As frequently happens in such cases, the Tribunal upheld the Administrative Law Judge’s decision and the assessment against the taxpayer. What is a little less typical in this case are the Tribunal’s findings in regards to certain procedural “irregularities” that could have more lasting implications on future cases. First, the Tribunal agreed with the taxpayer that the Division of Tax Appeals had improper ex parte communications with the Audit Division. Although the nature of the communication is not completely clear from the published case, it appears that someone from the Division of Tax Appeals (likely not the judge) made what seems like an innocuous call to the Audit Division. The Division had issued a separate notice for the penalties to the taxpayer, but had done so pursuant to a Notice and Demand, which has typically been treated as a final assessment with no appeal rights (more about that later), rather than pursuant to a Notice of Determination. The taxpayer, in fact, alleged in its petition that the penalties should be cancelled because they had improperly been assessed on a Notice and Demand. In reviewing the file and seeing the Notice and Demand, someone from Division of Tax Appeals called the Audit Division to ask whether a statutory notice (i.e. a Notice of Determination) existed for the penalties. The Audit Division then realized its error, cancelled the Notice and Demand and issued a Notice of Determination for the penalties. The Tribunal found that although this wasn’t a clear violation of the rules against ex parte communication, it violated the “spirit” of the rule that limits such communications to “clarification of procedural matters.”
What followed in the case may have a more lasting impact than curbing phone calls between the Division of Tax Appeals and the Audit Division. The Tribunal concluded that even if the Audit Division hadn’t been alerted to their mistake as to the type of notice for the penalties (and the Tribunal held that it was clearly the wrong type of notice), the Division of Tax Appeals would still have jurisdiction to hear a case regarding an assessment of penalties or otherwise on a Notice and Demand. The Tribunal noted that Tax Law 173-a(3) denies appeal rights in cases of “mathematical or clerical error or failure to pay tax shown due on a return…” but that the penalties assessed did not fit into this category. Moreover, the Tribunal concluded that the taxpayer had a right to a hearing on the issue of whether the Notice and Demand was improperly issued.
A Notice and Demand has generally been treated as having no appeal rights. The Tribunal’s holding in Grand Central JT VT appears to open the door to petitions based on a Notice and Demand in circumstances other than those explicitly mentioned in Section 173-a(3). Assessments by desk audit, for example, that go beyond mistakes on the return, denials of carry forward credits and losses that sometimes produce a Notice and Demand, and a myriad of other circumstances that could arguably fall outside the category of an error, now offer a foothold for an appeal. The holding in this case would seem to grant the Tribunal jurisdiction to hear every case in which the taxpayer alleges that the assessment is more than the result of taxpayer error or failure to pay what is shown as due on a return. Most of those cases would likely be decided by summary determination, but like the cases involving proper mailing records, they may end up occupying a significant portion of the time and energy of the Division of Tax Appeals.
It’s worth noting that the Tribunal decided in this case that regardless of how the Audit Division assessed the penalties, the taxpayer lacked reasonable cause for their abatement.
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