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Need a Break from SCOTUS and Wayfair? New York – Why Make a Federal Case about It?

07.09.18 | SALT Chat

Yes, I know the Supreme Court decision in Wayfair certainly may turn out to be the most important case related to state and local taxes the court has addressed in the last 25 years and maybe for the next 100 years.  Nevertheless, I need a break and likely so do you.  Therefore, I digress to another taxing topic my readers should find interesting.

We all have heard, and The Wall Street Journal has reported, that audits by the Internal Revenue Service have been on a downward trend and continue to plummet to extremely low levels.  Since virtually every state and local jurisdiction somehow ties the computation of tax due to a federal reference or starting point, the drop in federal audits and the corresponding mandate to report federal changes to state and local authorities has added another source of lost revenue to the coffers. 

No federal audit changes equals no corresponding state changes, which means the additional dollars the states receive for the IRS doing the work are not flowing in.  This is why I was not surprised to see the recent New York State Tax Appeals Tribunal decision[1], which held that the taxpayer was not a real estate professional, as defined by the Internal Revenue Code and accordingly was not entitled to deduct certain losses generated from his real property investments.

The Administrative Law Judge (the “lower” court) as well as the Tax Appeals Tribunal did not spend a significant amount of time analyzing the law, but did go into enormous amounts of detail regarding the information presented by the taxpayer and his failure to meet his burden of proof[2].

At Berdon we have been seeing this type of audit on the rise.  States are showing up at the door and requesting documentation that essentially relates to a federal issue.  Are they entitled to do so?  They certainly are.  We can help navigate the audits and steer the auditor’s requests to generally a more reasonable scope acceptable to both sides.  If you have raised questions or concerns, contact me at WBerkowitz@BerdonLLP.com or your Berdon advisor.

[1] In the Matter of Petition of Michael Strachan, DTA No. 826530 (June 28, 2018.)

[2] Here comes the musical reference:  This case is so laden with facts (eyes glazing over) that I couldn’t help but think of the classic 1967 song by Arlo Guthrie, “Alice’s Restaurant Massacree” where a “federal case” is made over a relatively minor violation of the local littering laws.  For those of you who have never heard the song please set aside 18 minutes and 34 seconds and either wait till Thanksgiving when many radio stations play it or go to your favorite streaming service immediately.

Wayne K. Berkowitz, CPA, J.D., LL.M., a tax partner and head of the State and Local Tax Group at Berdon LLP, New York Accountants, advises clients on the unique requirements of governments and municipalities across the nation.