A New York State Administrative Law Judge denied a couple’s claim for a personal income tax refund resulting from a resident tax credit, filed after the statute of limitations had expired, because the couple failed to show the mistake of fact necessary for the Commissioner to invoke his special refund authority under Tax Law § 697(d). Matter of Yang and Kyung H. Cho, DTA No. 824624 (N.Y.S. Div. of Tax App., Mar. 22, 2012).

The Chos timely filed their 2006 New York State personal income tax return and paid the tax due. In March 2010, the Chos were notified by the New Jersey Division of Taxation that they owed New Jersey income tax for the 2006 tax year, which they did not contest. In May 2010, the Chos filed an amended 2006 New York return seeking a refund based on a resident credit for taxes paid to New Jersey.

The Department denied the Chos’ claim for refund as untimely because the deadline for filing a refund claim expired on April 15, 2010, and the Division did not receive the refund claim until May 10, 2010. While the Chos conceded that their refund application was untimely, they asserted that, because of a “miscommunication with their accountant,” they failed to timely file a refund claim and thus had made an erroneous payment of taxes to New York under a “mistake of fact.” Therefore, they asserted the Commissioner’s special refund authority under Tax Law § 697(d), which provides:

Where no questions of fact or law are involved and it appears from the records of the tax commission that any moneys have been erroneously or illegally collected from any taxpayer or other person, or paid by such taxpayer or other person under a mistake of facts, pursuant to the provisions of this article, the tax commission at any time, without regard to any period of limitations, shall have the power . . . to cause such moneys so paid . . . to be refunded.

(Emphasis added.)

In determining whether this special refund authority was available for the Chos’ refund claim, the ALJ needed to determine whether the money paid by the taxpayers was paid under a mistake of fact or a mistake of law. Citing Matter of William M. and Judi L. Wallace, DTA No. 818025 (N.Y.S. Tax App. Trib., Oct. 11, 2001), the ALJ noted:

A mistake of fact has been defined as an understanding of the facts in a manner different than they actually are. A mistake of law, on the other hand, has been defined as acquaintance with the existence or nonexistence of facts, but ignorance of the legal consequences following from the facts.

(Emphasis added.)  

Applying this definition, the ALJ found that the Chos’ failure to report and pay the proper amount of tax to New Jersey, and then to claim the appropriate credit on their 2006 New York income tax return, was based on a mistake of law, not a mistake of fact. The ALJ first noted that the Chos were aware of all of the income at issue when they originally filed their returns. The ALJ then stated that the Chos did not provide any evidence or otherwise elaborate on why their “miscommunication” with their accountant was a mistake of fact and not law. Finally, the ALJ pointed out that the Chos were informed about their New Jersey deficiency on March 22, 2010, 24 days before the expiration of the New York statute of limitations, leaving them time to file a claim for refund.  

Accordingly, the ALJ held that the special refund authority provided in Tax Law § 697(d) was not applicable and granted summary judgment to the Division.

Additional Insights. While the Chos could have filed a timely refund claim after being notified that they owed additional taxes to New Jersey before the statute of limitations expired, in some cases taxpayers are assessed tax deficiencies in other states after the statute of limitations has expired, leaving the taxpayer without a remedy for avoiding multiple tax. Although not binding precedent, the Division of Tax Appeals has previously ruled that where a taxpayer does not receive notice of taxes owed to another jurisdiction until after the statute of limitations to file a New York claim for refund has expired, the special refund authority does not apply because the taxpayers’ mistake was one of law, and not fact. Matter of Daniel B. and Dolores Bowden et al., DTA Nos. 813529 through 813538 (N.Y.S. Div. of Tax App., Aug. 22, 1996).