MORTY REISS and RACHEL REISS and ELY REISS and ELAINE REISS - DECISION - 03/19/93

Transcription

1 MORTY REISS and RACHEL REISS and ELY REISS and ELAINE REISS - DECISION - 03/19/93 In the Matter of MORTY REISS and RACHEL REISS TAT DECISION and ELY REISS and ELAINE REISS TAT A - DECISION NEW YORK CITY TAX APPEALS TRIBUNAL APPEALS DIVISION REAL PROPERTY TRANSFER TAX - FINANCE DEPARTMENT S DELAYS DID NOT EXCUSE TAXPAYER FROM LIABILITY FOR REAL PROPERTY TRANSFER TAX DEFICIENCY AND INTEREST AND PENALTY IN RESPECT THEREOF. MARCH 19, 1993

2 New York City Tax Appeals Tribunal x : In the Matter of : : MORTY REISS and RACHEL REISS, : : TAT NO: Petitioners. : : x DECISION x : In the Matter of : : ELY REISS and ELAINE REISS, : : TAT NO: A Petitioners. : x Petitioners Morty and Rachel Reiss appeal from a Final Determination by Respondent, dated February 11, 1991, sustaining a previously assessed deficiency in the Real Property Transfer Tax ("RPT") with respect to the 1981 conveyance of a property at 6 Evergreen Street, in Staten Island. Petitioners Ely and Elaine Reiss appeal from another Final Determination, also dated February 11, 1991, sustaining an identical deficiency resulting from the 1981 conveyance of a neighboring property at 10 Evergreen Street, in Staten Island. The two transfers present identical issues and the matters were consolidated for hearing before Respondent's Hearings Bureau.

3 On consent of the parties, the appeals were similarly consolidated before this Tribunal. The four individual Petitioners were the grantees of their respective properties. The single grantor of both parcels was Reisshold Developers, Inc., a corporation whose two shareholders were Morty Reiss and Ely Reiss. In addition, Petitioners Morty Reiss and Ely Reiss (who are father and son) served as President and Vice President, respectively, of Reisshold Developers. Grantor was dissolved in August 1982, one month after petitioning for the hearing below. Petitioners appear by Abe Reiss, Esq., who is another son of Petitioner Morty Reiss. To complete the picture of the interlocking roles played here, we note that Petitioners' counsel herein served as attorney for the bank which financed the improvement and the purchase of both properties while simultaneously (according to his testimony at the hearing below, PP. 19, 20, 33) serving at the closing as attorney for both the seller and the purchasers. In May 1981, Reisshold Developers obtained construction loans on the two properties from West Side Federal Savings and Loan Association ("WSF"), which loans were secured by mortgages. The sum borrowed on each property was $85,000, the interest rate was 22%, and monthly payments of interest only were due on the first of 2

4 each month until May 1, 1982, when the entire principal was due in a single balloon payment. On October 19, 1981, the two properties were conveyed to their respective grantees, at which time grantees assumed grantor's obligations under each note and mortgage, by executing an "Extension and Consolidation Agreement." Under the terms of this latter document, the interest rate dropped to 14 3/4%, monthly payments were calculated to include principal as well as interest, the due date was extended to 2006 (by which time no balloon payment would be due), and the November 1981 payment was canceled, so that the first of the newly calculated monthly payments was to be due in December. Although grantees contracted in early October to pay $110,000 for each property, they later filed affidavits indicating a sales price of only $90,000, of which $85,000 comprised the assumption of the mortgage. Following the October 1981 closing, grantor and grantees jointly filed RPT returns, characterizing only $5,000 as net consideration for each property and showing a tax due of $50. In June 1982, Respondent sent grantor and all grantees notices of deficiency in the principal amount of $850 (on each parcel), as well as interest and penalties. Notices of Determination were issued on July 8, 1982 and, although Petitioners have claimed that the identity of grantor and grantees may have been inverted on the notices and/or that one of the notices may not have been sent to 3

5 grantor, it is not disputed that these Petitioners received the Notices and that grantor and grantees all filed Petitions seeking a hearing of their protests of the Determinations. The hearing was not held until September 1987, sixty-two months after the filing of the Petition. In the interim, Reisshold Developers was dissolved (1982), Morty Reiss died (1985), WSF ceased to exist, and the staff analyst who had subscribed the notice of deficiency departed Respondent's employ. The sole witness at the hearing was Abe Reiss, who testified to the details of the subject transactions as the attorney for every one of the parties to the 1981 closings. Forty-one months after the close of the hearing, Respondent issued its Final Determination, sustaining the deficiency. From that Final Determination, Petitioners now seek relief in this forum. In the case of a conveyance made pursuant to a contract executed prior to February 1, 1982, the Real Property Transfer Tax, as defined by Title 11, Chapter 21, of the Administrative Code of the City of New York (the "Code"), is imposed on the deed at the time of delivery by its grantor, at a rate (at the time relevant to this transaction) of one percent of "net consideration." For purposes of the Code, "net consideration" includes "the amount of any mortgage, lien or other encumbrance" other than one "which existed before the delivery of the deed and (remains)... after the delivery of the deed." In other words, a transfer which involves 4

6 creation of a new mortgage will obligate payment of a tax based not only on cash or other property transferred by grantee to grantor, but also, on the outstanding balance on the prior mortgage, even if the net consideration so calculated is larger than the transferor's equity. But where such prior mortgage is continued through the transfer, it is not required to be included in net consideration. Code sec [10]). The continuation of a mortgage following conveyance has diminished importance in more recent transactions by reason of amendments to the Code which make all mortgage amounts subject to the RPT. But, in October 1981, when the subject transaction took place, the distinction was critical. Respondent's Hearing Officer found the mortgage balance here to be includible in net consideration because the mortgage debt was "materially altered so that the lien surviving the closing [was] not pre-existing within the meaning of the Code." This conclusion was supported by reference to the change in maturity date and interest rate, and the altered amortization rate (involving periodic payments of principal, rather than a balloon). Respondent's decision cited as well to 50 West 23rd Associates v. City of New York, 160 A.D. 2d 660 (1st Dept. 1990), which supports Respondent's reasoning. Although not cited, Exchange Plaza Partners v. City of New York, 159 A.D. 2d 333 (1st Dept. 1990), is also in accord. By coincidence, this Tribunal upheld the aforesaid principle 5

7 of law in its first decision on the subject of "mortgages as consideration", Cord Meyer Development Company v. City of New York, TAT No: , decided January 9, Cord-Meyer involved a transaction somewhat more complex than the instant one, but, in deciding it, this Tribunal held its mortgage includible in net consideration for the precise reasons highlighted here by the Respondent's Hearing Officer. Thus, this Tribunal has little hesitation in sustaining the substantive result reached below. Yet, it is not the substantive ruling which is the nub of the instant appeal. Rather, Petitioners seek to overturn the Determination merely by reason of the time elapsed between the transaction, the hearing, and the Final Determination. Petitioners' pleadings assert that the interval of nine years and four months from conveyance to final determination was in itself prejudicial; that Petitioners could not be expected to keep records for so many years; that the assessment of interest and penalties is unjustifiable, since these amounts climbed during delays attributable to Respondent; and that Respondent is guilty of laches. (A fifth claim--that Respondent's Final Determination was impermissibly issued by someone other than the Hearing Officer-- was withdrawn at the pre-hearing conference herein). Petitioners' contentions were further amplified in an affidavit submitted with the briefs, as well as in the briefs themselves. Petitioners complain that the dissolution of grantor 6

8 in 1982 deprived them of needed records and left grantees "holding the bag"; that the death of Morty Reiss in 1985 deprived Petitioners of needed testimony as to the details of the transaction; that the departure and consequent unavailability of Respondent's auditor prejudiced Petitioners by depriving them of the opportunity to cross-examine a person with knowledge of the assessment; that the dissolution of the bank further deprived Petitioners of records which would have shown the transaction in a more favorable light; and that Respondent gained an unfair advantage in delaying the issuance of a Final Determination for more than three years until a court decision favorable to Respondent became available to support Respondent's position. These contentions evoke considerable sympathy for Petitioners and raise troubling questions about the extent of Respondent's case backlog in the mid-1980's, but they do not, either singly or collectively, justify our vacating the Final Determination. Respondent properly, and in timely fashion, put Petitioners on notice as to the amounts in dispute, by issuing a Notice of Deficiency and a subsequent Determination within eight months of the transaction and the RPT filing. Time limits for the retention of records traditionally relate only to years or transactions not yet in dispute. Once given notice of a dispute, a party to it destroys records only at its peril. Consequently, Petitioners cannot be heard to complain that the interval between the 7

9 conveyance and the Final Determination exceeded the usual record maintenance period. The delay in eliciting a hearing may properly be reckoned only from the filing of the Petition for Hearing in late July While the subsequent five-year hiatus is hardly a model of administrative efficiency, Petitioners cannot avoid an otherwise justified tax merely by citing such hiatus. First, Petitioners have offered not a scintilla of proof, at the hearing or since, that they requested, demanded, or otherwise sought to elicit, a speedier hearing. The record is bare as to the posture of the parties during this interval. The absence of interest or inquiry is a factor to be weighed in determining possible prejudice. Heller v. N.Y. State Tax Commission, 116 A.D. 2d 901 (3rd Dept. 1986). Nor have Petitioners indicated any effort to elicit the Final Determination between 1987 and These lapses, however, are overshadowed by a greater impediment to Petitioners' cause. Petitioners have failed to demonstrate any manner in which prejudice could have attached by reason of the delay. The dissolution of grantor could not be said to be prejudicial, since such dissolution occurred shortly after the conveyance, and even a speedy hearing would have been held subsequent to such dissolution. The death of Morty Reiss could hardly have been prejudicial, because Petitioners cannot demonstrate even one possible fact favorable to them which the decedent might have proven if he had 8

10 testified. Instead, their references to him consist of merest speculation, leaving it difficult to imagine how he could have influenced the outcome. Furthermore, the availability of Ely Reiss, the sole remaining shareholder and officer of Reisshold (who did not testify), and of Abe Reiss, the versatile shepherd of this multi-faceted transaction (who did testify), renders the centrality of the one deceased witness even less arguable. Similarly, the dissolution of WSF has not been shown to be prejudicial, since Petitioners cannot seem to imagine or articulate any particular fact which, if asserted by WSF, would have recast their transactions and altered their result. Rather, the facts of the transactions here at issue emerge clearly from the loan and mortgage documents in evidence. These facts mandate the conclusions of law upheld herein and are in no way susceptible of alternate interpretations by mystery witnesses. Nor can the unavailability of Respondent's auditor be said to be prejudicial to Petitioners, since neither his computations nor his motivation is in dispute. In the absence of a contrary assertion by Petitioners, the basis for the auditor's actions seems clear and undisputed. In dispute is solely the legal correctness of what he did. For these reasons, the unavailability of a grantee, of the bank, and of an auditor, did not "significantly or deliberately interfere with (this) party's capacity to prepare or present his case" and Petitioners have not shown any denial of due 9

11 process. See O'Keefe v. Murphy, 38 N.Y. 2d 563, at p. 568 (1976). Petitioners have failed to demonstrate prejudice, and, in its absence, delay alone never suffices to alter an otherwise just result. Sarkisian Brothers v. N.Y. State Division of Human Rights, 48 N.Y. 2d 816 (1979). Court decisions have repeatedly upheld administrative determinations which followed significant hearing delays (some as long as six and even nine years). Carroll McEntee & McGinley v. Dept. of Finance, 179 A.D. 2d 514 (1st Dept. 1992); G.H. Walker & Co. v. State Tax Commission, 62 A.D. 2d 77 (3rd Dept. 1978). Although the belated issuance of Respondent's Final Determination coincided perhaps too serendipitously with the publication of a court decision supporting its stand, the response to such one-sided control of the decision calendar cannot be to ignore or reject a well-reasoned precedent that we ourselves have recently reaffirmed. Respondent's substantive ruling must stand. The recent transfer of the hearings function to this Tribunal ensures that the practice complained of cannot recur. Regardless of the shortfall in Petitioners' purported appeals for equity, Respondent here can never be precluded from collecting the deficiency by the doctrine of laches. It is well settled that laches cannot be applied to a government agency in the execution of its statutorily mandated taxing functions. G. H. Walker & Co. v. N.Y. State Tax Commission, supra; McMahan v. N.Y. State Tax 10

12 Commission, 45 A.D. 2d 624 (3rd Dept. 1974). Finally, Petitioners complain of the penalties and interest they have been charged during the extended pendency of their protest. If penalties had been added during this period, Petitioners would be entitled to relief. However, the only penalty imposed was the $42.50 charge at the time of the original deficiency assessment. The compiling of interest charges is not premised on fault and is incident to the availability of the funds to Petitioners throughout these last 11 years. We find no authority for the proposition that we may abate such interest where it has accrued. See In the Matter of Mid-Boro Realty, Inc., TAT No , at p. 2 (September 25, 1990); In the Matter of Mary Whelan Phelan, TAT NO , at p. 8 (February 19, 1993). Respondent, in a submission requested by this Tribunal, calculated the interest charges imposed at each step in the appeal process 1 and Petitioners, in response, contested some of those calculations. However, it is apparent that the divergence results from a change in the law, effective July 16, 1985, which required interest to be compounded daily, based on the total of the previously assessed principal, penalty and interest. Once this change is factored in, Respondent's calculations appear to be correct. 1 This was done to reassure the Petitioner and the Tribunal that penalties had not been imposed or increased during the lengthy intervals complained of. 11

13 denied. For the reasons set forth above, the instant Petition is Dated: March 19, 1993 New York, New York MARK FRIEDLANDER Commissioner and President DOROTHY F. HENDERSON Commissioner SUSAN GROSSMAN Commissioner 12