The Appellate Division, Third Department, has reversed the New York State Tax Appeals Tribunal and held that statutory amendments enacted in April 2009 narrowing the Qualified Empire Zone Enterprise ("QEZE") tax credit cannot constitutionally be retroactively applied to the tax year beginning January 1, 2009. Mackenzie Hughes LLP v. N.Y.S. Tax Appeals Trib., No. 527595, 2019 NY Slip Op. 09337 (3d Dep't, Dec. 26, 2019). Separately, the Tribunal has now also held--contrary to its own previous decision in the Mackenzie Hughes LLP case--that the amendments cannot be applied retroactively. Matter of NRG Energy, Inc., DTA No. 826921 (N.Y.S. Tax App. Trib., Dec. 17. 2019).

The Mackenzie Hughes LLP Case

Facts. Mackenzie Hughes LLP ("Mackenzie Hughes"), a New York limited liability partnership, is a law firm that was formed out of a predecessor law firm, Mackenzie Smith Lewis Mitchell & Hughes, LLP ("MSLMH"). In 2001, MSLMH had entered into a 15-year lease for office space in Syracuse, after having been advised by representatives of the City of Syracuse that the firm could receive QEZE credits if it remained in its long-time location. Mackenzie Hughes was formed as a successor in 2002, assumed the lease, and became QEZE-certified in 2003, effective as of June 14, 2002.

In June 2009, Mackenzie Hughes was notified that its QEZE certification was being revoked effective January 1, 2008, due to the new amendments to the law. Mackenzie Hughes and approximately 20 of its partners and their spouses (the "Partners") challenged the revocation, but it was upheld by the Empire Zone Designation Board, which oversees the QEZE program.

On either their original or amended 2009 returns, the Partners claimed QEZE tax credits based upon their partnership interests in Mackenzie Hughes. The refunds were issued, but the Department of Taxation and Finance subsequently issued notices of deficiency to reclaim the amounts previously refunded, and Mackenzie Hughes and the Partners challenged the assessments before the Division of Tax Appeals.

Background on the QEZE Credits and Amendments. On April 7, 2009, the statute creating the QEZE credits was amended to impose new criteria for continued certification under the Empire Zones program (the "2009 Amendments"). The change was intended to prevent a perceived abuse caused by existing businesses reincorporating or transferring employees among related entities to create the appearance of having created new jobs or made new investments. In 2010, the statute was further amended to explicitly provide that the 2009 Amendments were retroactive to years beginning on or after January 1, 2008.

In 2013, the New York Court of Appeals held that retroactive application of the 2009 Amendments to the year beginning January 1, 2008, violated the Due Process Clause and was unconstitutional. James Square Assocs. LP v. Mullen, 21 N.Y.3d 233 (2013). The court applied a test set forth in Replan Development, Inc. v. Department of Housing Preservation & Development, 70 N.Y.2d 451 (1987), appeal dismissed, 485 U.S. 950 (1988), which looks at three factors: whether the taxpayer had been forewarned of the change in law and the reasonableness of reliance on the old law; the length of the retroactive period; and the public purpose of the retroactive application. In James Square, the Court of Appeals found that the taxpayers had not been forewarned of the legislative change, that the period of retroactivity back to January 1, 2008, was excessive, and that the retroactive application did not serve an important public purpose.

Decisions Below. Mackenzie Hughes and the Partners argued that the 2009 Amendments could not be retroactively applied back to January 1, 2009. An ALJ rejected this argument, finding that application of statutory changes enacted in April 2009 to the 2009 tax year itself was not a retroactive application of the law, and that even if it was, there was no violation of due process rights because the period of retroactivity was very short, Mackenzie Hughes and the Partners were aware of the likely changes, and the 2009 Amendments were enacted with the "clearly acceptable" public purposes of curtailing abuses of the Empire Zones program and achieving budget savings.

On exception, the Tax Appeals Tribunal, while finding that there was indeed a retroactive application of the law, and acknowledging that the Court of Appeals in James Square found that there was no acceptable public purpose served by the retroactive application, still upheld the application back to January 2009. The Tribunal relied on the short period of retroactivity--97 days--and its conclusion that there was no action that could have been taken by Mackenzie Hughes in 2008 or 2009 that would have altered the result, since the lease was signed and Mackenzie Hughes was formed in 2001 and 2002, respectively.

Appellate Division Decision. The Appellate Division reversed the Tribunal and held that the retroactive application violated the taxpayers' due process rights. Applying the same three factors discussed in Replan Development and James Square, the court found that no public purpose was served by the retroactive application, but that the short period of retroactivity weighed against the taxpayers, as they conceded at oral argument. However, the court found that the factor concerning forewarning of the change in the law and whether reliance on the old law was reasonable weighed in favor of the taxpayers. The court rejected the Department's argument that the Partners were on notice of the new law as of January 7, 2009, when the 2009 Amendments were introduced, holding that the "mere fact that legislation is being introduced does not mean that such legislation would ultimately be passed." The court also found that the factor concerning adequate forewarning does not focus on the actions that the parties could have taken, but rather on whether the parties' reliance was justified "under all the circumstances of the case and whether [their] expectations as to taxation have been unreasonably disappointed." The court noted that in 2001, MSLMH had been considering various plans to relocate but chose to remain in the Empire Zone and enter into a 15-year lease, invested approximately $800,000 in equipment and furnishings, and took other actions in reliance on receiving QEZE credits. The court therefore concluded that the Partners' reliance on the old law was reasonable. After "viewing all factors holistically," the court concluded that the 2009 Amendments could not be applied retroactively to the beginning of 2009.

The NRG Energy, Inc. Case

Facts. NRG Energy, Inc. ("NRG") owns and operates power plants that generate power from various fuel sources, including coal, natural gas, solar, and wind. It is the sole owner and member of Oswego Harbor Power LLC, which owns and operates the Oswego Generating Station in Oswego County, New York (the "Plant"). NRG and Oswego Harbor Power LLC were originally certified as eligible under the New York State Empire Zones Act for the Plant effective in 2002, which entitled NRG to QEZE tax credits, including the refundable credit for real property taxes.

NRG claimed 2009 QEZE credits with regard to two facilities in other Empire Zones and received a refund of approximately $24 million. In June 2009, it was notified that its certification for eligibility for the Plant was being revoked, retroactive to January 1, 2008. After the decision in James Square, NRG received its refunds of the QEZE credits for the Plant for 2008, but its claim on an amended 2009 return for an additional credit of approximately $5.9 million for the Plant was denied, because the certificate of eligibility for the Plant had been revoked in 2009, in reliance on the 2009 Amendments to the statute. NRG challenged the denial, arguing that the retroactive application of the 2009 Amendments to the year beginning January 1, 2009, was impermissible under James Square, and that the Department's "selective enforcement" of the statute violated its rights to equal protection under the Constitution.

Previous Decisions. An ALJ had rejected NRG's arguments, finding that application of the 2009 Amendments to the 2009 tax year itself was not retroactive application of the law, just as a different ALJ had found in the Mackenzie Hughes case. The ALJ also rejected NRG's argument that there was any violation of NRG's equal protection rights, finding that NRG had failed to demonstrate any "selectivity of enforcement" arising from "an intentional invidious plan of discrimination" on the part of the Department. The Tribunal reversed the ALJ's determination that no retroactive application of a statute had occurred, and remanded the case to the ALJ to determine whether that retroactive application was constitutional under the factors set forth in James Square and Replan Development. On remand, the ALJ again sustained the retroactive application of the amendments, finding that there was no action NRG could have taken to avoid the decertification, and that the short retroactive period was not enough to violate NRG's due process rights.

The case then went back to the Tribunal on a second exception.

Tribunal Decision. This time, the Tribunal found that NRG's due process rights had been violated by the retroactive imposition. With regard to the first part of the three-factor test--whether the taxpayer's reliance was justified and whether its expectations have been unreasonably disappointed--the Tribunal found that NRG, had it known that changes would have been required, could have taken actions that might have avoided the revocation of its certification. Even though the decertification was based upon reports filed prior to 2008, the Tribunal expressly found that NRG could have taken steps, such as changing its budget in a way that might have allowed it to still qualify, when it adopted its budget in December 2008. Therefore, the Tribunal found that the first factor weighed in favor of NRG, and that, in the absence of a public purpose for the retroactive application, weighing the competing factors resulted in the conclusion that NRG's due process rights were violated by retroactive application of the 2009 Amendments.


Taken together, these decisions demonstrate a welcome development in the law regarding retroactive application of tax imposition statutes. In Mackenzie Hughes, the Appellate Division makes it clear that, when taxpayers have made important business and financial decisions based on existing law, and their reliance was reasonable, new laws cannot be applied retroactively, and that the test does not focus on what actions could have been taken, but only on whether the taxpayers had adequate forewarning of a change and whether they justifiably relied on the existing law. In NRG, decided nine days before the Appellate Division decision in Mackenzie Hughes, the Tribunal found that there were actual actions that could have been taken by the taxpayer that it did not have the opportunity to take--arguably a higher standard than the one found relevant by the Appellate Division, but certainly consistent with the court's decision.

It is unclear whether the Department will seek leave to appeal to the Court of Appeals in Mackenzie Hughes (it cannot appeal the NRG decision). In light of both these decisions, however, circumstances in which new laws are retroactively applied to the detriment of taxpayers should be carefully reviewed and may well be subject to challenge.