An art gallery was denied a refund of sales tax that it had collected from one of its clients and remitted to the Department of Taxation and Finance, although the gallery had returned both the purchase price and the sales tax to the client when the painting was found to be a forgery, because the refund claim was held to have been untimely.  Matter of Richard L. Feigen & Company, Inc., LLC,  DTA No. 824996 (N.Y.S. Div. of Tax App., July 10, 2014).

Facts.  Richard L. Feigen & Company, Inc. (the “Gallery”), is an art gallery located in New York City.  In September 2003, the Gallery acquired from a Swiss seller what was represented to be a Max Ernst painting, “Forêt,” for $2.325 million.  The authenticity of the painting was supported by a Provenance showing the history of ownership and a Certificate of Authenticity from a respected art historian who was known to be a leading expert on Max Ernst.  In January 2004 the Gallery sold the painting for $2.5 million to Anna-Marie Kellen, and collected and remitted to the Department $215,625 in sales tax.

At the time of the 2004 sale, neither the Gallery nor Ms. Kellen had any knowledge or suspicion that the painting was not authentic.  However, in late 2010, news articles began to expose an art-fraud ring that included paintings purportedly painted  by Max Ernst, and three persons were arrested in Germany for their involvement.  They were later convicted and sentenced, and it was also discovered that the art historian who had provided the Certificate of Authenticity had been fooled by the forger as well.  In February 2011, the Gallery received notice from the Berlin Police Department that the painting might be a forgery; it provided information, retrieved the painting from Ms. Kellen, and sent it for a scientific examination, which resulted in a conclusion by the Gallery that the painting was not authentic.  In March 2011, the Gallery requested a refund from the Swiss seller of the $2.325 million it had paid for the painting, plus reimbursement for examination and shipping expenses, which was received in full.  On June 20, 2011, the Gallery in turn refunded the full purchase price, and the sales tax, to Ms. Kellen.  The next day it applied for a refund of the $215,625 in sales tax, relying on 20 NYCRR 534.8, which permits a refund when a taxpayer “erroneously collected sales tax on the sale of tangible personal property fraudulently misrepresented as an original work of art.”  The refund claim was denied by the Department as untimely.

Decision.  The Administrative Law Judge upheld the denial, in reliance on the statute of limitations contained in Tax Law § 1139(c), which requires applications for refund or credit of  sales tax to be filed within three years from the time the return was filed, or two years from when the tax was paid. The Gallery argued that the statute of limitations should have been tolled until, at the earliest, March 2011, as a result of fraud, citing CPLR § 213, which allows a civil action based on fraud to be filed by the later of six years from the date it accrued or two years from the time the fraud was discovered or could reasonably have been discovered.  The ALJ rejected this argument, finding that the Tax Law specifically disallows the granting of refunds after the specified period of time has passed, and that public policy does not favor granting a refund filed late. She relied on the decision in Matter of Renaud, DTA No. 823595 (N.Y.S. Tax App. Trib., Oct. 13, 2011), for the proposition that the statute of limitations allows a reasonable time for a taxpayer to realize an error has been made and seek a refund, and that the State knows there is only a specific statutory period during which it could be liable, after which the matter is ended, and “[a]nything less than this degree of certainty would make the financial operation of government difficult, if not impossible.”  The ALJ rejected the Gallery’s claim that equity requires a refund, since the Division of Tax Appeals “does not have authority to determine matters equitably.”  The ALJ also found that the “special refund authority” provisions of Tax Law §§ 697(d) and 1096(d) apply only to personal income tax and corporation franchise tax, and that failing to apply those provisions to the sales tax does not amount to a violation of the Gallery’s Constitutional rights to Equal Protection or Due Process.

Additional Insights

Given the statutory limits on refunds and the inability of the Division of Tax Appeals to award relief in equity, the ALJ had limited tools available to deal with the late-filed claim.  However, the case relied upon by the ALJ for her conclusion regarding the inapplicability of the CPLR provisions providing for tolling of the statute of limitations in the case of fraud, Matter of Renaud, does not seem to fully support the conclusion that the fraud tolling provisions are totally inapplicable, since it did not involve any claims that the taxpayer had been defrauded, or that the statute of limitations should be tolled for any reason.  In fact, the taxpayer  in Renaud had pled guilty to charges of grand larceny and was seeking in 2009 a refund of the amount it had been required to pay in restitution in 2001, so it is unsurprising that its refund claim was denied as untimely.  The Gallery in this case seems to have done everything it could under the circumstances, since it reasonably relied on the documents it had been provided by the seller, responded appropriately to a German police investigation, and returned the full purchase price and sales tax to its customer. Since the fraud was not discovered until long after the usual sales tax statute of limitations had expired, the Gallery – an innocent  party – is left bearing the sales tax.