Late Filing Penalty Upheld -- Sale of New York Co-op Apartment by Nonresidents

by Joseph Lipari
Published: January 15, 1997
Source: Inside New York Taxes

A cursory review of advance sheets reveals numerous instances of taxpayers being hurt by relying on out-of-state professionals to advise them on New York tax matters. In a recent example, an ALJ upheld a penalty against a taxpayer for late payment of a tax which, under existing authority, the taxpayer did not owe in the first place. (Charles M. and Linda C. Karpas, October 17, 1996).

Taxpayers were Florida residents who owned a New York cooperative apartment which they sold in 1991. Their accountant in Florida originally did not file a New York Personal Income Tax Return for that year. In 1994, however, the taxpayers received a notification from the Tax Division and, in response, they filed their 1991 New York State Personal Income Tax Return on or about October 14, 1994, showing tax due on the sale of the co-op apartment of about $11,000. The return was filed together with payment of the tax shown on the return and interest. The Tax Division responded by issuing a Notice and Demand seeking about $2,000 in penalties. The taxpayers' Florida accountant explained that in 1991 he "overlooked the fact that profit on the sale of the apartment should be reported as New York income."

According to the parties, the issue in the case was whether the penalty should be upheld. The taxpayers and their CPA claimed that the mistake was unintentional and resulted from the accountant's unfamiliarity with New York's personal income tax. The accountant argued that the taxpayers should not be penalized for relying on a professional who made an inadvertent error. The ALJ, however, reviewed the authorities on penalties and concluded that penalties could not be abated for the reasons given since there was no evidence presented as to whether their reliance on their accountant was reasonable (see, Matter of LT & B Realty v. State Tax Comm., 141 AD2d 185 (1989)).


Unfortunately for the taxpayers no one apparently bothered to research whether the tax was actually due. The relevant authorities (which are fairly easy to find using the CCH New York Tax Reporter), hold that nonresidents are not taxable on the sale of a cooperative apartment except to the extent the apartment is used in a New York trade or business. A sale of a co-op apartment is actually a sale of stock in the cooperative corporation rather than the sale of New York real property, and therefore, is gain from intangible property not ordinarily taxable to a nonresident (see, e.g. Gimma, TSB-A-88-(6)-I). Accordingly, the taxpayers not only should not have been required to pay the penalty but they should not have paid the tax claimed by the Division.

We have subsequently learned that neither the Division's attorney nor the ALJ had been aware of the authorities and, since the taxpayer did not raise the issue, did not feel a need to research the question.