Affirming the decision of an Administrative Law Judge, the New York State Tax Appeals Tribunal has denied an application for costs and fees filed by a petitioner who had succeeded in substantially reducing the asserted sales tax liability through settlement. Matter of Frank M. Grillo, DTA No. 823237 (N.Y.S. Tax App. Trib., Aug. 23, 2012). The sole issue on appeal was whether the Department of Taxation and Finance was “substantially justified” in sending a Notice of Determination to Mr. Grillo at his former business address, two years after he left the business.

Background Facts. Mr. Grillo joined Trinsic Communications, Inc. in April 2003 as its senior vice-president – business group, and was solely responsible for Trinsic’s business sales and marketing until August 2004. Trinsic’s primary business address was in Tampa, Florida. Mr. Grillo had lived in Jackson, Mississippi, since January 1995, and worked primarily out of an office maintained by Trinsic in Alabama. In August 2004, Mr. Grillo was appointed Trinsic’s acting chief operating officer, following the resignations of the company’s previous chairman, president and chief executive officer, senior vice president and chief technology officer. He continued to work for Trinsic primarily from Alabama through August 2005, when he began work for another company in Atlanta, Georgia. Mr. Grillo resigned from Trinsic effective September 30, 2005. He remained a resident of Mississippi until he moved to Georgia in 2007.

In February 2007, Trinsic filed for protection under Chapter 11 of the United States Bankruptcy Code, and entered into an asset purchase agreement for the sale of substantially all of its operating assets. Trinsic later filed a motion to convert its Chapter 11 proceeding into a Chapter 7 liquidation proceeding. Mr. Grillo also filed for personal bankruptcy protection.

Audit and Assessment. The audit of Trinsic had commenced in May 2005, just a few months before Mr. Grillo left his position at Trinsic. Despite requests by the Department, no responsible party questionnaire, which would have included a home address, was submitted for him. He did not file New York State personal income tax returns, and did not appear in the Department’s data system. Using the LexisNexis database, the auditor had found 16 different addresses for Mr. Grillo’s name and social security number, and was unable to further identify a current address. Trinsic’s 2004 federal income tax return listed the company’s Tampa address as Mr. Grillo’s address.

On March 2, 2007, the Department issued a Notice of Determination to Mr. Grillo as a responsible officer for $646,823, plus penalty and interest, in sales and use tax allegedly due from Trinsic for the period from December 1, 2003 through May 31, 2005, and mailed the notice to him at Trinsic’s Tampa address.

Protest Filed. In June 2009, Mr. Grillo responded to a collection call from the Department and provided his current Georgia home address. A copy of the notice was then sent to him at the Georgia address, and he stated that he had been unaware of the existence of the notice prior to his receipt of this copy in 2009. He filed a petition challenging the notice. Since a timely petition had been filed in response to an associated assessment filed against Trinsic, Mr. Grillo’s individual protest was therefore also considered timely under Tax Law § 1138[a][3][B], which provides that timely protests filed by a business will also be deemed to include protests by individuals charged with responsible person liability.

In 2010, Mr. Grillo entered into a negotiated closing agreement with the Department, resolving all issues raised by the 2007 Notice upon his total payment of $17,283. The closing agreement did not address whether either of the parties was the “prevailing party,” which left Mr. Grillo with the ability to seek costs and fees. He filed an application for $44,525 in attorneys’ fees and nearly $100 in expenses. He also provided information concerning his net worth, which was a negative number.

Application for Costs. In order to be entitled to costs, a party must be the “prevailing party,” and have a net worth that does not exceed $2 million. Even if both criteria are met, the Department is not required to pay fees and costs if it can establish that its position was “substantially justified.” Tax Law § 3030. In his application for costs, Mr. Grillo alleged that he was the prevailing party, due to the substantially reduced dollar amount for which the assessment was resolved, and that the Department should not have mailed the notice to him at the company address two years after he had left his employment. Therefore, he argued that the Department was not substantially justified in its actions.

The ALJ decision. The ALJ had concluded, first, that in light of the reduction of assessed tax from nearly $650,000, plus penalty and interest, to the settlement amount of a little over $17,000, Mr. Grillo qualified as the “prevailing party,” and, since his net worth did not exceed $2 million, he was entitled to receive fees and costs under the statute, unless the Department established that its position was substantially justified.

The ALJ reviewed the Department’s efforts to find the correct address for Mr. Grillo. The statute requires mailing to the person’s last known address, and refers to use of an address given in the last return or application filed; if no such filing was made, notice must be sent “to such address as may be obtainable.” Tax Law § 1147(a)(1).

Here, no filings had been made by Mr. Grillo in New York, and the ALJ acknowledged that there was no evidence he was ever obliged to make such a filing. The ALJ found that, under the circumstances, where the auditor had tried to locate a personal address but had been unable to do so, reliance on the company’s address was reasonable, and “constituted the use of ‘such address as may be obtainable’” as required by the statute. Therefore, he held that the Department was substantially justified, and no fees or costs were awarded.

The Tribunal Decision. The Tribunal agreed with the ALJ. It noted that Trinsic’s 2004 federal income tax return listed the company’s office in Tampa as Mr. Grillo’s address. In light of the fact that the LexisNexis search revealed 16 different addresses, use of the company’s address was found to be “reasonable and consistent with the requirement that the Notice be sent to ‘such address as may be obtainable’” as required by Tax Law § 1147[a][1].

Additional Insights. The Tax Appeals Tribunal concluded that it was “unreasonable” to expect the Department to send Notices to all 16 possible addresses found in the Lexis/Nexis database. However, neither the Tribunal decision, nor the ALJ’s decision that it sustained, addressed the fact that the company’s address relied upon by the Department in 2007 had been provided in a 2004 return, and that Mr. Grillo had left the company in 2005, by which time the company had not only already filed for bankruptcy protection but had entered into a contract to sell all of its assets. Under these circumstances, it appears that further inquiry should have been made by the Department as to whether the three-yearold address of a company in bankruptcy was really a “reasonable” means of contacting Mr. Grillo.

The Department does not appear to have appealed to the Tribunal the decision by the ALJ that a party need not have received a favorable decision from the Division of Tax Appeals or the Tax Appeals Tribunal to be considered a “prevailing party” for purposes of obtaining costs. Here, where the settlement amount was less than 3% of the amount originally assessed, the ALJ found the petitioner to have been the prevailing party for purposes of an award of costs.