STATE OF NEW YORK
TAX APPEALS TRIBUNAL
________________________________________________
In the Matter of the Petition
of
STEVEN GOODSTEIN
DECISION
DTA NO. 821326
for Revision of a Determination or for Refund of Tax on
Gains Derived from Real Property Transfers under
Article 31-B of the Tax Law.
________________________________________________
The Division of Taxation has filed an exception to the determination issued on July 3, 2008 in the matter of Steven Goodstein. Petitioner appeared by Hutton & Solomon LLP (Stephen L. Solomon, Esq. and Kenneth I. Moore, Esq., of counsel). The Division of Taxation appeared by Daniel Smirlock, Esq. (Kevin R. Law, Esq., of counsel).
The Division of Taxation filed a brief in support of its exception. Petitioner filed a brief in opposition. The Division of Taxation filed a reply brief. Oral argument, at the request of the Division of Taxation, was heard on October 22, 2008 in Troy, New York.
After reviewing the entire record in this matter, the Tax Appeals Tribunal renders the following decision.
ISSUES
I. Whether the Division of Taxation properly assessed real property transfer gains tax against petitioner as transferee on his acquisition of a controlling interest in Taft Partners Development Group from the transferor, Sholom Drizin.
II. If petitioner was properly assessed as the transferee, whether the issuance of a Notice of Determination to petitioner approximately 13 years after the issuance of the Notice of Determination to the transferor was an abuse of the Commissioner's discretion.
FINDINGS OF FACT
We find the facts as determined by the Administrative Law Judge. These facts are set forth below.
On January 5, 1984, Royale Towers Associates (as seller) and Sholom Drizin (as purchaser) entered into an agreement for the sale and purchase of real property, then known as the Taft Hotel, located in New York City. According to this purchase and sale agreement, the purchase price was to be $32,505,280.00.
On March 1, 1984, Sholom Drizin entered into an Agreement of Assignment, as assignor, with Arthur Cohen, Steven Goodstein, Martin Goodstein and Jacob Sopher, collectively listed as the assignee, and hereafter referred to as the "investor group," whereby Mr. Drizin, owner of 100% interest, agreed to assign to the investor group a 50% interest in the agreement for sale and purchase of the property that he had with Royale Towers Associates.
In addition, Mr. Drizin and the investor group had agreed to form a limited partnership to acquire title to and develop the property.
On March 7, 1984, Mr. Drizin and the investor group entered into an Agreement of Limited Partnership of Taft Partners Development Group (Taft Partners), pursuant to which the general partners held the following percentage interests in the partnership: Sholom Drizin - 50%; Arthur Cohen - 20%; Steven Goodstein - 8.5%; Martin Goodstein - 2%; and Jacob Sopher - 10%. The remaining 9.5% interest was held by limited partners: Andrew Goodstein, Martin Goodstein, Patricia Kay Goodstein and Mitchell Siegel, as trustees for the benefit of (f/b/o) Michele A. Goodstein under trust agreement (u/t/a) dated July 7, 1967, f/b/o Geoffrey A. Goodstein u/t/a July 7, 1967, and f/b/o Shari L. Goodstein u/t/a dated July 7, 1967, and Samuel Lewis.
On March 7, 1984, Sholom Drizin, as seller, and petitioner, Steven Goodstein, as purchaser acting in concert with the investor group, entered into a Partnership Interest Acquisition Agreement whereby Mr. Drizin agreed to sell to petitioner an additional 35% interest in Taft Partners for $8,320,000.00. This sale was consummated on September 24, 1984. On consummation of the sale, Mr. Drizin's remaining 15% interest in the partnership was converted into a limited partnership interest.
On September 25, 1984, Taft Partners acquired the 100% fee interest in the property from Royale Tower Associates and subsequently developed the property converting it to condominium status.
In connection with the conversion project, between January 15, 1987 and March 15, 1988, Taft Partners appropriately filed and paid real property transfer gains taxes (gains tax) in connection with the disposition of its condominium units.
In 1991, Taft Partners filed a Claim for Refund of Real Property Transfer Gains Tax in the amount of $533,273.51. This claim was based on an increase of Taft Partners' original purchase price to reflect the cost of the acquisition of the 35% partnership interest from Mr. Drizin.
Following an audit of the refund claim by the Division of Taxation ("Division"), the amount of the overpayment was reduced by the Division to $529,873.00.
As a result of the Division's audit of Taft Partners's tax returns and refund claim, the Division discovered that the sale of the 35% interest in Taft Partners by Sholom Drizin to Steven Goodstein had not been reported for gains tax purposes.
On April 30, 1992, the Division issued a Notice of Determination, under assessment number L-005582137, to Sholom Drizin, as the transferor, for the gains tax on the sale of the 35% interest. The Notice of Determination asserted gains tax in the principal amount of $643,309.00, plus interest of $804,228.86 and penalties of $225,158.00, for a total amount due of $1,672,695.86.
Mr. Drizin filed a timely petition to contest the Notice of Determination.
On July 31, 1995, the Division issued to Taft Partners a Notice of Determination, under assessment number GT-95073101, asserting that Taft Partners was liable for gains tax as the transferee on the sale by Mr. Drizin of the 35% partnership interest to the investor group.
Said notice assessed gains tax in the principal amount of $623,541.00, less credit for the "Condominium Overpayment" in the amount of $529,873.00, plus penalty of $32,783.80 and interest of $71,910.90, for a total amount remaining due of $198,362.70. The $198,362.70 was comprised of $93,668.00 of tax remaining due and the penalty of $32,783.80 and the interest of $71,910.90.
Taft Partners timely petitioned for a redetermination or for refund of the gains tax. The matter was put on hold pending a resolution of Sholom Drizin's petition.
On November 30, 1995, an administrative law judge granted Mr. Drizin's petition and canceled the Notice of Determination issued to Sholom Drizin, finding that the sale of the 35% interest by Mr. Drizin to the investor group was not a transfer of a controlling interest and, therefore, was not subject to tax.
On May 15, 1997, the Tax Appeals Tribunal reversed, finding that the sale of the 35% interest in Taft Partners by Sholom Drizin, as transferor, to Steven Goodstein, as transferee acting in concert with the rest of the investor group, was a taxable transfer and held Sholom Drizin liable for gains tax in the amount of $623,541.00, plus penalty and interest.
Mr. Drizin commenced an Article 78 proceeding in the Appellate Division, Third Department. As he failed to pay the amount due or file a bond, as required by law, Assistant Attorney General Julie Mereson made a motion to dismiss the proceeding, which was granted.
Following the dismissal of the Article 78 proceeding, settlement discussions began between Ms. Mereson and the representatives of Mr. Drizin, regarding the assessment. The representatives of Mr. Drizin drafted a stipulation of settlement which Ms. Mereson reviewed, made some changes to and then executed along with Mr. Drizin's representative.
The stipulation, dated July 7, 1998, provides as follows:
RE: MATTER OF SHOLOM DRIZIN DTA NO. 811808
IT IS HEREBY STIPULATED BY AND AGREED, by and between the taxpayer, Sholom Drizin, and the State of New York Department of Taxation and Finance, that the above matter and claim of the Department of Taxation and Finance for taxes, penalties and interest under assessment number L-005583137 is settled against Sholom Drizin for the amount of Eight Hundred Fifty Thousand ($850,000.00) Dollars, to be paid by check drawn on a New York bank on or before July 31, 1998.
IT IS FURTHER AGREED, that all appeals and proceedings will be withdrawn as part of the settlement.
During these settlement discussions, Ms. Mereson referred to a computation of tax, penalty and interest due prepared by the Division, which indicated a balance due by Mr. Drizin, as of June 30, 1998, in the amount of $980,000.00, computed as follows:
Tax Due 9/24/84 $623,541.00
Interest from 9/24/84 to 1/15/87 (1st payment) $176,158.00
Net $799,699.00
Less: Payment $375,987.00
Balance 1/15/87 $423,712.00
Interest 1/16/87 to 7/1/87 $ 15,734.00
Net $439,446.00
Payment 7/1/87 $133,402.00
Balance 7/1/87 $306,044.00
Interest 7/2/87 to 11/15/87 $ 8,672.00
Balance 11/15/87 $314,716.00
Payment 11/15/87 $ 18,416.00
Net 11/15/87 $296,300.00
Interest 11/16/87 to 3/15/88 $ 7,508.00
Balance 3/15/88 $303,808.00
Payment 3/15/88 $ 2,088.00(1)
Net 3/15/88 $301,740.00
Interest 3/15/88 to 6/30/98 $460,031.00
Total Tax and Interest $761,771.00
Penalty @ 35% $218,239.00
Balance Due $980,010.00
The payments in the above schedule, which total $529,873.00, were overpayments of gains taxes made by Taft Partners in connection with its condominium project. On January 17, 2001, at the hearing held in the Matter of the Petition of Taft Partners Development Group, DTA # 817465, Ms. Mereson testified that the $850,00.00 settlement amount was to represent the balance of the tax due over the transferee, i.e., Taft Partners, payments that the Division already had, plus interest and a portion of the penalty. The rest of the penalty would be waived.
At the same hearing, Paul Lefebvre, an attorney in the Division's Office of Counsel, Litigation Section, testified that in connection with gains tax assessments, when the liability of the transferor has been fully paid, the transferee's liability would be considered fully paid.
Mr. Lefebvre also testified at that hearing that when the Division received funds from Mr. Drizin they were applied to tax first, then to interest and then to penalties. The application of funds described by Mr. Lefebvre is consistent with the Division's policy, absent a directive from a taxpayer allocating payments differently.
On July 28, 1998, Mr. Drizin, pursuant to the stipulation referred to above, in full settlement of his liability as transferor, paid the Division $850,000.00.
On May 6, 2004, in the Matter of Taft Partners Dev. Group, the Tax Appeals Tribunal confirmed its prior finding that Steven Goodstein acting in concert with the investor group was the transferee and ordered that Taft Partners' claim for refund of overpaid gains tax of $529,873.00 be granted. In December 2004, the Division issued the refund of $529,873.00 of tax, plus interest of $614,860.75, to Taft Partners. Subsequent to the refund, the Division did not and has not changed the way it applied the $850,000.00 received from Mr. Drizin, on July 28, 1998, to tax, interest and penalty.
On April 29, 2005, the Division issued a Notice of Determination to petitioner, as transferee, asserting gains tax, in the principal amount of $529,873.00, due on the sale of the 35% interest in Taft Partners by Mr. Drizin. No interest or penalties were assessed. The Attachment to Notice of Determination set forth the following explanation for this determination:
Pursuant to New York State Tax Law Article 31-B, Section 1444(1), The Commissioner of Taxation and Finance has determined that a taxable acquisition of a controlling interest occurred when you purchased an additional 35% interest in Taft Partners Development Group on September 24, 1984.
As the required Real Property Transfer Gains Tax filing has never been made for the acquisition of this controlling interest, your tax liability as the transferee has been determined to be $529,873.00, in accordance with to [sic] the Taft Partners Development Group Tax Appeals Decision (DTA No. 817465). See paragraph 7, page 4 of this decision.
On June 6, 2006, petitioner made payment to the Division of the amount asserted in the Notice of Determination, i.e., $529,873.00, under protest, converting these proceedings into a claim for refund.
In her determination, the Administrative Law Judge found that the tax due and owing on the transfer of the 35% interest in Taft Partners had been paid by Sholom Drizin, as transferor, by a stipulation of settlement between Mr. Drizin and the Division. This stipulation of settlement, dated July 7, 1998, provided that the matter was settled against Mr. Drizin for the amount of $850,000.00. As part of the stipulation of settlement, all appeals and proceedings were to be withdrawn as well. The Administrative Law Judge noted that Mr. Drizin, in full settlement of his liability as transferor made a payment to the Division in the amount of $850,000.00. The Administrative Law Judge found that the terms contained in the stipulation of settlement were unambiguous; e.g., Mr. Drizin, the transferor, was released from further liability for gains tax due on his transfer of the 35% interest in Taft Partners to petitioner, upon his payment of $850,000.00, an amount clearly in excess of the gains tax due on such transfer, i.e., $623,541.00. The Administrative Law Judge noted, and the Division agreed, that payments received from a taxpayer are first applied to the principal amount of tax due and then to interest and penalty. Therefore, the Administrative Law Judge reasoned that the transferor fully paid the tax due, and there is no balance of tax due and owing for which petitioner may be held liable. The Administrative Law Judge stated that our decision in Matter of Taft Partners Dev. Group (Tax Appeals Tribunal, May 6, 2004) concluded that the Division had already assessed Sholom Drizin, as transferor, and collected the tax due. Thus, the Administrative Law Judge held that the Division cannot assert any liability against petitioner for the transferor's tax. Therefore, the Administrative Law Judge canceled the Notice of Determination.
Since the notice was canceled, it rendered moot the issue of whether the issuance of the notice was an abuse of discretion.
The Division argues that the full tax due on the transfer of the 35% interest in Taft Partners was not paid. The Division emphasizes that in drafting its settlement with Mr. Drizin, it credited the tax due on the transfer in the amount of $528,873.00 erroneously paid by Taft Partners as transferee. The Division asserts that the actual tax amount paid by Mr. Drizin was only $93,668.00. The Division claims that the remainder of the settlement money was applied to penalty and interest. Thus, the Division maintains that petitioner herein must pay the amount of tax that was refunded to Taft Partners to ensure that the Division is made whole. The Division claims that public policy dictates that petitioner cannot benefit due to his failure to properly file the transferee questionnaire in this case.
In opposition, petitioner argues that the settlement in the amount of $850,000.00 was in excess of the total tax due in this case. Therefore, petitioner asserts that since the tax liability has been completely satisfied, he cannot now be held liable as the transferee. Moreover, although the Administrative Law Judge's conclusion canceled the notice issued to petitioner in this case, petitioner argues that even if it was determined that he is liable as the transferee, the fact that the Division assessed him 13 years after the transfer is inappropriate and an abuse of discretion on behalf of the Commissioner.
In response, the Division claims that the lapse of over 13 years between the time of the transfer and the issuance of the notice against petitioner is irrelevant due to the fact that petitioner never properly reported the transfer as the transferee in this case. As such, the Division argues that there is no statutory limitation on the time required to file an assessment against petitioner.
At issue in this proceeding is the Notice of Determination, dated April 29, 2005, issued by the Division to petitioner, as transferee, asserting gains tax, in the principal sum of $529,873.00, due on such transfer. The question that we must decide is whether the Division can now assess petitioner for an amount of tax that was considered paid when it entered into a settlement with Mr. Drizin wherein both parties intended such settlement to be in full satisfaction of the tax liability on the transfer of the 35% interest in the Taft Hotel. We find that the Division cannot now assess petitioner as the transferee.
Tax Law former § 1442 provided, in pertinent part, that: "[t]he tax imposed by this article shall be paid by the transferor to the tax commission, or any agent of such commission. . . , on the date of the transfer." Pursuant to Tax Law former § 1447(1), the Commissioner of Taxation and Finance was authorized to prescribe forms that both the transferor and the transferee were to complete and file concerning each transfer of real property.
Tax Law former § 1447(3)(a) established a derivative transferee liability where the transferee failed to file the required transferee questionnaire or where the transferee supplied willfully false or fraudulent information or where the transferee was informed that a tentative assessment against the transferor existed and failed to hold back payments due the transferor up to the amount of the assessment. It is undisputed that petitioner herein failed to file the required transferee questionnaire. Therefore, petitioner became personally liable for the gains tax due from the transferor, Mr. Drizin, as a result of the transfer and, thus, petitioner's liability is derivative of that of the transferor (see, Tax Law former § 1447[3][a]).
Therefore, it is necessary for us to focus on whether the transferor has paid his liability. As concluded by the Administrative Law Judge, we find that the settlement entered into between the Division and Sholom Drizin is unambiguous. The terms of the settlement as borne out in the findings of fact indicate that the transferor's liability was considered fully satisfied when full payment was made under the terms of the settlement.
The Division asserts that the payments it applied against the transferor's liability pursuant to the settlement agreement were required to be refunded to Taft Partners pursuant to a 2004 decision by this Tribunal (Matter of Taft Partners Dev. Group, supra). Therefore, based on this refund, the Division now seeks to assert the balance of the transferor's liability to petitioner herein as transferee.
We stated in Taft Partners that the two parties to the settlement agreement were Sholom Drizin, as transferor, and the Department of Taxation & Finance. The fact that the Division was directed to refund tax erroneously paid by Taft Partners does not affect the settlement agreement freely entered into between the Division and Mr. Drizin. The transferor's obligation under the settlement agreement was fully satisfied when the agreement was executed and payment was made.
The Division, in essence, wants us to set aside the settlement because the facts on which the agreement was reached changed to its detriment. We refuse to vacate the settlement.
"Mistake of fact is not a ground upon which a compromise and settlement may be easily avoided . . . . Where qualified parties, represented by able counsel, voluntarily enter into a compromise and settlement agreement, each realizing what he was receiving under the agreement, a failure of one party to foresee the effect of the compromise is not such a mistake as will warrant a rescission of the agreement [citations omitted]" (19A NY Jur 2d Compromise, Accord and Release § 56).
The facts as set forth above demonstrate that as early as 1995, Taft Partners had disputed that it owed any gains tax liability as the transferee. The facts indicate that Taft Partners had timely filed a petition with the Division of Tax Appeals on this exact issue and that such proceeding was held in abeyance until the petition of Sholom Drizin was resolved. The settlement in this case occurred in July of 1998. When the Division and Mr. Drizin resolved this case by settlement, both parties accepted the fact that Taft Partners had paid $529,873.00 toward the liability. Obviously, the Division was a party in both proceedings, i.e. the petitions filed by Mr. Drizin as well as by Taft Partners, and was aware of the possibility that Taft Partners could possibly prevail on the underlying issue of whether it was properly the transferee in the transfer of the 35% interest. Despite this possibility, the Division entered into a settlement with Mr. Drizin, as transferor, to settle the transferor liability on the transaction. Both sides were aware that the transferor was effectively given credit for taxes already paid by Taft Partners and the settlement in no way addressed the issue of any recalculation of transferor liability in the event of any future court proceeding. "[A] compromise and settlement cannot be invalidated on the ground of mistake if the mistake is one which the parties assumed the risk of making when they entered into the compromise" (15A Am Jur 2d, Compromise and Settlement § 45). Therefore, we find that the transferor liability was satisfied when Mr. Drizin paid the full amount set forth in the settlement.
As stated by the Administrative Law Judge, and conceded by the Division, there was no provision in the former Gains Tax Law that created a liability on the part of the transferee separate and apart from the transferee's derivative liability with the transferor. As such, since the transferor's liability has been fully satisfied, petitioner cannot be assessed as the transferee for the amount of tax that the Division was required to refund to Taft Partners.
Accordingly, it is ORDERED, ADJUDGED and DECREED that:
1. The exception of the Division of Taxation is denied;
2. The determination of the Administrative Law Judge is affirmed;
3. The petition of Steven Goodstein is granted; and
4. The Notice of Determination dated April 29, 2005 is canceled and the Division of Taxation is directed to refund $529,873.00 plus applicable interest to petitioner.
DATED: Troy, New York
April 16, 2009
/s/ Carroll R. Jenkins
Carroll R. Jenkins
Commissioner
1. The correct amount per the original computations is $2,068.00. The amount the parties stipulated to was a typographical error. All totals are correct, however.