In re Reiner: estoppel conquers all.

• Author: Sinclair, Kirk

In a recent New York State Division of Tax Appeals decision, the court held that when a taxpayer reasonably relies on the published, written guidance of the Division of Taxation (Division), the Division will be estopped from retroactively changing the rules in a way that will cause an avoidable, detrimental effect on the taxpayer; see In the Matter of the Petition of Robert and Naomi Reiner, State of New York Division of Tax Appeals, Administrative Law Judge Unit, DTA No. 820266 (7/13/06).

Facts

In 1996, the taxpayers (a husband and wife who filed jointly), New York state residents, owned and operated a business located in Pennsylvania that engaged in the manufacture and sale of household cleaning products. The business was taxable as an S corporation for both Federal and New York purposes. It reported taxes on an October 1-September 30 fiscal year.

In 1996, the taxpayers reached an agreement to sell substantially all of the business's assets to a third party. Prior to the sale, and throughout the due-diligence process, the taxpayers were intently focused on the specific dollar amount they would receive from the sale after satisfying all outstanding obligations and taxes. The taxpayers were aware that as S shareholders, items of income, gain, loss and deduction would pass through to them and be included in their personal income tax return. The taxpayers' position was clear from the beginning that if the after-tax numbers did not reach an acceptable level, the sale would not occur.

Rules: In reaching its decision, the court discussed the possible application of two distinct rules: the "year-end" rule and the "prorate" rule. Under the former, income items of a part-year resident shareholder will be sourced to New York if the shareholder resides there on the last day of the entity's fiscal year. Alternatively, under the prorate rule, a shareholder's residency status on the last day of the entity's fiscal year is irrelevant. The determining factor is the number of days the shareholder is a resident during the year in which the change of residency occurs. The taxpayers' accountant advised them that the year-end rule would apply to them. This advice was supported by both regulations and court cases in effect at the time. Further, the taxpayers' accountant had past experience dealing with the issue that supported this advice.

The taxpayers, in accordance with this advice, and to ensure that the income items would not be sourced to New York...