A New York City Administrative Law Judge held that a taxpayer’s New York City real property transfer tax returns were not false or fraudulent and therefore the Department of Finance could not reopen the closed three-year statute of limitations period for assessment. Matter of Steuben Delshah, LLC, et al., TAT (H) 12-12 (RP), et al. (N.Y.C. Tax App. Trib., Admin. Law Judge Div., Jan. 9, 2018) (released Feb. 22, 2018). The ALJ rejected the Department’s claim that the reporting position taken on the returns — that the transfers were exempt transfers by or to a charitable organization — was itself a basis for finding fraud.
The Transactions. Steuben Delshah, LLC (“Steuben”) sought to purchase real property in Staten Island (the “Property”) that was owned by Greentree Steuben, LLC (“Greentree”). In order to reduce the potential real property transfer tax (“RPTT”) due on the transfer, Steuben worked with a local tax-exempt organization, the African American Parent Council (“AAPC”), to purchase the property in order to qualify for the exemption for transfers by or to a charitable organization. First, Greentree and AAPC entered into a Contract of Sale under which Greentree agreed to sell the property to AAPC for $22,000,000. Then, AAPC entered into an Assignment and Assumption Agreement with Steuben under which it agreed to transfer its rights and obligations under the Greentree-AAPC Contract of Sale to Steuben. AAPC and Steuben then entered into their own Contract of Sale for the Property for the purchase price of $22,030,000. Greentree executed a deed transferring the property to AAPC, and AAPC then executed a deed transferring the Property to Steuben.
In 2008, the parties presented the deeds to the Richmond County Clerk for recording, along with New York City RPTT returns. The RPTT returns accurately reported all of the relevant information about the transfers, including the information about the tax exempt organization, and claimed that the transfers were exempt from the RPTT. Although the County Clerk conducted a two month examination of the AAPC-Steuben deed before accepting it for recording, it ultimately accepted both deeds for recording.
The Assessment. In 2009, approximately a year after the RPTT returns were filed, the Department of Finance became aware of the transfers to and from AAPC and began to gather information regarding those transactions. In early 2012 — more than three years after the returns were filed — the Department issued Notices of Determination collapsing the two transactions into one single taxable transfer from Greentree to Steuben and asserting fraud penalties. It was undisputed that the three years statute of limitations for assessing RPTT had expired.
Law. New York City imposes the RPTT upon transfers of real property based on the consideration for the transfer. However, transfers to and from charitable organizations are exempt from the RPTT. Admin. Code § 11-2106(b)(2). The open period for assessment of RPTT is three years from when the RPTT return is filed, but this three year limitation period does not apply to “false or fraudulent return[s] with intent to evade the tax.” Admin. Code § 11-2116(b). The Department claimed that the RPTT returns were false or fraudulent and that, therefore, the statute of limitations was inapplicable. Steuben brought a summary determination motion, asserting that even more than three years after the Notices were issued, and after extensive discovery, the Department still had not made a prima facie showing of fraud.
Determination of the ALJ. The ALJ determined that in order to carry its burden that the returns were false or fraudulent, the Department had to first establish that the returns contained “a fraudulent misrepresentation or omission of a material fact.” Citing to both federal law and the Department’s own letter rulings, the ALJ further noted that the statute of limitations for assessment commences when a return is filed that is “in substantial compliance with the requirements of the law with respect to disclosing the requisite information essential to the making of assessments.” Applying these standards, the ALJ found that the returns at issue substantially complied with the law because they disclosed the requisite information essential to the making of assessments, and that they did not misrepresent or conceal any material information. In so finding, the ALJ noted that “[i]t is axiomatic that information cannot be concealed if that information is neither asked for, nor required to be reported.”
The ALJ also rejected the Department’s claim that the mere filing of the returns reporting the transfers to and from AAPC was an act constituting a false representation. The ALJ noted that in New York, no court or Tribunal has ever considered a tax return to be fraudulent based solely upon its reporting position. He found that a finding of fraud requires more than the intent to avoid taxation; it requires a material concealment or false reporting. While the ALJ acknowledged that the record raised questions as to whether the transactions should have been collapsed into one taxable transaction as asserted by the Department, he noted that a timely Notice would have permitted full inquiry into the underlying transfers. The ALJ therefore cancelled the Notices in their entirety.
This decision makes an important distinction between transactions undertaken solely to avoid taxation and transactions which involve false reporting, fraudulent information, or concealment. The former may be subject to tax under the economic substance, substance over form, sham transaction, and step transaction doctrines. In essence, those doctrines can be invoked by the Department as a basis for taxing transactions based on their substance rather than on their form. However, this decision confirms that under New York law those doctrines cannot, without more, be used as a basis for assessing tax after the statute of limitations has expired. The Department has filed an Exception to the ALJ decision