ALJ DENIES TAXPAYER’S PETITION FOR AWARD OF COSTS AND DEPARTMENT’S MOTION FOR FRIVOLOUS PETITION PENALTIES

An individual who refused to respond to a desk audit request to substantiate itemized deductions to support a personal income tax refund, but who eventually substantiated those deductions and refund claim at a conciliation conference, was not entitled to an award of costs available to a prevailing party. Matter of Brenda Collins, DTA No. 829379 (N.Y.S. Div. of Tax App., Nov. 21, 2019). The ALJ concluded that the Tax Department was substantially justified in denying the refund (and issuing a notice of deficiency) in light of the individual’s initial refusal to substantiate her claimed deductions. However, the ALJ also denied the Department’s motion to impose a frivolous petition penalty under Tax Law § 2018, concluding that the taxpayer’s petition seeking costs, while “poorly reasoned,” was not so “completely without merit” as to constitute a “frivolous petition.” 

NYC RULES THAT SALE OF BUILDING PRINCIPALLY OCCUPIED AS A SINGLE RESIDENCE QUALIFIED FOR LOWER RESIDENTIAL REAL PROPERTY TRANSFER TAX RATE 

The sale of a four-story building principally occupied by the property owner and his family as a single residence, but where the ground floor was used as a medical office and later as a nursing business, nonetheless qualified for the lower residential NYC real property transfer tax rate of 1.425% applicable to one, two, or three family houses. Finance Letter Ruling, FLR 19-4998 (N.Y.C. Dep’t of Fin., July 9, 2019), released Nov. 2019. The building was listed in the NYC real property tax assessment rolls as Class 1 Property, which includes houses “used primarily for residential purposes.” The Department of Finance concluded that, in the absence of information indicating that the property tax classification was incorrect, the Class 1 classification was controlling and the sale qualified for the lower rate, even though approximately 20% of the gross floor footage constituted commercial space.

FIRST DEPARTMENT AFFIRMS AVAILABILITY OF TAX EXEMPTION FOR DIALYSIS CENTER

The Appellate Division, First Department, has held that a corporation providing dialysis services to its affiliates – a large nonprofit hospital complex in Brooklyn and a nonprofit institute for nursing and rehabilitation – qualified for an exemption from real property taxation, notwithstanding its own for-profit status. Brookdale Physicians’ Dialysis Assocs., Inc. v. Dep’t of Fin., No. 156074/2017, 2019 NY Slip Op. 08636 (1st Dep’t Dec. 3, 2019). The court found that the dialysis center provided the critical healthcare services of hemodialysis and peritoneal dialysis to its nonprofit affiliates, and placed any profit it earned from renting the dialysis center from the institute back into its nonprofit healthcare-provider affiliates. Because the building was used to provide dialysis services for patients of the hospital and the nursing institute, and the services were “reasonably incident” to the institute’s purpose of funding and supporting its healthcare affiliates, the building qualified for tax-exempt status. 

DEDUCTION DENIED FOR ROYALTIES RECEIVED FROM FOREIGN NON-TAXPAYER AFFILIATES

Once again, a New York State ALJ has upheld the Department of Taxation and Finance’s denial of a deduction claimed under Tax Law former § 208(9)(o)(3) for royalties received from foreign affiliates. Matter of Int’l Bus. Machs. Corp. and Combined Affiliates, DTA Nos. 827825, 827997 & 827998 (N.Y.S. Div. of Tax App., Dec. 19, 2019). The statute had provided that a taxpayer could deduct from its taxable income royalty payments received from a “related member” during the taxable year, “unless such royalty payments would not be required to be added back” under the expense disallowance provisions or other similar provisions of the Tax Law. The ALJ denied the deduction, finding that the foreign royalty payors would never be required to add back the royalty payments because they were not subject to Article 9-A, and that instead of furthering the legislative intent of the addback and exclusion provisions, which had been to tax royalty transactions between related parties only once, allowing taxpayers to deduct royalties paid to non-taxpayer foreign affiliates would instead result in the royalty income not being subject to tax at all.