In Matter of Mark A. Rothberg, DTA No. 823318 (N.Y.S. Div. of Tax App., Mar. 29, 2012), a New York State Administrative Law Judge held that the Division of Tax Appeals lacked jurisdiction to provide a hearing when the taxpayer had received neither a notification of a tax deficiency nor denial of a refund application.

In Rothberg, the petitioner was a New York resident employed in New Jersey. He filed returns for the years 1994 through 2010, but according to the Department of Taxation and Finance did not make full payment of the amounts shown as due, or any payment in certain years. The Department did receive portions of federal income tax refunds owed to Rothberg by the Internal Revenue Service, and applied those payments as offsets to Rothberg’s outstanding New York assessments. The Department applied them, as is its usual practice, first to tax, then to penalties, and then to interest, starting with the oldest outstanding assessment.

The proceeding was commenced in response to a levy against Rothberg’s bank account in June 1, 2009, based on outstanding warrants, and a notice of garnishment sent to his employer, seeking payment of approximately $100,000. Thereafter, the Department recalculated the amounts due, based on amounts credited from the IRS payments over the years, leaving a net difference of approximately $34,000.

Rothberg claimed that, in 2003, in connection with refinancing his apartment, he had been required to and did satisfy all outstanding tax obligations, and that this satisfaction was confirmed in a 2003 telephone conversation with a Department official. No documentation was provided, other than a satisfaction of one warrant for approximately $4,000. The ALJ noted that Rothberg “appears to assert” that none of the IRS payments should have been applied to periods prior to 2004, and that the payments were sufficient to offset all or most of the amounts owed for 2004 and thereafter.

Rothberg had commenced a proceeding in Supreme Court, the state’s trial court, seeking to vacate the levy and warrants. That proceeding was dismissed for failure to exhaust administrative remedies. Rothberg then requested a conciliation conference, which was rejected on jurisdictional grounds, leading to a petition filed with the Division of Tax Appeals seeking a hearing.

The ALJ held that the Division of Tax Appeals lacked jurisdiction to provide a hearing. He found that the various provisions in the New York Tax Law regarding the right to hearing “limit the right of a taxpayer to file a petition to situations where a notice of deficiency has been issued or an application for refund of tax paid has been made and denied.” Here, neither of those had occurred. The petitioner had filed tax returns, which are regarded as self-assessing the amount of tax shown to be due. The Department issued notices and demands for the tax shown due (or determined to be due based on math errors), which is not the same as the assertion of a “deficiency.” Under Tax Law § 173- a(2), a notice and demand “shall not be construed as a notice which gives a person the right to a hearing….”

The ALJ then went on to note that, even if jurisdiction existed, Rothberg had failed to provide sufficient evidence to support his claims, since he presented no documentation that satisfaction of the one warrant in question eliminated all his outstanding liabilities, and that, even if all the claimed federal offsets were applied, the net result still left nearly half the assessed amounts unpaid.

Additional Insights. In 1994, the Appellate Division had held that no provision in the Tax Law, as it then was written, clearly provided that a notice and demand did not give rise to the right to a hearing. Donal A. Meyers et al. v. Tax Appeals Tribunal, 201 A.D.2d 185, (3d Dep’t 1994). In 2004, the law was amended to clearly eliminate the right to a hearing before the Division of Tax Appeals when the taxpayer is challenging a notice or demand for unpaid tax, interest, and penalties resulting from a mathematical or clerical error, or from the failure to pay the tax shown due on a return.

More interesting is the fact that Rothberg first tried to bring his action in the state court, where it was dismissed, presumably on the State’s motion, for failure to exhaust administrative remedies. Having achieved that dismissal, it appears that the Department then argued — successfully, thus far — that in fact Rothberg has no administrative pre-payment remedies, leaving him with only the potential remedy of paying all amounts claimed to be due and filing a claim for refund, another option not discussed at all in the decision.