New York Slice: New York’s Minimalist Approach to Discovery in Tax Matters

New York Slice is a new column focusing on New York State and City tax issues, authored by the attorneys in the SALT group at Eversheds Sutherland (US) LLP.

The New York Division of Tax Appeals (DTA) issued a recent order that highlights the unique discovery rules that apply in the litigation of New York tax matters, which differ substantially from other states that offer more expansive discovery options when taxpayers appeal state tax assessments or denials of refund claims.

On Sept. 3, 2020, the DTA issued an order addressing an “attorney-issued” subpoena in In Matter of West 20th Street Enterprises Corp. The order concluded that the DTA lacked jurisdiction to modify or quash the subpoena. But the administrative law judge (ALJ) explained that if he had jurisdiction, he would have quashed the subpoena on the basis that the petitioning taxpayer’s attorney did not have the authority to issue the subpoena under the applicable judicial and administrative procedural rules. Order, In the Matter of the Petitions of West 20th Street Enterprises Corp., DTA Nos. 828472-75 (N.Y.S. Div. Tax Apps. Sept. 3, 2020).

Discovery in New York Tax Matters

The DTA is the trier of fact when a taxpayer disputes a tax assessment or denial of a refund claim, and the record established before an ALJ is used for any subsequent appeals to the New York State Tax Appeals Tribunal or to the New York courts.

The rules applicable to the DTA (the New York State Tax Appeals Tribunals Rules of Practice and Procedure, or “tax appeals rules”) only allow for limited discovery. For example, the tax appeals rules offer no mechanism for parties to request answers to interrogatories, and depositions of witnesses are only permitted if there is a substantial risk that the person being deposed will not be available to testify at a hearing. 20 NYCRR 3000.6(c). The tax appeals rules contemplate that an ALJ may issue a subpoena, but only to require the attendance of witnesses or to require the production of documentary evidence at a hearing. 20 NYCRR 3000.7(a).

From a practical perspective, the few discovery tools that are available to litigants in DTA matters do not tend to result in the discovery of any new information. The tax appeals rules allow the parties to serve requests for admissions and to request a bill of particulars, which were both recently the subject of discovery disputes at the DTA.

Requests for admissions are limited to “matters as to which the party requesting the admission reasonably believes there can be no substantial dispute at the hearing and which are within the knowledge of the adverse party or can be ascertained by him or her upon reasonable inquiry.” 20 NYCRR 3000.6(b)(1)(iii). Earlier this year, the DTA vacated a taxpayer’s requests for admissions that focused on matters relating to the taxpayer’s business operations (finding “[s]uch matters cannot reasonably be expected to be within the knowledge of the [Department] or be obtained by reasonable inquiry”). In the Matter of the Petitions of Capeci, DTA Nos. 828636, 828637, 828638, 828639 and 828640 (N.Y. Div. Tax Apps. Jan. 9, 2020).

This summer, the DTA also ruled that the department did not have to respond to a taxpayer’s demand for a bill of particulars, explaining that a “bill of particulars amplifies a pleading by setting forth in greater detail the nature of the allegations and what the party making them intends to prove” and “a party need particularize only those matters upon which it has the burden of proof.” Since the taxpayer had the burden of overcoming the presumption of correctness that attached to the department’s assessment, the DTA reasoned that the taxpayer’s demand for a bill of particulars from the department was “improper.” In the Matter of the Petition of Bey, DTA No. 828698 (N.Y. Div. Tax Apps. July 30, 2020).

The West 20th Street Subpoena

In West 20th Street, an adult entertainment establishment (petitioners) sought to use an attorney-issued subpoena to obtain information on the resolution of a tax dispute with a different taxpayer. The petitioners challenged a department assessment asserting that “scrip” sold to patrons of adult entertainment establishments are admission charges subject to sales tax. During a hearing to establish the record in the matter, the petitioners stated that they intended to serve the department a subpoena seeking information about another recent case before the DTA addressing the same substantive issue. The taxpayer in that other case reached a settlement with the department and the notices assessing sales tax in the other case apparently were cancelled.

Two weeks after the hearing, the petitioners’ attorney issued and served a subpoena duces tecum on the department, seeking “any and all documents and communications concerning or related to the decision to cancel the notices of determination issued to” the taxpayers in the other case. In response, the department filed a motion in the DTA to withdraw or quash the subpoena.

The ALJ’s Analysis

The ALJ first concluded that he lacked jurisdiction to withdraw or quash the petitioners’ subpoena. The subpoena at issue was an “attorney-issued” subpoena pursuant to Section 2302 of New York’s Civil Practice Law and Rules (CPLR). The ALJ explained that under the rules applicable to the DTA, a petitioner’s attorney may issue a subpoena pursuant to the CPLR. However, the ALJ found that the DTA has no jurisdiction to act on such a unilaterally issued subpoena. Instead, jurisdiction over such a subpoena lies with the New York State Supreme Court (New York’s trial court).

The ALJ’s opinion could have ended with the finding of a lack of jurisdiction. However, the ALJ further concluded that if the DTA did have jurisdiction to rule on the department’s motion, he would have quashed the subpoena. According to the ALJ, the petitioners’ attorney issued the subpoena under a CPLR rule that had not been adopted in the tax appeals rules. The New York State Administrative Procedure Act gives administrative agencies like the DTA the authority to adopt their own discovery rules, and the ALJ cited case law holding that the “disclosure devices” of the CPLR do not apply to an administrative agency unless they are also adopted as a rule by the agency. Heim v. Regan.

Finally, the ALJ pointed out that the petitioners’ attorney served the subpoena weeks after the hearing establishing the factual record in the matter. The ALJ had agreed to keep the record open after the hearing solely to allow the petitioners to submit affidavits of performers and employees at the petitioners’ establishment. Thus, even if the petitioners’ subpoena was proper, the hearing record would not have been open for the petitioners to submit documents procured from the department in response to the subpoena.

Insight

The decision in West 20th Street offers a glimpse into some of the nuances of litigating tax matters at the DTA. While the DTA’s hearings have been referred to as “trial by ambush” due to the lack of discovery tools that are standard fare in other state courts, in practice taxpayers may actually prefer New York’s minimalist approach to discovery in tax litigation. As between the taxpayer and the department, the taxpayer is almost always subject to greater inconvenience and burden when responding to discovery requests because the taxpayer is usually in sole possession of the vast majority of the facts relevant to a dispute.

For example, consider a highly factual tax dispute, such as one involving whether a group of companies are “unitary” or whether a company has nexus with a state. Taxpayers in other state courts may find themselves spending months or years answering discovery that may involve extensive review of records and resources outside of the taxpayer’s own tax department. Often the years at issue in the litigation are five, ten, or more years in the past, making it challenging for the taxpayer to find the relevant documents or the people with knowledge relevant to any discovery requests. But in New York, once the department completes an audit, the tax appeals rules described above provide very limited ability to conduct additional factual development or to require the taxpayer to produce new information.

In addition, New York taxpayers are not left completely in the dark about facts in the possession of the department. Even though the tax appeals rules provide for limited discovery, taxpayers frequently use New York’s Freedom of Information Law (FOIL) to obtain a copy of the their audit file from the department. FOIL requests can also be used to obtain copies of documents relating to the department’s published positions in advisory opinions, technical memoranda, and other policy statements. Like typical discovery tools, certain privileges and exceptions apply to the production of documents in response to a FOIL request. See N.Y. Public Officers Law Section 87(2).

Practically speaking, in most New York disputes, taxpayers are unlikely to find themselves at a disadvantage because of the limited discovery tools available. That is because even when other state court rules allow more liberal discovery in tax matters, documents turned over by the state tax authority often largely consist of copies of the taxpayer’s own returns and the taxpayer’s responses to audit questions, which are also available through a FOIL request in New York. Obtaining the type of information sought by the taxpayer in West 20th Street (information pertaining to other taxpayers) is generally barred by state laws that protect taxpayer confidentiality. See Moody’s Corp. v. N.Y. State Dep’t of Tax’n & Fin. (finding the department properly denied taxpayer’s access to documents containing information pertaining to other taxpayers under N.Y. Tax Law Section 211(8) and N.Y. Public Officers Law Section 87(2)(a)).

Therefore, taxpayers seeking efficient resolution of their tax disputes in New York may find that the tax appeal process in New York has advantages over other state appeal processes that tend to place a more significant discovery burden on the taxpayer. Some might say the limited discovery tools available to the parties in New York tax disputes create a situation where “less is more.”

This column doesn’t necessarily reflect the opinion of The Bureau of National Affairs Inc. or its owners.

Author Information

Eversheds Sutherland (US) LLP Counsel Open Weaver Banks represents clients in state and local tax controversies at the administrative, trial and appellate levels. Her work includes income, franchise, sales and use, and property tax matters.

Eversheds Sutherland (US) LLP Counsel Ted Friedman focuses his practice on state and local tax matters. He counsels clients on a wide range of state and local tax issues involving income and franchise taxes, sales and use taxes, gross receipts taxes, property taxes and telecommunication taxes.

Eversheds Sutherland (US) LLP Counsel Michael Hilkin focuses on tax controversy and transactional issues relating to state and local income, franchise, sales and use, gross receipts and other business taxes.