I. Federal Courts
The Supreme Court in United States v. Windsor declared unconstitutional Section 3 of the Defense of Marriage Act of 1996 (DOMA), as violating the due process clause of the Fifth Amendment, which guarantees every person equal protection of the law. S.Ct. No. 12-307 (2013). The landmark decision will have a significant impact on federal tax law. Following the Windsor decision, Treasury announced that a same-sex union celebrated in a jurisdiction recognizing such marriages would be respected, for federal tax purposes, in all states. Rev. Rul. 2013-17. The IRS stated that for tax years in which the statute of limitations is still open, same sex couples may file amended returns.
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The Supreme Court, in cases involving Amazon and Overstock, declined to exercise certiorari to hear facial Constitutional challenges to New York’s revenue law which imposes sales tax on internet sales based upon a “presumption” of nexus in New York. The decision by the New York Court of Appeals, which upheld the taxing statute, was in effect upheld. Amazon.com LLC v. N.Y.S. Dep’t of Taxation & Fin., No. 13-259 (12/2/2013); Overstock.com., Inc. v. N.Y.S. Dep’t of Taxation & Fin., No. 13-252 (12/2/2013).
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In Obergefell v. Kasich, 2013 U.S. Dist. LEXIS 10277 (S.D. Ohio 2013), the Court forbade the Ohio registrar from issuing a death certificate unless the death certificate reflected the marriage by the same-sex couple in Maryland shortly before the decedent’s death. The plaintiff Obergefell argued that he would suffer irreparable harm unless the death certificate indicated his marriage. The Ohio constitution prohibits same-sex marriage, but such marriages are legal in Maryland.
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Syring v. U.S., 2013 WL 4040445 (W.D. Wis.) underscores the importance of properly designating tax payments. Taxpayers should designate tax payments to the oldest tax liability; otherwise the government may apply the tax to penalties and more recent tax liabilities, which may be disadvantageous. In Syring, under a belief that the estate would owe more than $600,000 in taxes, it made an undesignated payment to IRS of $170,000. Later, the estate filed a return indicating no estate tax due. At the same time, the IRS found a tax due, but only of $25,526. The taxpayer claimed a refund which was denied by IRS. The Service asserted that the three-year period for claiming a refund had lapsed. Holding for the IRS, the District Court found that the payment, when made, was neither designated as a deposit, nor made with the intent that it constitute a deposit. Accordingly, the Service was correct in treating the remittance as a payment, in accordance with its own advice in Rev. Proc. 2005-18.
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In U.S. v. Blake, 111 AFTR 2d 2013-1722 (E.D.N.Y. 2013), the decedent’s estate owed $253,590 in estate tax. The decedent had died in 1989. The IRS pursued collection, and in 1993 filed a proof of claim against the estate. The executor of the estate, the decedent’s daughter, entered into an installment agreement to satisfy the then outstanding estate tax liability of $560,215 in August of 1995. The executor died in 2005, and the estate defaulted on the installment agreement. The IRS then proceeded against the granddaughter, who was the named executor of the daughter’s estate, by filing notices of tax lien in 2005 on two parcels of real property owned by the granddaughter. In response, the executor commenced a quiet title action in New York Supreme Court in 2010. While that action was pending, the United States brought an action in federal court, seeking payment. The district court granted the executor’s motion to dismiss, citing the factors set forth in Colorado River Water Conservation District v. U.S., 424 U.S. 800 (1976). Among the factors weighing most heavily against the government was the fact that state court already had jurisdiction over the res of the action, and that the federal action would be “duplicative” in nature.
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The Supreme Court denied certiorari in a case brought by an Albany strip club, which had argued unsuccessfully in New York tax tribunals, and then in the 3rd Department, that the imposition of sales tax was improper. The position of the club was that it was exempt from sales tax, since the admission charges related to “musical arts or choreographed performances.” Matter of New London Corp. v. N.Y.S. Tax App. Trib., 19 N.Y.2d 1058 (2012), cert. denied, 134 S.Ct. 422 (2013).
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In a stinging rebuke to the Northern District, which had found that New York had acted unconstitutionally, the Second Circuit Court of Appeals reversed, and found that New York had neither erred nor violated the Constitution when it imposed a civil penalty following the conviction of the taxpayer for tax fraud. Abuzaid v. Mattox, Nos. 10-1210-cv, 10-1785-cv (2d Cir. 8/12/13). The case involved a taxpayer who had pled guilty to crimes involving cigarette stamp fraud, only to be later assessed by the Department under a civil penalty statute. The taxpayer argued successfully in District Court that the later imposition of a civil penalty under a statute, tinged with criminal overtones, violated the taxpayer’s right not to be subject to double jeopardy under the Fifth Amendment.
The Court of Appeals (after deliberating for two years) however, found that the civil penalty was just that — a civil penalty, and that the taxpayer had not been subject to criminal prosecution for the same offence twice. Having reversed the holding of the District Court, the Court of Appeals did not stop there. It then mused over whether to dismiss the appeal with prejudice or to dismiss it without prejudice.
Ultimately, the Court of Appeals dismissed it with prejudice, thereby preventing any New York taxpayer from again challenging the statute in New York State court. The argument against dismissing the case without prejudice consisted of a comity argument — i.e., that the federal judiciary should not interfere with state courts. However, the Second Circuit scathingly noted that dismissal with prejudice was warranted in order to prevent “meritless” litigation in state court, and that this consideration outweighed in this case the importance of the doctrine of comity.
II. New York Courts
The Appellate Division, Second Department, recently upheld a constitutional challenge to the MTA payroll tax by Nassau County. Mangano v. Silver, et al., 107 A.D.3d 956 (2nd Dep’t 2013). Earlier, the Third Department had rejected a challenge to the tax made by Rockland County, which argued that it failed to receive services commensurate with the tax imposed on its residents. Vanderhoef v. Silver, No. 516180, 2013 NY Slip Op. 8486 (3rd Dep’t, 12/19/13).
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The Appellate Division, Third Department, reviewed and affirmed a decision of the Tax Appeal Tribunal in Matter of Xerox Corp. v. NYS Tax Appeals Tribunal, 2013 Slip Op 06899 which upheld the interpretation given by the Department to Tax Law §208(6), which defines “investment income” for purposes of the corporate franchise tax. Xerox sold office equipment to governmental agencies under fixed purchase option leases and installment agreements. Xerox filed amended returns for the tax years 1997, 1998 1999 recharacterizing interest income from “investment capital” to “investment income.” The change resulted in a refund request, which was denied.
Following a hearing in the Division of Tax Appeals, the ALJ found for Xerox. On appeal, the Tax Appeals Tribunal reversed. The Appellate Division, hearing the matter in an Article 78 proceeding pursuant to Tax Law §2016, affirmed the decision of the Tax Appeals Tribunal. Business income is defined as “entire net income minus investment income.” Investment income is defined as “income . . . [derived] from investment capital” less allowable deductions (Tax Law §208), which is “investment in stocks, bonds and other securities, corporate and governmental . . .” (Tax Law §208). Xerox took the position that the finance agreements constituted “securities” for purposes of Tax Law §208. The Appellate Division rejected the appeal of Xerox on two grounds: First, the Third Department explained that “[u]nder well-established law, “an agency’s interpretation of the statutes it administers must be upheld absent demonstrated irrationality or unreasonableness.” The Court explained:
[while] deference to an administrative agency is not required where the question is one of pure statutory interpretation, deference is appropriate where the question is one of specific application of broad statutory term[s] by the agency charged with administering the statute.
Against this backdrop, the Appellate Division then noted that although the franchise tax statutes do not define the term “security” or “other securities,” under the principle of ejusdem generis — of the same kind — the scope of general statutory language, if unclear, is limited by specific terms or phrases that precede it. . .
The Court remarked that where the statute provides no definition, reference should be made to the “plain meaning” of the words. Here, Xerox had adduced no evidence to show that the finance agreements were ever sold on an “open market or a recognized exchange,” or were “commonly recognized by investors as securities.”
III. New York Administrative Tax Tribunals
In Matter of Steven E. Breitman, DTA No. 824268 (2013), a New York Administrative Law Judge rejected the challenge by the taxpayer, a New Jersey resident, of New York’s imposition of a tax on a sale of the taxpayer’s leasehold interests in Pennsylvania. The taxpayer’s corporation had elected S corporate status, and the taxpayer had filed a nonresident return in the year in question, reporting no New York source income. The Department argued that a portion of the gain constituted New York source income. The ALJ agreed, remarking that in order to avoid the portion of gain that was determined to be New York source income, the taxpayer would have had to show that the gain which New York had characterized as New York source income was “grossly disproportionate,” a finding which the taxpayer had failed to demonstrate.
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The rules of the CPLR apply equally to disputes in the Division of Tax Appeals. So held the Tax Appeals Tribunal in rejecting the decision of the Administrative Law Judge in Matter of Medical Capital Corp., DTA No. 824837 (7/25/13). The taxpayer had received a Notice of Deficiency from the New York asserting a tax due of $48,000. The Department made a motion to dismiss, which was granted by the ALJ. On appeal, the Tax Appeals Tribunal held that under CPLR §3211, every pleading must be given a liberal construction and that the taxpayer should have been given the benefit of “every possible inference.”