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Tax Law

There’s No Turning Back: New York State Tax Appeals Tribunal Holds Retroactive Application of Statutory Amendments Violates Due Process

The New York State Tax Appeals Tribunal struck down the retroactive application of legislative amendments to a taxpayer who reasonably relied on a precedential decision of the Tribunal that was final and irrevocable at the time the taxpayer sold his shares in an S corporation.

On July 31, 2009, the non-resident taxpayer sold shares in an S corporation and elected under IRC § 338(h)(10) to treat the sale as an asset sale instead of a sale of stock. In making the federal election, the taxpayer relied on the Tribunal’s decision in Matter of Baum (February 12, 2009), in which the Tribunal held that, notwithstanding the deemed treatment of IRC § 338(h)(10) transactions for federal tax purposes, for the purpose of determining a taxpayer’s New York income tax, the transaction would be treated as a sale of stock and not a sale of assets. In 2010, subsequent to the taxpayer’s sale, the New York legislature amended Tax Law § 632(a)(2) to provide that a non-resident S corporation shareholder must treat the sale of stock subject to an IRC § 338(h)(10) election as the sale of assets and apportion the sale proceeds to New York in accordance with the S corporation’s business allocation percentage. The amendment was retroactively effective for tax years beginning on or after January 1, 2007, and any other taxable year in which the period of limitations on assessment remained open.

In striking down the retroactive application of the amendments to the taxpayer, the Tribunal held that the taxpayer’s reliance on Baum was reasonable and that public policy considerations supporting the integrity of Tribunal decisions outweighed public policy considerations supporting correction of an erroneous Tribunal decision. Under these circumstances, the retroactive application of the 2010 amendment to the taxpayer’s 2009 tax year violated the taxpayer’s rights under the Due Process Clauses of the U.S. and New York Constitutions. The Tribunal distinguished other decisions that upheld the retroactive of the same legislation on the basis that the taxpayers in the other decisions entered into their transactions before the Tribunal’s decision in Baum and, therefore, did not rely on a final, precedential opinion of the Tribunal.

In the Matter of the Petition of Lewis, Dkt. No. 827791 (N.Y. Tax Appeals Tribunal May 21, 2020)