New York City Commercial Rent Tax -- Protective Refund Claim

Published: July 31, 2000
Source: R & H Letter to Clients & Friends

A recent determination of an Administrative Law Judge of the New York City Tax Appeals Tribunal(1) involving the New York City Commercial Rent Tax ("CRT") requires that protective refund claims be filed in order to preserve tenants' rights with respect to CRT paid on real property tax escalation amounts. Under the CRT statute, refund claims must be filed within 18 months from the date fixed for filing the return or within six months after payment. Because this statue of limitations is rather short, we suggest that tenants file protective refund claims under the CRT(2) immediately, to preserve any CRT refund rights they may have.

The issue that creates this concern arises out of escalation clauses included in leases. Most commercial leases in the City contain provisions requiring tenants to pay additional rent attributable to increases in the real property tax on the building. Because these escalations constitute additional rent, tenants must pay CRT on the escalation amounts -- essentially one tax is imposed on the payment of another tax.

Frequently, landlords protest their property tax assessments through a proceeding under Article 7 of the Real Property Tax Law. These Article 7 proceedings can take many years to be resolved (in the Fried, Frank case, the Article 7 proceeding took over eight years). In the meantime, the landlord must pay the real property tax, and the tenant must pay the real property tax escalations as required under the lease, as well as the CRT on the escalations. At the end of the Article 7 proceeding the landlord may get a property tax refund. Should the landlord succeed in reducing the property taxes, standard property tax escalation clauses in commercial leases provide for some refund or credit to the tenant reflecting its proportionate share of the savings.

Most taxpayers thought (as did Fried, Frank) that when the refund or credit was triggered under the tax escalation clause their CRT would be adjusted in that period to reflect the reduced amount of rent owed in that later year. The City's Department of Finance disagreed, however. The City argued that to preserve the CRT benefit, the taxpayer must have filed a refund claim within eighteen months of the payment of the CRT for the period to which the challenged property tax related. In other words, the City attributed the rent reduction to the earlier year, not to the year in which the reduction actually occurred. As a result, taxpayers would have to make protective refund claims with each CRT return filed, even though they will not know whether the real property tax will in fact ever be lowered, or by how much. Adding insult to injury, the CRT refunds will bear no interest.(3)

On May 12, 2000, a City Administrative Law Judge upheld the Department's position, essentially requiring Fried, Frank to pay CRT on the amount of property tax reduction that was credited to it in the later year.

The Fried, Frank case is currently on appeal, and one may hope that reason and fairness will prevail in a reversal of the ALJ's decision. In the interim, however, we recommend filing protective refund claims to preserve any rights you might one day have to a refund of CRT. A refund claim filed now will cover CRT paid for the eighteen-month period prior to the date the claim is filed; we also recommend attaching a refund claim to each quarterly CRT return you file in the future. We suggest mentioning Matter of Fried, Frank, Harris, Shriver & Jacobson in the body of the refund claim, so that the administrative burden the City has brought upon itself to record and track the protective refund claims will be made even more apparent.

If, like Fried, Frank, you have actually been granted a reduction in rent under a property tax escalation clause due to a reduced property tax burden, we suggest you follow the same approach as Fried, Frank, and reduce your later-year CRT obligation to reflect the escalation adjustment, at least pending the resolution of this issue. It would be advisable to disclose all the facts and explain that the rent reduction is being claimed pending a resolution of the Fried, Frank case.

There is no City form to claim a CRT refund. Refunds are claimed by letter (preferably sent by certified mail, return receipt requested). For a form of a protective refund claim or if you have any questions, please call Glenn Newman, Carolyn Joy Lee or Lary Wolf at 212-903-8700.


1. Matter of Fried, Frank, Harris, Shriver & Jacobson (decided May 12, 2000).

2. Administrative Code of the City of New York Search7RH11-709.

3. Administrative Code Search7RH11-709.