filed a petition for hearing in the Division of Tax Appeals, but they had never filed a request for refund of the amounts paid with their election to participate in the VCI.

The ALJ held that the Division of Tax Appeals lacked jurisdiction over the matter. The petitioners had chosen to participate in the VCI program, and had elected the option that preserved certain appeal rights. Under that option, taxpayers could file a petition with the Division of Tax Appeals only after the Department took action on a claim for refund of the amounts paid, or certain time periods had elapsed – the earlier of either 180 days after the date of a final determination by the IRS with respect to the transactions involved, or three years after a claim for refund is filed or two years after full payment was made.

Here, the petition was found to be premature. Since the petitioners had never filed a claim for refund of the tax paid, much less waited for the expiration of the various periods specified in the statute for when a petition could be filed, the ALJ held there was no jurisdiction to consider their request. Despite the fact that the Department had agreed to withdraw its argument that jurisdiction was lacking, the ALJ held that such a concession was not binding, and that the parties cannot stipulate to confer jurisdiction in the absence of statutory authority.

Finally, in Matter of Cateria Corporation, DTA No. 823700 (N.Y.S. Div. of Tax App., Jan. 6, 2011), an ALJ held that the petitioner was not entitled to a hearing to contest amounts claimed due in several “Notices and Demands” issued during 2009. The notices had been issued based upon the Department’s review of the petitioner’s sales and use tax returns for mathematical accuracy, reported computation of tax by locality, timely filing and full payment of the amounts due, and the review conducted by the Department concluded that the petitioner had not made full payment of the tax shown to be due on the returns. The ALJ dismissed the petition, based upon Tax Law § 173-a. This provision was added in 2004, and provides that a taxpayer does not have the right to a pre-payment hearing to contest a notice and demand claiming tax is due because of errors on a return, federal changes, or failure to pay the tax shown as due on the return. See “Summary of 2004 Budget Legislation and Other Recently Enacted Legislation Relating to Sales and Compensating Use Tax,” TSB-M-04(8) S (N.Y.S. Dept. of Taxation & Fin., Dec. 3, 2004).

Additional Insights

These cases highlight the importance of paying close attention to the procedural rules set out in the statutes and regulations that established the Division of Tax Appeals and give it its authority. While it operates in a less formal manner than a judicial body, the Division of Tax Appeals only has the authority granted to it by statute, and cannot hear matters outside that authority. Petitions need to be in the specified form, and include a copy of the notice being contested and all the grounds for the protest. Exceptions filed with the Tax Appeals Tribunal to contest ALJ decisions need to specifically describe the findings that are contested and submit alternative findings. When seeking relief from payment under a specific program such as the Voluntary Compliance Initiative, taxpayers need to be sure they have followed all the correct steps in the right order: requesting a refund, if that is what is desired, waiting the appropriate amount of time, and then seeking review in the Department. As the decision in Sznajderman demonstrates, even if the Department explicitly withdraws any objection, an ALJ will not hear a case that is not properly before the Division of Tax Appeals. And the decision in Cateria stresses the importance of careful review of the kind of notice received by a taxpayer to decide on the appropriate remedy. The issuance of a notice and demand will not give a taxpayer an automatic right to a pre-payment hearing. While in certain circumstances the Department will agree to hold a “courtesy conference,” that remedy cannot be counted upon. However, a taxpayer who receives such a notice does have the right to pay, file a claim for refund, and then exercise full appeal rights if the refund is denied.