Court of Appeals – S Corporation: Caprio, et al. v. New York State Department of Taxation and Finance, et al.

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New York State Court of Appeals

S Corporation

2010 Amendments to Tax Law – Constitutionality

Caprio, et al. v. New York State Department of Taxation and Finance, et al.

No. 116

Judge Stein

Background: At issue on appeal is whether the 3 1/2-year retroactive application for the 2010 amendments to Tax Law Section 632 is unconstitutional as applied to the plaintiffs. They allege that the amendments retroactively imposed a tax on the 2007 sale of the stock of their subchapter S corporation in a deemed asset sale, for which they utilized the installment method for federal tax purposes.

Ruling: The Court of Appeals held that the retroactive application did not violate the plaintiffs’ due process rights. The court noted that the plaintiffs did not demonstrate their reliance on their own reading of the law at the time of the transaction in 2007 was reasonable. In fact, the plaintiffs relied upon an untested interpretation of the prior law that was unsupported by any actual experience, practice or professional advice. Further, their interpretation was in conflict with the foundational purposes of S corporations, which permit shareholders to avoid paying corporate taxes by paying the taxes themselves, not to completely avoid paying any state taxes, as the plaintiffs seek with the suit.

Judith Vale for the appellants; John G. Nicolich for the respondents