The New York State Tax Appeals Tribunal has held that a fact alleged in a petition was deemed admitted by the Department of Taxation and Finance, since the answer denying that fact was not timely filed, and has remanded the case to the Administrative Law Judge for further proceedings. Matter of Forest City Enterprises, Inc., DTA No. 825157 (N.Y.S. Tax App. Trib., May 19, 2016).

Background. Forest City Enterprises, Inc. (“Forest City”) is a developer, owner, and operator of urban real estate projects, and has conducted project development activities in New York State through a wholly owned subsidiary, Forest City Ratner Companies, LLC (“FCRC”) that had its headquarters in Brooklyn, New York. FC Yonkers Associates, LLC (“FC Yonkers”) is another related entity that was formed to own and develop a project known as “Ridge Hill” in Yonkers, New York, on an 80-acre parcel of land. In 2002, the Ridge Hill property was designated as within the boundaries of the Yonkers Empire Zone. After a series of transactions concerning the ownership and management of the Ridge Hill property, FC Yonkers entered into a “Tax Benefit Leaseback Agreement” on August 2, 2007, with the City of Yonkers Industrial Development Agency (“YIDA”), in which FC Yonkers conveyed a leasehold interest in the real property, buildings, and equipment at Ridge Hill (the “Facility”) to YIDA, YIDA leased the Facility back to FC Yonkers for rent of $1.00 per year, and FC Yonkers agreed to make certain specified real property tax payments. In January 2008, the City of Yonkers and FC Yonkers executed a “Memorandum of Understanding” in which the parties agreed that FC Yonkers was “legally responsible for making payment-in-lieu-of tax payments to the City of Yonkers” pursuant to a “1979 PILOT Ordinance.” In 2008, FC Yonkers paid approximately $7 million to the City of Yonkers in response to an invoice that referenced the Tax Benefit Leaseback Agreement. 

For 2008, FC Yonkers claimed an EZ wage tax credit of $3,000 and a QEZE credit for real property taxes of $7 million. On its 2008 form IT-606 (Claim for QEZE Credit for Real Property Taxes), FC Yonkers reported varying numbers of employees during each quarter of 2008, a test year employment number of zero, and a current tax year employment number of one. 

The Audit and the Law. The Department audited the claim for credit, questioning particularly whether FC Yonkers, rather than other related entities, actually employed the individuals it had claimed as employees. There was no dispute that, if the credit was available, Forest City was entitled to claim it due to its ultimate ownership of FC Yonkers, an LLC. Substantial information was produced concerning various employees, their duties with FC Yonkers and related entities, and their various tax filings.

The QEZE credit for real property tax is determined by computing “the product of the benefit period factor..., the employment increase factor and the eligible real property taxes paid or incurred by the QEZE during the taxable year.” Tax Law § 15(b)(1). Therefore, the critical issue in the audit was whether FC Yonkers had an “employment number,” as defined in Tax Law § 14(g), of at least one for 2008, so that it would have an “employment increase factor” greater than zero. 

The auditor reviewed the Department’s internal databases and concluded that none of the individuals identified as employees was actually employed by FC Yonkers in New York State. Therefore, the auditor took the position that FC Yonkers’ “employment number” was zero for the 2008 year, so that its employment increase factor was also zero, and the entire credit was disallowed.

The ALJ Hearing and Decision. On July 30, 2012, Forest City filed a petition with the Division of Tax Appeals seeking review of the denial. In its petition, Forest City included an allegation that FC Yonkers “has an ‘Employment Number’ (as that term is defined in § 14 (g) of the New York Tax Law) of at least 1.0 for the Taxable Year.” The Division of Tax Appeals acknowledged receipt of the petition on August 10, 2012, commencing the Department’s 75-day period to file its answer, which made the answer due on October 24, 2012. On August 17, 2012, the Division of Tax Appeals granted the Department’s request to extend the deadline for serving its answer to November 8, 2012. The answer was mailed to the Division of Tax Appeals on November 16, 2012. The answer was received on November 19, 2012, and there was no indication in the Division of Tax Appeals’ file that the answer was filed on any earlier date.

In its hearing memorandum, which under the Tribunal Rules of Practice and Procedure is due 10 days before the hearing, the Department raised an alternative basis for its denial of the QEZE credit, claiming that the $7 million payment made by FC Yonkers did not qualify as “eligible real property taxes” for purposes of the QEZE credit.

At the hearing before the ALJ, Forest City presented considerable evidence concerning its employees, including testimony and affidavits, expense receipts, minutes of meetings regarding construction management for the Ridge Hill project, and evidence concerning a claimed common paymaster agreement. Forest City also argued that, because the Department’s answer was served late, all factual allegations in the petition were deemed admitted, including the allegation that FC Yonkers had an employment number “of at least 1.0.”

The ALJ acknowledged that Forest City was claiming that, since the Department’s answer was served late, all material allegations of fact in the petition were deemed admitted. However, she concluded that the assertion that FC Yonkers had an employment number of at least 1.0 was not a material allegation of fact, but rather an “ultimate conclusion of law,” and therefore was not deemed admitted by the late-filed answer. The ALJ then reviewed the evidence presented at the hearing and found it insufficient to establish that FC Yonkers employment number was anything other than zero, concluding that there was no common paymaster agreement established, and that Forest City had failed to prove a common law employment relationship between FC Yonkers and the individuals alleged to be its employees. Therefore, the ALJ concluded that FC Yonkers, with an employment number and thus an employment increase factor of zero, was not entitled to the credit and that the issue of whether the taxes themselves were eligible was rendered moot.

Tribunal Decision. The Tribunal reversed the ALJ’s conclusion on the preclusive effect of the late-filed answer. It noted that, under the Tribunal Rules, if an answer is not timely filed and served, “all material allegations of fact . . . shall be deemed admitted” 20 NYCRR § 3000.4(b)(4). While recognizing “the vexing nature of the distinction between questions of fact and questions of law,” as described in Pullman-Standard v. Swint, 456 U.S. 273, 288 (1982), the Tribunal found that, in this case, “the scale tips in favor of a conclusion that the allegation is predominately factual.” Since it was undisputed that the question of FC Yonkers employment number was material, the contention was found to be a material allegation and was deemed admitted. 

The only remaining issue was whether the amounts paid by FC Yonkers were for eligible real property taxes under the statute. Since the ALJ had not reached this issue, finding it moot, the Tribunal remanded the case back to the ALJ for a supplemental determination to be made “as expeditiously as possible,” and based upon the factual record already made at the hearing. 

Additional Insights

It is rare to see a case where the Department’s late filing of an answer results in the deemed admission of a material fact, much less one that is so critical to the ultimate determination. Nonetheless, the Tribunal’s rules clearly provide for such a result, and the allegation in question—that FC Yonkers has an employment number of at least 1.0—certainly appears to be primarily a factual allegation and could hardly have been more material to the issues in dispute. This decision is an important reminder that the Tribunal’s rules and time requirements are to be taken seriously by all parties. On remand, the only issue remaining is whether the taxes paid by FC Yonkers meet the statutory requirements, since the Tribunal’s decision has foreclosed further consideration of the employment number issue.