The New York Division of Tax Appeals (DTA) held that the retroactive application of an amended statute did not violate a non-resident individual’s due process rights. In 2009, the individual entered into an agreement to sell his shares in an S corporation and made an IRC 338(h)(10) election, pursuant to which the transaction was treated as an asset sale for federal tax purposes. At the time of the sale, the individual was advised by his tax accountant that under a then recently-issued Tax Appeals Tribunal (Tribunal) decision, New York would treat the transaction as a sale of an intangible, i.e., stock, notwithstanding the deemed asset sale treatment for federal tax purposes, and that the gain on the sale would not be subject to New York tax. In 2010, however, prior to the date on which the individual filed his New York return for the 2009 tax year, New York amended its statute to provide that if shareholders of an S corporation made an IRC § 338(h)(10) election, the gain shall be treated as New York source income allocated based on the State’s rules. The DTA, relying on a 2015 New York Court of Appeals decision, found that the individual’s reliance on the Tribunal decision was not reasonable. The DTA explained that the Court of Appeals had determined the Tribunal’s decision was a departure from the Division’s long-standing and articulated policy in administering transactions involving deemed asset sale elections made by non-resident taxpayers, and that the Court of Appeals accepted the validity of the Legislature’s stated aims of curing an incorrect Tribunal decision.
In the Matter of the Petition of Franklin C. Lewis, NY St. Div. of Tax Appeals, DTA No, 827791 (June 20, 2019)