Retroactive Application Of 2010 Statutory Amendment Permitted By Tribunal -

Reversing the decision of an Administrative Law Judge, the New York State Tax Appeals Tribunal has upheld the constitutionality of retroactively applying to the 2008 tax year a 2010 statutory amendment to Tax Law § 632(a)(2) concerning the treatment of installment payments by nonresident shareholders of an S corporation. Matter of Jeffrey M. and Melissa Luizza, DTA No. 824932 (N.Y.S. Tax App. Trib., Mar. 29, 2016). Despite the fact that the taxpayers had reasonably relied on the then-current state of the law in structuring their 2008 transaction, the Tribunal found that the recent decision of the Court of Appeals in Caprio v. New York State Dep’t of Taxation and Fin. et al., 25 N.Y.3d 744 (2015), reh’g denied, 26 N.Y.3d 955 (2015), required it to apply the statutory amendment retroactively.

Facts. The petitioners, Mr. and Mrs. Luizza, were nonresidents of New York. Mr. Luizza owned 100% of the stock of an S corporation that did business in New York and other states, and in December 2007 he agreed to sell the company to an unrelated purchaser. At the purchaser’s request, Mr. Luizza agreed to an election to treat the sale as a deemed sale of the company’s assets pursuant to Internal Revenue Code (“IRC”) § 338(h)(10), but only to the extent that there would be “no negative federal or state tax implications for the S corporation or himself individually,” and requested that he be reimbursed for any such tax consequences. The purchaser requested instead that the tax consequences of the election be addressed up front, so Mr. Luizza and his accountants researched the federal and New York State tax implications, including the effects of Tax Law § 632(a)(2) and other New York State authority available in late 2007 and early 2008. Mr. Luizza was advised by his tax advisors that there would be no tax consequences in New York as a result of the election, and he therefore agreed not to require the purchaser to increase the purchase price or to provide indemnity when the sale closed in March 2008. The Department of Taxation and Finance stipulated that “Mr. Luizza reasonably relied on the New York law applicable at the time of the sale when he agreed not to require the [b]uyer to increase the purchase price nor to provide indemnity for any additional taxes arising as a result of the election.”