In addition to my prior article, the issue in the case actually was the subject of some press reports a few years ago, when taxpayers complained about the tax department’s interpretation. Basically, one of the benefits for taxpayers under the Empire Zone Program was the availability of a “tax reduction credit” that essentially did what it said: it reduced the New York State taxes payable for qualifying taxpayers in Empire Zones. The specific issue here arose in the context of S corporation shareholders who lived in New York (i.e., who were NY residents). The law provided that these taxpayers were entitled to a credit for tax on the flow-through portion of their S corporation income that was “allocated to the State.” For resident shareholders, though, arguably ALL their income is allocated to the State because residents pay tax on all of their income. The tax department had taken the position, however, that even though the shareholders in question may have paid 100% tax on their S corporation income, they would only get a corresponding credit for the amount of such S corporation income that was properly apportionable to the State under the business allocation percentage rules that apply to nonresident shareholders. And if the S corporation had a significant amount of out-of-state sales, for instance, the NY resident shareholder’s tax reduction credit would be minimal, even though they would have paid 100% tax on their S corporation income as a resident of the state.
As noted above, taxpayers won in a series of cases a few years ago (see, e.g., the Batty and Peneffeather cases and the Henson case). And oddly, the tax department chose to not appeal any of these prior losses. That is, until the Purcell case. Perhaps the fact that the proposed assessments here totaled close to $2,000,000 had something to do with it! Or, however, a simpler explanation probably exists. Namely, the taxpayers in this case – unlike some other cases – also received a New York tax credit for taxes paid to other states on income that was earned there. Thus, this gave the tax department a perfect test case. Since Mr. Purcell already received some credit off his New York taxes for the tax he paid to Virginia on his S corporation income, why should his New York tax reduction credit be computed as if 100% of his income was taxable in New York? The Tax Department may have felt this kind of case looked a little like double-dipping, even though I would argue that the availability of the empire zone credit should turn on the language of the law only, despite how good or bad a particular taxpayer’s facts appeared.
In any case, the Tax Appeals Tribunal didn’t specifically address that issue. Their view was simply that the Tax Department’s overall interpretation of the statute was reasonable and, therefore, should be upheld. And while recognizing that the taxpayer’s view was also reasonable, the Tribunal nonetheless deferred to the tax department’s interpretation since, as a tax credit statute, it believed that the taxpayer was required to prove that its interpretation was the only reasonable one. Also of note, the Tribunal also clarified (twice actually) that it gave no deference to the tax department’s forms and instructions. It just thought that its interpretation was also reasonable and therefore should be upheld.
This probably just floats by as an unusual case on a technical issue related to an Empire Zone Program that has been completely overhauled anyway. But for us tax nerds who follow the inner workings of the New York Division of Tax Appeals, it is nonetheless an interesting development. After losing so many of these cases, the Tax Department finally picked one to appeal and, to its credit, it paid off. But given the string of taxpayer victories before this case, and some legitimate questions about whether the Tribunal’s view was the right one, I think we can expect that the taxpayer will appeal this, as is his right, via an Article 78 proceeding.
