In Matter of Joel and Rona Levy, DTA No. 825005 (N.Y.S. Div. of Tax App., May 22, 2014), a New York State Administrative Law Judge concluded that there is no legal authority to grant in equity to a taxpayer an extension of the statute of limitations for refunds, and denied the taxpayers’ request for a refund filed after the statute of limitations had expired.

Background.  In 2002, the Levys hired a new tax return preparer, Todd Newman, for their personal and S corporation returns starting in 2002.  Between 2002 and 2007, the Levys received “frequent notices” from federal and state taxing authorities informing them of various missed tax-filing deadlines, and were increasingly unable   to reach Mr. Newman, although they retained him as their preparer.  The Levys also incurred net operating losses in 2002 and subsequent years, and claimed that Mr. Newman failed to advise them to file amended State personal income returns applying a net operating loss carryback to the 2001 year.  The Levys did not file such an amended 2001 State return and refund request until January 2011, well more than three years after the applicable statute of limitations for refunds had closed.

Meanwhile, in 2010, Mr. Newman was convicted of grand larceny and repeated failure to file his own personal income tax returns, and was sentenced to nine years in prison. Although his crimes did not directly affect the Levys or their tax returns, the Levys asserted that Mr. Newman’s criminal conduct must have been “distracting” and prevented him from providing competent representation.  Thus, after having their refund request on their 2001 amended return denied by the Department as untimely, the Levys petitioned the Division of Tax Appeals for relief in equity.

The decision.  Concluding that there are no exceptions to the State’s statute of limitations “that allow for consideration of individual circumstances,” the ALJ refused to grant the Levys an equitable tolling of the statute of limitations applicable to their 2001 return.  The ALJ cited a U.S. Supreme Court case, United States v. Brockamp, 519 U.S. 347 (1997), which held that the statutory time limitations for the filing of a federal refund claim could not be  equitably tolled, and determined that there was “no reason to interpret” the State’s statute of limitations differently, regardless of whether a taxpayer may have “very compelling personal reasons” for requesting equitable relief.  Further, the ALJ appeared to question whether the Levys would have deserved relief in equity even if the Division of Tax Appeals had the power to provide it, pointing out that the Levys failed to identify “a causal link” between Mr. Newman’s criminal conduct and their own circumstances, and that the Levys continued to use him even after several other “episodes of neglect” on his part.

Additional Insights

The ALJ’s decision in this case is consistent with previous New York State cases holding that tax statutes of limitations may not be tolled in equity, regardless of the circumstances leading to a taxpayer requesting a refund after the statute has closed.  While bad advice and neglect may serve as the basis for a malpractice claim against a preparer, taxpayers should not expect any relief from the State.