STATE OF NEW YORK
TAX APPEALS TRIBUNAL
________________________________________________
In the Matter of the Petition
of
KATHLEEN KARLSBERG
DECISION
DTA NO. 822130
for Redetermination of a Deficiency or for Refund of New
York State Personal Income Tax under Article 22 of the
Tax Law for the Years 2003 and 2004.
________________________________________________
Petitioner, Kathleen Karlsberg, filed an exception to the determination of the Administrative Law Judge issued on December 18, 2008. Petitioner appeared by Kenneth Terrano, Esq. The Division of Taxation appeared by Daniel Smirlock, Esq. (Herbert M. Friedman, Jr., Esq., of counsel).
Petitioner filed a brief in support of her exception. The Division of Taxation filed a letter brief in opposition. Petitioner filed a reply brief. Oral argument, at petitioner's request, was heard on October 14, 2009 in Troy, New York.
After reviewing the entire record in this matter, the Tax Appeals Tribunal renders the following decision.
ISSUE
Whether the Administrative Law Judge correctly determined that gambling losses claimed as itemized deductions on a personal income tax return are subject to the itemized deduction limitation under Tax Law § 615(f).
FINDINGS OF FACT
We find the facts as determined by the Administrative Law Judge. These facts are set forth below.
Petitioner, Kathleen Karlsberg, timely filed her 2003 New York State Resident Income Tax Return. Petitioner reported adjusted gross income of $253,220.00, which included $155,550.00 in gambling winnings. Petitioner claimed a deduction for $155,550.00 in gambling losses among her itemized deductions. Given her reported adjusted gross income, and in accordance with the itemized deduction adjustment on the return (IT-201 ATT), petitioner reduced her total itemized deductions by 25 percent, from $163,157.00 to $122,368.00. Petitioner thus reported $130,852.00 in taxable income and tax liability of $15,375.00. After allowing for tax withheld and credits, the return reported $7,003.00 in tax due.
Petitioner filed an amended return for 2003, dated November 28, 2006, on which she increased her reported itemized deduction by $34,072.00. As a result of this change, petitioner's total tax liability for 2003 was reduced to $9,645.00 and the amended return claimed a refund of $5,730.00.
On March 20, 2007, petitioner filed a claim for refund for 2003 seeking a refund of the $5,730.00 claimed on the amended return.
By Notice of Disallowance dated May 25, 2007, the Division of Taxation ("Division") disallowed petitioner's refund claim for 2003.
Petitioner also timely filed her 2004 New York State Resident Income Tax Return. She reported adjusted gross income of $866,903.00, which included $817,825.00 in gambling winnings. Petitioner claimed a deduction for $817,825.00 in gambling losses among her itemized deductions. Given her reported adjusted gross income and in accordance with the itemized deduction adjustment on the return (IT-201 ATT), petitioner reduced her total itemized deductions by 50 percent, from $819,642.00 to $409,821.00. Petitioner thus reported $457,082.00 in taxable income and tax liability of $55,535.00. After allowing for tax withheld and credits, the return reported $51,544.00 in tax due.
Petitioner did not pay the amount reported due on her 2004 return and on July 18, 2005, the Division issued to petitioner a Notice and Demand assessing tax due for 2004 in the amount of $51,544.00, plus penalty and interest.
On October 10, 2006, petitioner filed an amended return for 2004, dated August 25, 2006, on which she increased her reported itemized deduction by $409,821.00. As a result of this change, petitioner's total reported tax liability for 2004 was reduced to $4,449.00 with reported tax due of $521.00.
On November 6, 2006, petitioner filed a second amended return for 2004, dated October 23, 2006. On this second amended return, petitioner increased her itemized deduction as reported on her original return by $427,458.00. As a result of this change, petitioner's total tax liability for 2004 as reported on this second amended return was reduced to $2,606.00 and this amended return claimed a refund of $1,385.00.
On February 5, 2007, the Division issued to petitioner a Notice and Demand assessing tax due for 2004 in the amount of $50,139.00, plus interest. This Notice and Demand replaced the July 18, 2005 Notice and Demand.
On March 14, 2007, petitioner filed a claim for refund for 2004 seeking $2,910.13, the amount of payments made on her 2004 income tax assessment according to a Response to Taxpayer Inquiry dated March 12, 2007.
By Notice of Disallowance dated May 18, 2007, the Division disallowed petitioner's refund claim for 2004.
Petitioner's refund claims and amended returns for 2003 and 2004 were based on the premise that her gambling losses were not subject to the itemized deduction limitation and that, therefore, she was entitled to claim the full amount of such losses (to the extent of winnings).
The Division's denial of petitioner's refund claims and its refusal to accept petitioner's amended returns were based on its position that petitioner's gambling losses were subject to the itemized deduction limitation under Tax Law § 615(f) and that petitioner had properly reduced her total itemized deductions on her original returns.
In support of her position, petitioner relies on Division Publication 140-W (FAQs: New York State Lottery Winners: What Are My Tax Responsibilities for New York State?), a publication that explains how New York State, New York City, and Yonkers income taxes apply to lottery prizes won on or after October 1, 2000. Petitioner specifically relies on the Division's answer to Question 16:
Q: Can I deduct the amount spent on non-winning lottery tickets on my income tax return?
A: If you itemize your deductions on your federal income tax return, you may be able to deduct the amount spent on lottery tickets and any other gambling losses up to the amount of your gambling winnings as miscellaneous itemized deductions. For more information regarding federal requirements, see federal Publication 529, Miscellaneous Deductions. To obtain Internal Revenue Service forms and publications, call toll free 1 800 829-3676. You can also obtain IRS forms and publications through the Internet at www.irs.gov.
Petitioner filed her returns as a single filer during the years at issue.
THE DETERMINATION OF THE ADMINISTRATIVE LAW JUDGE
In his determination, the Administrative Law Judge noted the provisions of Tax Law § 615(f) and § 115.5 of the Division's regulations (20 NYCRR 115.5), which provide that New York itemized deductions are subject to limitation where a taxpayer's adjusted gross income exceeds certain levels, depending on filing status. The Administrative Law Judge found that as a single filer, petitioner was required to reduce her total itemized deductions when her New York adjusted gross income exceeded $100,000.00. The Administrative Law Judge cited Matter of Pospischil (Tax Appeals Tribunal, June 6, 1996), in which the Tribunal concluded that pursuant to Tax Law § 615(f), all New York itemized deductions, including gambling losses to the extent of winnings, are subject to the New York itemized deduction limitation. Based on this, the Administrative Law Judge determined that petitioner had properly reduced her New York itemized deductions on her original returns filed for the years at issue.
The Administrative Law Judge pointed out that Tax Law § 615(f) does not exclude gambling losses from the reduction calculations. He noted that this was in contrast to Internal Revenue Code § 68, which specifically excepts gambling losses, to the extent of winnings, from the reduction calculations.
The Administrative Law Judge rejected petitioner's argument that the Division, through its Publication 140-W, had adopted the federal position on gambling loss deductions. The Administrative Law Judge found that Publication 140-W did not have any legal effect. Further, the Administrative Law Judge concluded that Publication 140-W could not reasonably be interpreted as an adoption of the federal position. However, even if it could be considered to have adopted the federal position on gambling loss deductions, Tax Law § 615(f) was controlling.
The Administrative Law Judge also rejected petitioner's assertion that Tax Law § 615(f), as applied in this instance, violated her equal protection rights in that it results in a significantly greater tax liability for her as compared to similarly situated taxpayers. The Administrative Law Judge found that while the statute may occasionally yield harsh results, particularly in the case of a problem or compulsive gambler, such inequities are insufficient to find an equal protection violation where a rational purpose may be seen in the broad legislative goal of raising revenue through a system of progressive taxation.
The Administrative Law Judge gave no credence to petitioner's argument that the application of Tax Law § 615(f) in this instance violates Article I (§ 1) of the New York State constitution by denying petitioner her rights. The Administrative Law Judge found that since the Tax Law does not provide petitioner with the right she claims, i.e., the right to deduct the full amount of her gambling losses to the extent of winnings without limitation, there can be no violation of Article I (§ 1).
The Administrative Law Judge denied the petition and sustained the Division's notices of disallowance dated May 18, 2007 and May 25, 2007.
ARGUMENTS ON EXCEPTION
On exception, petitioner agrees that Matter of Pospischil (supra) held that Tax Law § 612(a) provides that New York adjusted gross income ("AGI") is to be the same as federal AGI (with modifications), thereby requiring the inclusion of gambling winnings in the New York AGI of resident individuals. Further, petitioner notes that Tax Law § 615(a) defines the New York itemized deduction of a resident individual as the total amount of an individual's federal itemized deductions, subject to the modifications contained in § 615. Petitioner asserts that § 615(a) clearly adopts the federal policy that gambling losses are allowed as itemized deductions to the extent that gambling losses equal gambling winnings.
Petitioner maintains that § 615(f) fails to specifically address whether the "final element of the federal policy" (i.e., no reduction to the itemized deduction for gambling loss) is rejected or adopted by the Tax Law. As a result, petitioner argues that a resident individual could reasonably assume that the Tax Law does prohibit the reduction of the gambling loss itemized deduction.
Petitioner notes that other states either adopt the federal policy in total, or reject it in full. Petitioner argues that New York takes a middle ground by limiting the amount that can be deducted based on New York AGI. Petitioner believes that New York State needs to re-evaluate the application of Tax Law § 615(f) to gambling loss itemized deductions.
Petitioner maintains that the Division's Publication 140-W clearly adopts the federal policy regarding gambling loss itemized deductions in its entirety, unequivocally referring to the requirements of federal policy on this issue rather than the reduction requirements of Tax Law § 615(f). Petitioner disagrees with the Administrative Law Judge's conclusion that Tax Law § 615(f) is controlling on this issue rather than Publication 140-W. Petitioner argues that the application of § 615(f) to petitioner's situation results in a harsh and unreasonable tax assessment, which further supports the adoption of petitioner's position by New York State. Petitioner also maintains that State Administrative Procedure Act § 206 clearly requires the adoption of the federal policy regarding the deduction of gambling losses in its entirety in light of the punitive results that the application of Tax Law § 615(f) produces.
Petitioner asserts that Tax Law § 615(f) unconstitutionally classified her as an individual with income of over $475,000.00 in 2004, when she earned only $48,000.00 in that year. As she won and lost $850,000.00 gambling during 2004, and had to reduce her itemized deductions by 50 percent as a result of Tax Law § 615(f), she has been assessed a tax liability that exceeds her gross earned income for that year. However, a similarly situated individual who had gambling losses of $50,000.00 and the same earned income as petitioner would be allowed to deduct the entire gambling loss. Petitioner argues that this is an irrational and unconstitutional classification as both individuals are in the same position at the end of the year, in that they both have no net income from gambling.
In opposition, the Division argues that for each of the years at issue, petitioner's New York AGI exceeded the $100,000.00 threshold provided by Tax Law § 615(f) for a single taxpayer and petitioner was, therefore, required to limit the amount of her itemized deductions. The Division maintains that its Publication 140-W is consistent with the treatment of gambling losses pursuant to § 615(f). Although it provides that gambling losses may be able to be deducted up to the amount of winnings, it does not mandate that a taxpayer is allowed to deduct the full amount of his or her gambling losses in all cases. The Division agrees with the Administrative Law Judge that even if there is some ambiguity in this publication, it has no legal effect.
The Division argues that the application of Tax Law § 615(f) to petitioner is constitutional, asserting that while petitioner may have won (and lost) more than another hypothetical taxpayer, and, therefore, owed more tax on that income, this does not make the application of Tax Law § 615(f) unconstitutional as to petitioner.
OPINION
"Gross income," as defined in § 61 of the Internal Revenue Code, includes gambling winnings (see, Bauman v. Commissioner, 65 TCM 2165 [1993]). Federal adjusted gross income is defined as gross income less certain deductions not relevant herein (see, IRC § 62). Pursuant to Tax Law § 612(a), the New York adjusted gross income of a resident individual "means his federal adjusted gross income as defined in the laws of the United States for the taxable year, with the modifications specified in this section." Petitioner does not question that her gambling winnings for the years at issue are properly included in her New York adjusted gross income.
Tax Law § 615(a) provides, in applicable part, that the "New York itemized deduction of a resident individual means the total amount of his deductions from federal adjusted gross income, other than federal deductions for personal exemptions, as provided in the laws of the United States for the taxable year, with the modifications specified in this section, except as provided for under subsection (f) of this section" (emphasis added).
Tax Law § 615(f) provides the following:
(f) The New York itemized deduction otherwise allowable under this section shall be reduced by the sum of the amounts determined under paragraphs one, two and three of this subsection.
(1) An amount equal to the New York itemized deduction otherwise allowable under subsection (a) of this section, multiplied by a percentage, such percentage to be determined by multiplying, for taxable years beginning in nineteen hundred eighty-eight, ten percent, and for taxable years beginning after nineteen hundred eighty-eight, twenty-five percent, by a fraction,
(A) in the case of an unmarried individual or married individual filing a separate return, the numerator of which is the lesser of fifty thousand dollars or the excess of such individual's New York adjusted gross income over one hundred thousand dollars and the denominator of which is fifty thousand dollars;
* * * *
(2) An amount equal to the New York itemized deduction of an individual otherwise allowable under subsection (a) of this section, multiplied by a percentage, such percentage to be determined by multiplying, for taxable years beginning in nineteen hundred eighty-eight, ten percent, and for taxable years beginning after nineteen hundred eighty-eight, twenty-five percent, by a fraction, the numerator of which is the lesser of fifty thousand dollars or the excess of such individual's New York adjusted gross income over four hundred seventy-five thousand dollars and the denominator of which is fifty thousand dollars.
* * * *
The application of this section is explained in § 115.5 of the Division's regulations (20 NYCRR 115.5):
(a) The New York itemized deduction allowable under section 615(a) of the Tax Law (see section 115.1 of this Part) shall be reduced by the sum of the amounts determined under paragraphs (b)(1) and (2) of this section.
(b) For taxable years beginning in 1989 and thereafter.
(1) An amount equal to the itemized deduction otherwise allowable under section 615(a) of the Tax Law (see section 115.1 of this Part) multiplied by 25 percent, the product of which is multiplied by a fraction, the numerator of which is the lesser of $50,000; or
(i) for an unmarried individual, other than a head of household or a surviving spouse, or married individual filing a separate New York State personal income tax return, the excess of such individual's New York adjusted gross income over $100,000;
(ii) for a married individual filing a joint New York State personal income tax return or a surviving spouse, the excess of such individual's New York adjusted gross income over $200,000;
(iii) for an individual who is a head of household, the excess of such individual's New York adjusted gross income over $150,000;
and the denominator of which is $50,000.
(2) An amount equal to the itemized deduction otherwise allowable under section 615(a) of the Tax Law (see section 115.1 of this Part) multiplied by 25 percent, the product of which is multiplied by a fraction, the numerator of which is the lesser of $50,000 or the excess of such individual's New York adjusted gross income over $475,000, and the denominator of which is $50,000.
Despite petitioner's arguments to the contrary, we find that the itemized deduction of gambling losses, to the extent of gambling winnings, is subject to the itemized deduction reduction provisions of Tax Law § 615(f). While "gambling losses to the extent of gambling winnings" are not specifically included in or excluded from § 615(f), neither are medical expenses, investment interest, or casualty or theft losses. Yet each of these aforementioned categories of deductions, along with gambling losses to the extent of gambling gains, are specifically excepted from the overall limitation on itemized deductions losses provided by IRC § 68(a) (see, IRC § 68[c])" . . . [T]he failure of the Legislature to include a matter within the scope of an act may be construed as an indication that its exclusion was intended" (McKinney's Cons Laws of NY, Book One, Statutes, § 74).
While petitioner is free to disagree with the legislative wisdom underlying the enactment of this section of law, neither petitioner nor this Tribunal is empowered to ignore its provisions. We have previously considered this issue in Matter of Pospischil (supra) and find no basis on which to distinguish our decision therein.
We likewise reject petitioner's argument that the less than specific language of the Division's Publication 140-W is sufficient to counteract the clear language of Tax Law § 615(f). As the Administrative Law Judge correctly noted, even the Division's regulations provide that its "publications, notices, and online tax information in themselves do not have any legal effect" (20 NYCRR 2375.9[c]).
Further, we find no merit to petitioner's arguments that Tax Law § 615(f) is unconstitutional. First, we do not have jurisdiction to address the constitutionality of a statute on its face (see, Matter of Unger, Tax Appeals Tribunal, March 24, 1994; see also, Matter of Toothaker, Tax Appeals Tribunal, September 9, 1993; Matter of Fourth Day Enters., Tax Appeals Tribunal, October 27, 1988). Second, we find that the application of Tax Law § 615(f) to petitioner does not violate her equal protection rights.
In Matter of Brady v. State of New York (80 NY2d 596 [1992], cert denied 509 US 905 [1993]), the Court of Appeals captured the essence of petitioner's argument herein:
Plaintiffs' real quarrel, in the end, is with the graduated tax. A system of progressive taxation apportions the tax burden based on ability to pay--higher income taxpayers can pay more and are therefore taxed at a higher rate than lower income taxpayers. This system does not implicate the State or Federal Constitution so long as the rates are applied, as here, in a nondiscriminatory manner and only to taxable New York income.
Tax Law § 615(f) effectively imposes a higher tax on higher income taxpayers by reducing the amount of their otherwise allowable itemized deductions. Despite the fact that petitioner did not retain her gambling winnings in the years at issue but proceeded to lose them in their entirety, the fact remains that during those years, her gambling gains were properly reported as income. New York's treatment of petitioner is no different than its treatment of any other New York resident taxpayer similarly situated in terms of annual income who has potentially off-setting itemized deductions for federal purposes due to medical expenses, investment interest, or casualty or theft losses. Such expenses and losses would be fully deductible for federal purposes, but limited for New York State purposes. Absent a showing of uneven treatment, there can be no equal protection violation (see, Trump v. Chu, 65 NY2d 20 [1985], lv dismissed 474 US 915 [1985]). Thus, we affirm the determination of the Administrative Law Judge.
Accordingly, it is ORDERED, ADJUDGED and DECREED that:
1. The exception of Kathleen Karlsberg is denied:
2. The determination of the Administrative Law Judge is affirmed;
3. The petition of Kathleen Karlsberg is denied; and
4. The Notices of Disallowance dated May 18, 2007 and May 25, 2007 are sustained.
DATED: Troy, New York
March 1, 2010
/s/ Carroll R. Jenkins
Carroll R. Jenkins
Commissioner