STATE OF NEW YORK
DIVISION OF TAX APPEALS
____________________________________________
In the Matter of the Petition
of
IRENE TATA
ORDER
AND
DTA NO. 821417
NICHOLAS KOTSCHAUBY
for Redetermination of a Deficiency or for Refund of
New York State and City Personal Income Taxes
under Article 22 of the Tax Law and the New York
City Administrative Code for the Year 2002.
____________________________________________
Petitioners, Irene Tata and Nicholas Kotschauby, filed a petition for redetermination of a deficiency or for refund of New York State and City personal income taxes under Article 22 of the Tax Law and the New York City Administrative Code for the year 2002.
On January 23, 2008, the Division of Taxation, appearing by Daniel Smirlock, Esq. (John E. Matthews, Esq., of counsel), filed with the Division of Tax Appeals a Notice of Cancellation of Deficiency and Discontinuance of Proceeding. On February 21, 2008, the Division of Tax Appeals issued an Order of Discontinuance canceling the Notice of Deficiency and discontinuing the proceedings with prejudice.
By letter dated March 20, 2008, petitioners, appearing pro se, filed an application for costs under Tax Law § 3030. The Division of Taxation, appearing by Daniel Smirlock, Esq. (John E. Matthews, Esq., of counsel), filed an affidavit and documentation in opposition to the application on April 2, 2008, which date began the 90-day period for the issuance of this order.
Based upon petitioners' application for costs, the Division of Taxation's affidavit and documentation in opposition, the Order of Discontinuance and all pleadings and proceedings had herein, Thomas C. Sacca, Administrative Law Judge, renders the following order.
ISSUE
Whether petitioners are entitled to an award of costs pursuant to Tax Law § 3030.
FINDINGS OF FACT
1. On November 4, 2005, the Division of Taxation (Division) issued to petitioners a Statement of Proposed Audit Changes. The statement indicated that a comparison of their federal and state income tax returns revealed federal adjusted gross income as reported on their federal income tax return to be in excess of federal adjusted gross income as reported on their New York State return by $9,118.00. The statement further advised petitioners that "[f]or the 2002 tax year you filed a New York State return as a full year resident. All the income you reported on the federal return should be reported on the New York State return." Finally, the statement indicated that unless a response was received by December 4, 2005 explaining the difference, the Division would issue a notice of deficiency assessing additional tax due of $709.00, plus interest.
2. As no response was received to the Statement of Audit Changes, the Division, on March 27, 2006, issued a Notice of Deficiency to petitioners assessing New York State and City personal income tax due in the amount of $709.00, plus interest.
3. On May 11, 2006, petitioners' representative, Carl E. Stoops, CPA, sent a letter to the Division of Taxation in which he stated, in part, as follows:
We have finally received the IRS Tax Return Transcript. As per the transcript, taxpayers did not pay any tax on the income of $9,118. Although the income of $9,118 was recorded on the Tax Return Transcript, IRS did not calculate the tax on this income. Enclosed are copies of the IRS Tax Return Transcript and Form 1040 for your review and reference.
4. On August 7, 2006, petitioners filed a Request for Conciliation Conference with the Bureau of Conciliation and Mediation Services (BCMS). In response, BCMS issued, on August 18, 2006, a Conciliation Order Dismissing Request which denied petitioners' request for a conciliation conference because the request was filed late, having been filed in excess of 90 days after the date the notice of deficiency was issued.
5. On November 14, 2006, petitioners filed a petition with the Division of Tax Appeals protesting the denial of a conciliation conference and requesting a small claims hearing. Included with the petition were copies of the IRS Tax Return Transcript and petitioners' federal income tax return (Form 1040) for the year 2002. The Division's answer, filed on January 24, 2007, asserted that the request for a conciliation conference was untimely and that the Division of Tax Appeals did not have jurisdiction over this matter. The matter was scheduled for a small claims hearing on January 30, 2008 on the issue of the timeliness of petitioners' request for a conciliation conference.
6. In preparing for the small claims hearing, the Division reviewed both the issue of timeliness and the documentation submitted by petitioners with their petition. The Division concluded that sufficient documentation had been provided to explain the difference in the federal adjusted gross income as reported on petitioners' federal and state income tax returns. On January 23, 2008, the Division filed with the Division of Tax Appeals a Notice of Cancellation of Deficiency and Discontinuance of Proceeding canceling the deficiency at issue.
7. On March 20, 2008, petitioners sent a letter to the Division of Tax Appeals requesting reimbursement of accountant fees in the amount of $250.00. Attached to the letter was an invoice, marked paid, from the accounting firm of Stoops & Company, LLC. The invoice states as follows:
For Professional Services Rendered:
Representation for NYS Correspondence Audit for Year 2002
Request for Conciliation Conference
Filed for Petition to NYS Division of Tax Appeals for Redetermination of Deficiency Notice
Cancellation of Deficiency Notice in Full
Telephone/Certified Mails/Misc. Exp. Included
Total Fee . . . . . . $250.00
Also attached to the letter was a sworn statement by petitioners that their net worth did not exceed two million dollars.
8. The Division argues that the application for costs must fail because its position was substantially justified thus preventing petitioner from being the prevailing party in this matter.
CONCLUSIONS OF LAW
A. Tax Law § 3030(a) provides, generally, as follows:
In any administrative or court proceeding which is brought by or against the commissioner in connection with the determination, collection, or refund of any tax, the prevailing party may be awarded a judgment or settlement for:
(1) reasonable administrative costs incurred in connection with such administrative proceeding within the department, and
(2) reasonable litigation costs incurred in connection with such court proceeding.
Reasonable administrative costs include reasonable fees paid in connection with the administrative proceeding, but incurred after the issuance of the notice or other document giving rise to the taxpayer=s right to a hearing. (Tax Law § 3030 [c][2][B].) The statute also provides that fees for the services of an individual who is authorized to practice before the Division of Tax Appeals are treated as fees for the services of an attorney. (Tax Law § 3030[c][3].)
B. A prevailing party is defined by the statute as follows:
[A]ny party in any proceeding to which [Tax Law § 3030(a)] applies (other than the commissioner or any creditor of the taxpayer involved):
(i) who (I) has substantially prevailed with respect to the amount in controversy, or (II) has substantially prevailed with respect to the most significant issue or set of issues presented, and
(ii) who (I) within thirty days of final judgment in the action, submits to the court an application for fees and other expenses which shows that the party is a prevailing party and is eligible to receive an award under this section, and the amount sought, including an itemized statement from an attorney or expert witness representing or appearing in behalf of the party stating the actual time expended and the rate at which fees and other expenses were computed . . . and (II) is an individual whose net worth did not exceed two million dollars at the time the civil action was filed . . . .
(B) Exception if the commissioner establishes that the commissioner's position was substantially justified.
(i) General rule. A party shall not be treated as the prevailing party in a proceeding to which subdivision (a) of this section applies if the commissioner establishes that the position of the commissioner in the proceeding was substantially justified.
(ii) Burden of proof. The commissioner shall have the burden of proof of establishing that the commissioner's position in a proceeding referred to in subdivision (a) of this section was substantially justified, in which event, a party shall not be treated as a prevailing party.
(iii) Presumption. For purposes of clause (i) of this subparagraph, the position of the commissioner shall be presumed not to be substantially justified if the department, inter alia, did not follow its applicable published guidance in the administrative proceeding. Such presumption may be rebutted.
* * *
(C) Determination as to prevailing party. Any determination under this paragraph as to whether a party is a prevailing party shall be made by agreement of the parties or (i) in the case where the final determination with respect to tax is made at the administrative level, by the division of tax appeals, or (ii) in the case where such final determination is made by a court, the court. (Tax Law § 3030[c][5].)
C. It is concluded that petitioners were not the prevailing party within the meaning and intent of Tax Law § 3030 because the Division was substantially justified in issuing the Notice of Deficiency based upon the information it then had in its possession. Prior to the issuance of the Notice of Deficiency on March 27, 2006, the Division requested, in the Statement of Audit Changes, that petitioners explain the difference in the federal adjusted gross income amounts reported on their federal and New York State personal income tax returns. No explanation came from petitioners, and the Division increased petitioners' federal adjusted gross income on their state return to the amount shown on petitioners' federal income tax return. This adjustment was proper, as petitioners were full year residents of New York State for the year 2002 and the starting point for New York adjusted gross income of a resident individual is federal adjusted gross income (Tax Law § 612[a]). After the Notice of Deficiency had been issued, petitioners submitted copies of the IRS Tax Return Transcript and their federal income tax return to the Division of Taxation and then again with their petition to the Division of Tax Appeals. It was only then that the difference between the federal and New York State returns had been explained. Further delaying a resolution was petitioners' failure to file a timely request for a conciliation conference, thereby losing the opportunity to resolve this matter at BCMS. Instead, the case proceeded to the Division of Tax Appeals on the issue of timeliness.
As the Division's position was substantially justified when it issued the Notice of Deficiency to petitioners, petitioners were not the prevailing party within the meaning and intent of Tax Law § 3030. In addition, petitioners' failure to timely file a request for a conciliation conference contributed to the delay of the resolution of this matter.
D. The application for costs of Irene Tata and Nicholas Kotschauby is denied.
DATED: Troy, New York
June 12, 2008