author: Stein, J.

text:
    [37 NE3d 707, 16 NYS3d 204]
    Philip Caprio et al., Respondents, v New York State Department of Taxation and Finance et al., Appellants, et al., Defendant.
    Argued June 4, 2015;
    decided July 1, 2015

      POINTS OF COUNSEL

      Eric T. Schneiderman, Attorney General, New York City (Judith N. Vale, Barbara D. Underwood and Cecelia C. Chang of counsel), for appellants.
    Retroactive application of the curative 2010 amendments does not violate due process. (Matter of Varrington Corp. v City of N.Y. Dept. of Fin., 85 NY2d 28; Welch v Henry, 305 US 134; United States v Carlton, 512 US 26; Matter of Replan Dev. v Department of Hous. Presero. & Dev. of City of N.Y., 70 NY2d 451; Canisius Coll, v United States, 799 F2d 18; DeMartino v Commissioner of Internal Revenue, 862 F2d 400; James Sq. Assoc. LP v Mullen, 21 NY3d 233; Montana Rail Link, Inc. v United States, 76 F3d 991.)

      Ingram Yuzek Gainen Carroll & Bertolotti, LLP, New York City (John G. Nicolich and Roger Cukras of counsel), and Pitta & Giblin LLP, New York City (Vincent F. Pitta of counsel), for respondents.
    Retroactive application of the 2010 amendments violates taxpayers’ federal and state due process rights. (RKO-Keith-Orpheum Theatres, Inc. v City of New York, 308 NY 493; Matter of Chrysler Props. v Morris, 23 NY2d 515; United States

      v Carlton, 512 US 26; United States v Darusmont, 449 US 292; United States v Hudson, 299 US 498; Welch v Henry, 305 US 134; Holly S. Clarendon Trust v State Tax Commn., 43 NY2d 933; Matter of Lacidem Realty Corp. v Graves, 288 NY 354; People ex rel. Beck v Graves, 280 NY 405; Matter of Slewett & Farber v Board of Assessors of County of Nassau, 80 AD2d 186.)
   OPINION OF THE COURT

Stein, J.

On this appeal, we are asked to decide whether the 3/2-year retroactive application of the 2010 amendments to Tax Law § 632 (a) (2) (L 2010, ch 57, § 1, part C) is unconstitutional, as applied to plaintiffs, under the Due Process Clauses of the United States and New York State Constitutions. The amendments, as applied here, involve the intersection of two federal tax statutes, 26 USC §§ 338 (h) (10) and 453 (h) (1) (A), which address “deemed asset sales” and use of the installment method of accounting, respectively. Plaintiffs challenge the amendments insofar as they 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. Applying the balancing of the equities test set forth in James Sq. Assoc. LP v Mullen (21 NY3d 233, 246 [2013]) and Matter of Replan Dev. v Department of Hous. Preserv. & Dev. of City of N.Y. (70 NY2d 451, 456 [1987], appeal dismissed 485 US 950 [1988]), we conclude that retroactive application of the 2010 amendments did not violate plaintiffs’ due process rights.

I

Plaintiffs are Florida residents who owned the capital stock of Tri-Maintenance & Contractors, Inc. doing business as TMC Services, Inc., a New Jersey corporation that provided janitorial services. TMC had elected to be taxed as a subchapter S corporation for state and federal tax purposes (see Internal Revenue Code [26 USC] §§ 1361-1379; Tax Law § 660). An S corporation is permitted to avoid paying corporate income taxes by passing through income to its shareholders, who are then responsible for reporting the income on their personal tax returns. The character of the income remains the same and is treated as though the shareholder realized it directly from the S corporation’s source, or incurred it in the same manner that the corporation did (see 26 USC § 1366 [a], [b]; Tax Law § 617 [b]).

Resident New York shareholders pay state income tax on all pass-through S corporation income (see Tax Law § 617 [a], [b]), but nonresidents are assessed proportional New York State income taxes based on the percentage of the S corporation’s total gains that are derived from or connected with New York sources of corporate income (see Tax Law §§ 631 [a] [1] [B]; 632 [a] [2]). To ensure parallel state and federal treatment, each item of pass-through gain retains the same character for state and federal income tax purposes (see Tax Law §§617 [b]; 632 [e] [2]). TMC earned nearly 50% of its total income in New York.

In 2007, plaintiffs sold all of their shares in TMC to Sanitors Services, Inc., for approximately $20 million. Plaintiffs and Sanitors jointly made an election under Internal Revenue Code (26 USC) § 338 (h) (10) to treat the transaction as a “deemed asset sale,” pursuant to which the corporation that is being sold is treated, for tax purposes, as if it sold all of its assets to the buyer and then distributed the sale proceeds to its shareholders in a complete liquidation. A deemed asset sale is generally made at the request of the purchaser, which receives the beneficial tax consequences of an asset sale, such as a stepped up basis for the target (i.e., selling) corporation’s assets, that it could not obtain from a straight stock purchase. For federal tax purposes, the gains realized by the target corporation are treated as corporate asset sale gains and, in the case of an S corporation, usually passed through to shareholders as taxable asset sale income, rather than as capital gains on stocks, which would be subject to a more favorable tax rate (see 26 CFR 1.338[h][10]-l [d] [3] — [5]; see also Byron F. Egan, Asset Acquisitions: Assuming and Avoiding Liabilities, 116 Penn St L Rev 913, 928 [2012]).

Further, the sale here was structured in such a way that the purchase price was to be paid in installments pursuant to promissory notes, rather than with cash up-front. When the installment method is used, taxpayers recognize gains or income in the taxable years in which the payments are actually received, rather than the year the notes representing the installment obligation are received (see 26 USC § 453 [h] [1] [A]). We note that, in their submissions before Supreme Court, plaintiffs limited their challenge to the retroactive application of the amendments pertaining to the tax treatment of installment obligations under 26 USC § 453 (h) (1) (A), and expressly acknowledged that they “d[id] not challenge those portions of the 2010 Amendments related to 26 USC § 338 (h) (10), which have no bearing on [plaintiffs’] claims and [were] not even identified in the Verified Complaint.” That acknowledgment— along with the use of the installment method, and the fact that plaintiffs limited their challenge to retroactive application of the statute and conceded that prospective application cannot be contested (37 Misc 3d 964, 975 [Sup Ct, NY County 2012])— distinguishes this case from Burton v New York State Dept. of Taxation & Fin. (25 NY3d 732 [2015] [decided herewith]), in which the plaintiffs challenge the prospective application of the amendments to transactions in which an election has been made under section 338 (h) (10).

On its 2007 tax returns, TMC reported the deemed asset sale in the same manner as if it had actually sold its assets to Sanitors and received, in consideration, the installment obligations. It used the installment method of accounting to report its gain arising from the sale — i.e., TMC did not report any gain because it had not received any cash payments as of the date of its deemed liquidation; nor did it recognize any gain from the distribution of the installment obligations to plaintiffs in the deemed liquidation. Plaintiffs, however, reported a gain on their 2007 federal income tax returns of approximately $18 million (resulting from the payments received that year under the first installment obligation) and reported a gain of approximately $1 million on their 2008 federal income tax returns in connection with additional payments received that year.

In contrast, with respect to their New York income taxes, plaintiffs reported no income or gain derived from the sale of TMC, arguing that, pursuant to various federal tax statutes and regulations, the payments they received from the sale were treated as the proceeds of a sale of stock — an intangible asset — the gain from which is not taxable to them by the State under Tax Law § 631 (b) (2). Specifically, plaintiffs relied upon 26 USC § 453 (h) (1) (A), which states that

“[i]f, in a liquidation to which [26 USC §] 331 applies, the shareholder receives (in exchange for the shareholder’s stock) an installment obligation acquired in respect of a sale or exchange by the corporation . . . then, for purposes of this section, the receipt of payments under such obligation (but not the receipt of such obligation) by the shareholder shall be treated as the receipt of payment for the stock” (emphasis added).

In their brief before us, plaintiffs also point to 26 CFR 1.338(h)(10)-l (d) (8) (ii), which authorizes the use of the installment method under section 453 in connection with deemed asset sales and indicates that S corporation shareholders are “treated as receiving in the deemed liquidation the . . . installment obligations ... in exchange for their recently purchased stock” (emphasis added). Thus, because Tax Law § 631 (b) (2) provides that gain from the sale of an intangible asset, such as stock, is not taxable to a nonresident individual, except in circumstances that do not apply here, plaintiffs maintain that they owed no New York state taxes on the gain from the sale of TMC to Sanitors, even though the transaction was deemed to be a sale of assets for federal tax purposes.

Similar arguments were accepted in 2009 decisions by the Tax Appeals Tribunal in Matter of Baum (2009 WL 427425, 2009 NY Tax LEXIS 17 [NY St Tax Appeals Trib DTA Nos. 820837, 820838, Feb. 12, 2009]) and by the Division of Tax Appeals in Matter of Mintz (2009 WL 1657395, 2009 NY Tax LEXIS 46 [NY St Div of Tax Appeals DTA Nos. 821807, 821806, June 4, 2009]). Those matters concerned, respectively, a deemed asset sale of an S corporation that did not involve the installment method, and an actual — not deemed — asset sale of an S corporation in return for an installment payment obligation governed by 26 USC § 453 (h) (1) (A), which the corporation distributed to its shareholders in exchange for stock in a liquidation. Finding that Mintz and Baum had erroneously overturned long-standing state policies with respect to taxation of nonresident S corporation shareholders who sell their interest pursuant to elections under either section 338 (h) (10) (deemed asset sales) or 453 (h) (1) (A) (installment sales) of the Internal Revenue Code, the legislature amended Tax Law § 632 to abrogate those determinations (L 2010, ch 57, § 1, part C, § 1). The legislature explained that the amendment was “intended to clarify the concept of federal conformity in the personal income tax and is necessary to prevent confusion in the preparation of returns, unintended refunds, and protracted litigation of issues that have been properly administered up to now” (id.).

Prior to its amendment, Tax Law § 632 (a) (2) mandated only that, as relevant here:

“In determining New York source income of a nonresident shareholder of an S corporation . . . there shall be included only the portion derived from or connected with New York sources of such shareholder’s pro rata share of items of S corporation income, loss and deduction entering into his federal adjusted gross income.”

The 2010 amendments clarified, among other things, that if the S corporation distributed an installment obligation under 26 USC § 453 (h) (1) (A) or made a deemed asset sale election under 26 USC § 338 (h) (10), “any gain recognized on the receipt of payments from the installment obligation . . . [or] on the deemed asset sale for federal income tax purposes will be treated as New York source income” (Tax Law § 632 [a] [2], as amended by L 2010, ch 57, § 1, part C, § 2). The amendments were made retroactive to all taxable years beginning on or after January 1, 2007 — which represent those years for which the statute of limitations for seeking a refund or assessing additional tax was still open (L 2010, ch 57, § 1, part C, § 4, as amended by L 2010, ch 312, § 1, part B, § 1) — thus, effectively creating a 3V2-year period of retroactivity.

Thereafter, the Department of Taxation and Finance (DTF) audited plaintiffs’ 2007 and 2008 state income tax returns and issued a notice of deficiency assessing approximately $775,000 in additional taxes and interest due as a result of the deemed asset sale of TMC. Plaintiffs then commenced this action, seeking a declaration that the 2010 amendments “retroactively impos[ing] tax on gain recognized on the receipt of payments from installment obligations distributed under [s]ection 453(h)(1)(A) of the Internal Revenue Code,” as applied to plaintiffs, violate the Due Process Clauses of the United States Constitution and New York State Constitution. Plaintiffs also sought an injunction prohibiting enforcement of Tax Law § 632 against them insofar as the amendments “retroactively impose tax on gain recognized from the receipt of payments on installment obligations distributed under [s]ection 453(h)(1)(A) of the Code.” Specifically, the complaint alleged that the amendments

“impose! ] a tax for the first time on the gain recognized on payments received from installment obligations distributed under [s]ection 453(h)(1)(A) of the Code, and the 2010 amendments provide an excessive period of retroactivity of [3V2] years as applied to [plaintiffs], thereby creating a hard and oppressive effect on the[ir] settled expectations.”

The parties cross-moved for summary judgment. Supreme Court denied plaintiffs’ motion, granted defendants’ motion, and dismissed the complaint in a thorough decision (37 Misc 3d 964 [Sup Ct, NY County 2012]). The court determined that the amendments were curative because they were necessary to correct Mintz and Baum, as well as to clarify the concept of federal conformity and prevent confusion and protracted litigation (see id. at 980-982). Given those curative purposes and, because plaintiffs failed to show reasonable reliance on any relevant pre-amendment law, the court concluded that retroactive application of the statute was justified by rational legislative purposes and was not harsh and oppressive (see id. at 982-987).

The Appellate Division, with one Justice dissenting, reversed, concluding that plaintiffs reasonably relied upon their interpretation of the pre-amendment Tax Law as supporting a view that installment payments in connection with sales of S corporations are treated as the receipt of payment for stock and, given plaintiffs’ nonresident status, are not subject to New York state income tax (117 AD3d 168, 174-176 [2014]). The majority further determined that the length of the retroactive period was excessive because, in that Court’s view, the amendments were neither curative nor supported by a compelling public purpose (see id. at 176-178). The Appellate Division subsequently granted defendants’ motion for leave to appeal to this Court, certifying the question of whether its order reversing the judgment of Supreme Court was properly made. We now answer that question in the negative.

II

Recently, in James Square, we reiterated that

“the retroactivity provisions of a tax statute are not necessarily unconstitutional and are . . . considered valid if for a short period . . . because taxation is ‘but a way of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and must bear its burdens’ ” (21 NY3d at 246, quoting Welch v Henry, 305 US 134, 146 [1938]).

We nevertheless recognized that “[a]n aggrieved taxpayer may choose to make a claim that a retroactive tax violates the Due Process Clause under the standards in United States v Carlton (512 US 26 [1994]) and our precedent in Replan” (James Square, 21 NY3d at 247-248). In that regard, a retroactive tax violates due process only if it is “so harsh and oppressive as to transgress the constitutional limitation” (Replan, 70 NY2d at 455 [internal quotation marks and citation omitted]; see Matter of Varrington Corp. v City of N.Y. Dept. of Fin., 85 NY2d 28, 32 [1995]), and the Supreme Court of the United States has explained that the “harsh and oppressive formulation . . . does not differ from the prohibition against arbitrary and irrational legislation that applies generally to enactments in the sphere of economic policy” (Carlton, 512 US at 30 [internal quotation marks and citation omitted]). Thus, to make out a due process violation in this context, a plaintiff must show that the retroactive application of a tax is arbitrary and irrational.

While “retroactive legislation does have to meet a burden not faced by legislation that has only future effects [,] . . . that burden is met simply by showing that the retroactive application of the legislation is itself justified by a rational legislative purpose” {id. at 31 [internal quotation marks and citation omitted]). In analyzing whether a statute is harsh and oppressive— and, thus, arbitrary and irrational — this Court uses a balancing-of-equities test first articulated in Replan:

“The important factors in determining whether a retroactive tax transgresses the constitutional limitation are (1) ‘the taxpayer’s forewarning of a change in the legislation and the reasonableness of . . . reliance on the old law,’ (2) ‘the length of the retroactive period,’ and (3) ‘the public purpose for retroactive application’ ” (James Square, 21 NY3d at 246, quoting Replan, 70 NY2d at 456).

m

The inquiry with respect to the first prong “focuses on whether the taxpayer’s reliance has been justified under all the circumstances of the case and whether his [or her] expectations as to taxation [have been] unreasonably disappointed” (Replan, 70 NY2d at 456 [internal quotation marks and citation omitted]). There is justifiable reliance only if the taxpayer “obtained a sufficiently certain right to the money prior to the enactment of the new legislation” {id. [internal quotation marks and citation omitted]). The Supreme Court has determined that lack of notice regarding an amendment and reliance upon even a correct reading of an original statute “is insufficient to establish a constitutional violation [because] [t]ax legislation is not a promise, and a taxpayer has no vested right in the Internal Revenue Code” (Carlton, 512 US at 33). In applying that rule, we concluded in James Square that the curative purpose of a statute is relevant to the reasonableness of a taxpayer’s reliance. Specifically, we distinguished the “insufficient reliance in . . . Carlton” on the ground that, in Carlton, “the retroactive effect of the tax deduction was to correct an error made by Congress that created a significant and unanticipated revenue loss,” while the retroactive amendments in James Square “were not meant to cure an unintended error by the legislature!,] . . . [but] to increase tax receipts for the state budget” (21 NY3d at 248 [internal quotation marks and citation omitted]).

Here, plaintiffs have not shown that their reliance on their own reading of the law, at the time of the transaction in 2007, was reasonable. Plaintiffs relied upon an untested interpretation of the prior law — unsupported by any actual experience, practice or professional advice — that is 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 plaintiffs seek to do here. Acceptance of plaintiffs’ interpretation of the pre-amendment law would require that we discredit the legislative findings articulated in the amended statute that long-standing policies of DTF required taxpayers to pay proportionate state income taxes on deemed asset sale gains, whether or not they delayed reporting those gains through installment reporting (see L 2010, ch 57, § 1, part C, § 1). Not only does plaintiffs’ reading of the statute contradict the legislature’s express findings, their interpretation is not, in itself, reasonable. Plaintiffs ask us to accept that the preamendment Tax Law did not merely permit the use of installment reporting to delay reporting of gains, but also to transform asset sale earnings — whether deemed or actual— into a different form to circumvent the payment of state taxes altogether, based only on a delay in payment, however short. That plaintiffs may have read such a promise into our state Tax Law is insufficient to establish their reasonable reliance thereupon (see Carlton, 512 US at 33; Varrington, 85 NY2d at 33).

As the trial court noted (37 Misc 3d at 985-986), the instant case is analogous to Varrington, in which this Court held that, when a long-standing policy has been changed by a nonbinding ruling, and then the old policy is codified by statute or regulation, the “Retroactive tax legislation” does not violate due process (85 NY2d at 32). In Varrington, the taxpayer sought and obtained a refund in 1988 of taxes paid for the years 1984-1986, based upon a 1988 advisory opinion from DTF and a letter ruling by the Department of Finance of the City of New York regarding another taxpayer (see id. at 31). Subsequently, in 1990, the City enacted a regulation codifying its prior, longstanding policy and then sought to recoup the refund (see id. at 31-32, 35).

Although the City was seeking to recover a refund that it paid in 1988, it effectively applied the 1990 regulation retroactively for a period of six years, because the refund related to taxes paid for years beginning in 1984. We noted that, contrary to the taxpayers’ argument regarding the City’s policy prior to 1988, the taxes had been paid in accordance with the City’s long-standing taxing policy, and the 1988 advisory opinion and letter represented a significant change from that policy (see id. at 34-35). We, therefore, concluded that the taxpayer’s belief that it was entitled to a refund, which it actually obtained, did not amount to reasonable reliance and upheld the regulation’s retroactive application (see id. at 33). We explained that the taxpayer had “no vested or actionable right in these circumstances to the benefit of a tax statute or regulation ... in the detrimental reliance sense” (id.). Because the 1988 letter ruling was a “blip on the screen” representing a significant change from prior tax policy, we held that “there was no cognizable detrimental reliance on the temporarily altered, long-standing tax policy” (id. at 35).

Similarly here, we cannot ignore the legislative findings that Mintz and Baum “erroneously overturned the longstanding policies of” DTF regarding the taxation of S corporations that make elections under either section 338 (h) (10) or 453 (h) (1) (A) of the Internal Revenue Code (L 2010, ch 57, § 1, part C, § 1). While “[t]he Legislature has no power to declare, retroactively, that an existing statute shall receive a given construction when such a construction is contrary to that which the statute would ordinarily have received” (Matter of Roosevelt Raceway v Monaghan, 9 NY2d 293, 304 [1961], appeal dismissed 368 US 12 [1961]), this Court has long stated that, “when the Legislature does tell us what it meant by a previous act, its subsequent statement of earlier intent is entitled to very great weight” (Matter of Chatlos v McGoldrick, 302 NY 380, 388 [1951]). Before its amendment, Tax Law § 632 (a) (2) did not clearly prohibit the taxation of gain on installment payments received in connection with corporate asset sales or deemed asset sales. Thus, we cannot say that the legislature has construed the statute in a manner that is contrary to the construction it would ordinarily receive, and we give due consideration to the legislative findings regarding the underlying intent of the statute prior to the 2010 amendments, particularly given that those findings are supported by the unrefuted affidavit of a DTF tax auditor detailing this State’s taxation policy.

Even in the absence of express legislative findings, we would conclude that plaintiffs failed to establish that Mintz and Baum correctly reflected the State’s pre-amendment policy regarding state taxation of gain derived from installment obligations issued in connection with a deemed asset sale. In addition to the affidavit of a tax auditor, DTF submitted an internal PowerPoint presentation distributed to new auditors in 2002, which contained an “advisory” that S corporations were attempting to rely upon the installment method to avoid reporting distributions to their shareholders. The presentation reflects DTF’s policy that “subsequent gains” on installment obligations “at the individual level” after the S corporation has liquidated “would be treated as having been distributed from the S corporation, and thus allocable to New York State.” While this PowerPoint presentation was not publicly available, it supports the legislative findings regarding DTF’s policy prior to amendment of the statute and also is consistent with DTF’s Publication 88 for tax year 2006 — of which we take judicial notice as a matter of public record (see Affronti v Crosson, 95 NY2d 713, 720 [2001], cert denied 534 US 826 [2001]) — which was published in December 2006, prior to the transaction at issue (NY State Department of Taxation and Finance Publication 88: General Tax Information for New York State Nonresidents and Part-Year Residents [Dec. 2006]). In Publication 88, DTF instructed nonresident S corporation shareholders to report “installment income from a[ ] [26 USC §] 453 transaction” as New York source income for income tax purposes (Publication 88 at 11-12); this is contrary to the subsequent determination in Mintz.

Although plaintiffs contend that the primary issue presented on this appeal is this State’s taxation of payments from an installment obligation, they submit no relevant authority— beyond their own interpretation of the applicable federal and state statutes — to support their construction of the Tax Law with respect to treatment of installment obligations. Under these circumstances — as in Varrington — we conclude that “[t]his record is . . . devoid of evidence to support [plaintiffs’] claim that New York had a long-established policy of not taxing” the gain recognized by nonresident S corporation shareholders in connection with installment payment obligations distributed pursuant to 26 USC § 453 (h) (1) (A) of the Internal Revenue Code; rather, “all of the evidence points in the opposite direction” (85 NY2d at 35). In any event, plaintiffs have not shown reasonable reliance on their interpretation of the pre-amendment version of Tax Law § 632 (a) (2), given the legislative findings that Mintz and Baum temporarily altered a long-standing, contrary policy that was in effect at the time of the taxable transaction (see id. at 35), as well as the curative purpose of the retroactive amendments — which expressly “were . . . meant to cure an unintended [administrative] error” (James Square, 21 NY3d at 248).

IV

The remaining factors of the balancing-of-the-equities test do not require extended discussion; those factors also militate in favor of upholding the retroactive application of the statute.

The second factor is the length of the retroactive period (id. at 246). The 3V2-year retroactive period here was designed to cover open tax years; that is, the period of time during which S corporation shareholders who engaged in deemed asset sales or received an installment payment obligation distributed by the corporation could seek a refund under Mintz and Baum. Although this Court has rejected lesser periods (see id. at 249 [16 months]; Matter of Chrysler Props. v Morris, 23 NY2d 515 [1969] [one month]), it has upheld an effective six-year period where the statute in question was curative (see Varrington, 85 NY2d at 31). Indeed, in James Square, this Court stated that, while one year is generally not considered excessive, “longer periods of retroactivity [have also been] upheld . . . [in] cases [that] concerned curative measures by legislatures to correct errors” (21 NY3d at 249). In enacting the 2010 amendments, the legislature sought both to correct an administrative error and to prevent “an unexpected loss of revenue” (id. at 250); in this regard, the legislative findings recite that the amendments were necessary to prevent “unintended refunds,” which DTF estimated would amount to many millions of dollars annually without legislative intervention (L 2010, ch 57, § 1, part C, § 1). The legislature further sought, among other things, “to prevent confusion in the preparation of returns” by S corporation purchasers (id.). Inasmuch as these purposes were curative and the period of retroactivity was rationally related thereto — the amendments applied retroactively to only those tax years that remained open — the second factor favors rejection of plaintiffs’ challenge.

The third and final factor to be considered is the public purpose for the retroactive application. In James Square, we recognized that “attempting to correct an error” or preventing “significant and unanticipated revenue loss” were rational public purposes underlying retroactivity (21 NY3d at 248-249 [internal quotation marks and citation omitted]). Here, the legislature was not acting merely to increase tax receipts, but to prevent unanticipated and unintended consequences arising from erroneous administrative determinations that were contrary to long-standing DTF policies (cf. id. at 250). In our view, the curative, rational public purposes set forth in the legislative findings (L 2010, ch 57, § 1, part C, § 1) are compelling and, thus, this factor also supports upholding the retroactive application of the statute.

In sum, given the legislature’s curative purposes, the extension of retroactive application of the statute to only those tax years for which taxpayers could seek a refund, and the lack of justifiable reliance by plaintiffs on prior law, the retroactivity period here is not excessive, arbitrary or irrational (see James Square, 21 NY3d at 249). Accordingly, the order of the Appellate Division should be reversed, with costs, appellants’ motion for summary judgment granted, judgment granted declaring that the retroactive application as to plaintiffs of the 2010 amendment to Tax Law § 632 (a) (2) is valid under the Due Process Clauses of the United States and New York Constitutions, and the certified question answered in the negative.

Chief Judge Lippman and Judges Read, Pigott, Rivera, Abdus-Sadaam and Fahey concur.

Order reversed, with costs, appellants’ motion for summary judgment granted, judgment granted declaring that the retroactive application as to plaintiffs of the 2010 amendment to Tax Law § 632 (a) (2) is valid under the Due Process Clauses of the United States and New York Constitutions, and certified question answered in the negative.

      . It is common that, because of the favorable tax treatment to the purchaser and the unfavorable tax consequences for the seller, a higher sale price is negotiated.

      . The first installment of approximately $19.5 million, plus interest, was to be paid on March 1, 2007 — one month after the deemed asset sale and deemed liquidation. The second installment of $500,000, plus interest, was due on February 1, 2008, along with a contingent “earnout obligation” payment. TMC passed these installment notes on to plaintiffs.

      . Plaintiffs also note that federal regulations provide that the shareholders of an S corporation target subject to a deemed asset sale election generally must treat the liquidation of the corporation following the asset sale “as a distribution in complete liquidation to which section 331 or 332 applies” (26 CFR 1.338[h][10]-1 [d] [5] [i]). Because 26 USC § 331 (a) states that “[a]mounts received by a shareholder in a distribution in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock” (emphasis added), plaintiffs argue that they must be treated as having sold stock for tax purposes, despite their election to treat the sale of TMC as a deemed asset sale. Plaintiffs do not address that portion of 26 CFR 1.388(h)(10)-l (d) (5) (i) providing that, where the target of a deemed asset sale is an S corporation, “shareholders (whether or not they sell their stock) take their pro rata share of the deemed sale tax consequences into account under [26 USC §] 1366.”

      . Supreme Court also dismissed the complaint as against the Governor, which was not challenged on appeal, and denied plaintiffs’ request for attorney’s fees pursuant to 42 USC § 1988 (b) on the ground that they were not a prevailing party (37 Misc 3d at 987-988).

      . While plaintiffs do point to various pre-amendment documents submitted or prepared by DTF as supporting their construction of the Tax Law, as well as arguably conflicting language in the 2002 internal PowerPoint presentation regarding the treatment of deemed asset sales under 26 USC § 338 (h) (10), they ask us to disregard many of the documents and cases from other states upon which DTF relies to establish that plaintiffs had notice of the questionable nature of their current interpretation of the treatment of such sales under the pre-amendment statute. Plaintiffs ask us to disregard these authorities on the ground that they do not “concern] ] state taxation of payments from an installment obligation under [s]ection 453 (h) (1) (A) of the [Internal Revenue] Code, which is the issue presented in this appeal” (emphasis added). Of course, this argument applies with equal force to the documents regarding deemed asset sales on which plaintiffs rely.

      . The latter concern was evidently related to the fact that the Mintz and Baum determinations threatened to deprive purchasers in a deemed asset sale — or an asset sale and liquidation involving installment payments — of the future tax benefits arising from a stepped up basis of the assets. Because those determinations permitted sellers to treat the transactions as stock sales, it became unclear whether the purchasers could permissibly treat the transactions as asset sales for purposes of New York state income taxation (see Mem in Support, 2010-11 New York State Executive Budget, Revenue Article VII Legislation at 12-13).


source: Caselaw Access Project

author: Fahey, J.

license: Public Domain

text:
    [37 NE3d 725, 16 NYS3d 222]
    JF Capital Advisors, LLC, Appellant, v The Lightstone Group, LLC, et al., Respondents.
    Argued June 3, 2015;
    decided July 1, 2015

      POINTS OF COUNSEL

      Weber Law Group LLP, Melville (Jason A. Stern of counsel), for appellant.
    I. The appellate decision should be reversed because it applied General Obligations Law § 5-701 (a) (10) too broadly. (Freedman v Chemical Constr. Corp., 43 NY2d 260; Sporn v Suffolk Mktg., 56 NY2d 864; Tower Intl., Inc. v Caledonian Airways, Ltd., 133 F3d 908; Intercontinental Planning v Daystrom, Inc., 24 NY2d 372; Snyder v Bronfman, 13 NY3d 504; Gutkowski v Steinbrenner, 680 F Supp 2d 602; Enfeld v Hemmerdinger Estate Corp., 34 AD2d 980; Whitman Heffernan Rhein & Co. v Griffin Co., 163 AD2d 86; GEM Advisors, Inc. v Corporacion Sidenor, S.A., 667 F Supp 2d 308; Ashwood

      Capital, Inc. v OTG Mgt., Inc., 99 AD3d 1.) II. The First Department’s application of the breach of contract standard to plaintiff’s quantum meruit and unjust enrichment claims is in violation of this Court’s holding in Morris Cohon & Co. v Russell (23 NY2d 569 [1969]). (Gottesman Co. v Keystone Enters., Inc., 43 AD3d 696; Davis & Mamber v Adrienne Vittadini, Inc., 212 AD2d 424; Kalfin v United States Olympic Commn., 209 AD2d 279; Springwell Corp. v Falcon Drilling Co., Inc., 16 F Supp 2d 300; Shapiro v Dictaphone Corp., 66 AD2d 882; New-mark & Co. Real Estate Inc. v 2615 E. 17 St. Realty LLC, 80 AD3d 476; Stevens v Publicis S.A., 50 AD3d 253, 10 NY3d 930.) III. Dismissal of JF Capital Advisors, LLC’s claims was premature without discovery of critical facts. (Gottesman Co. v Keystone Enters., Inc., 43 AD3d 696; Ladenburg Thalmann & Co. v Tim’s Amusements, 275 AD2d 243; Tenesaca Delgado v Bretz & Coven, LLP, 109 AD3d 38; Marcus v Hemphill Harris Travel Corp., 193 AD2d 543.)

      Emery Celli Brinckerhoff & Abady LLP, New York City (Elizabeth S. Saylor, Andrew G. Celli, Jr. and Hayley Horowitz of counsel), for respondents.
    I. The Appellate Division’s ruling dismissing the complaint was required by both the policy and the plain language of General Obligations Law § 5-701 (a) (10). (Intercontinental Planning v Daystrom, Inc., 24 NY2d 372; Freedman v Chemical Constr. Corp., 43 NY2d 260; Minichiello v Royal Bus. Funds Corp., 18 NY2d 521; Snyder v Bronfman, 57 AD3d 393, 13 NY3d 504; Gutkowski v Steinbrenner, 680 F Supp 2d 602; Orderline Wholesale Distribs., Inc. v Gibbons, Green, van Amerongen, Ltd., 675 F Supp 122; Enfeld v Hemmerdinger Estate Corp., 34 AD2d 980, 28 NY2d 606; Whitman Heffernan Rhein & Co. v Griffin Co., 163 AD2d 86; Zeising v Kelly, 152 F Supp 2d 335; United Resource Recovery Corp. v Ramko Venture Mgt., Inc., 584 F Supp 2d 645.) II. JF Capital Advisors, LLC’s argument that a writing exists to satisfy General Obligations Law § 5-701 (a) (10) is not properly before the Court and is meritless. (Morris Cohon & Co. v Russell, 23 NY2d 569; Bingham v New York City Tr. Auth., 99 NY2d 355; Wild v Catholic Health Sys., 21 NY3d 951; Roohan v First Guar. Mtge., LLC, 97 AD3d 891; Mehmet v Add2Net, Inc., 66 AD3d 437; Duane Morris LLP v Astor Holdings Inc., 61 AD3d 418; Elezaj v Carlin Constr. Co., 89 NY2d 992; Matter of Meister, 39 AD2d 857; Metropolitan Steel Indus. v Citnalta Constr. Corp., 302 AD2d 233; Ladenburg Thalmann & Co. v Tim’s Amusements, 275 AD2d 243.) III. Dismissal of the complaint for failure to state a claim is required. (Snyder v Bronfman, 13 NY3d 504; Herzog v Town of Thompson, 216 AD2d 801.)
   OPINION OF THE COURT

Fahey, J.

The primary issue on this appeal is whether the statute of frauds, as embodied in General Obligations Law § 5-701 (a) (10), bars the causes of action set forth in the amended complaint. In that pleading, plaintiff claims to have rendered to defendants financial advisory services for what plaintiff characterizes as nine groups of investment opportunities, and plaintiff seeks recovery for those services rendered based on theories of quantum meruit and unjust enrichment. We conclude that the statute of frauds does not bar the causes of action with respect to five of the nine project groups, to wit, with respect to what the amended complaint characterizes as the “Innkeepers Project,” the “Fitchburg and Omaha Projects,” the “Towneplace Suites Metairie Project,” the “Hotel Victor Project,” and the “Crowne Plaza Somerset Project.” We therefore modify the Appellate Division’s order by denying those parts of defendants’ motion seeking to dismiss the amended complaint with respect to those project groups.

L

Inasmuch as this appeal had its genesis in a motion to dismiss pursuant to CPLR 3211 (a) (7), we are bound to, inter alia, “accept the facts as alleged in the [amended] complaint as true” (Leon v Martinez, 84 NY2d 83, 87 [1994]). Plaintiff alleges that it and its principals are hospitality industry consultants engaged in the business of providing investment and advisory services. In November 2010, defendants solicited plaintiff’s assistance in analyzing an investment opportunity involving certain hotel/water park properties. The parties entered into a written agreement whereby plaintiff provided financial and analytical services to defendants regarding that project, and defendants paid plaintiff for its work with respect to that opportunity.

Defendants did not purchase the hotel/water park properties, and those holdings eventually became the subject of an online auction. Based on the seller’s willingness to dispose of the hotel/water park properties separately, defendants again sought plaintiff’s services with the goal of acquiring only 2 of the 10 holdings that comprised the hotel/water park properties. Plaintiff provided continuing “advisory services” to defendants consisting of financial and market analyses with respect to the hotel/water park endeavor, as well as to other projects, and defendants accepted those services.

According to plaintiff, however, defendants did not compensate plaintiff for such work. Consequently, plaintiff commenced this action through the filing of a complaint in which it asserted six causes of action, including claims for quantum meruit and unjust enrichment. Defendants moved to dismiss the complaint, and Supreme Court granted the motion but afforded plaintiff “leave to serve and file an amended complaint alleging causes of action for quantum meruit and unjust enrichment” (2012 NY Slip Op 33788[U], *12 [Sup Ct, NY County 2012]).

Plaintiff availed itself of that leave, and the amended complaint lies at the core of this appeal. There, as noted, plaintiff asserts causes of action for quantum meruit and unjust enrichment, through which it seeks compensation for approximately $480,000 in services it rendered to defendants in connection with the nine project groups. Plaintiff generally alleges that its work with respect to each of the project groups consisted of the review, analysis, and modeling of the finances and operations of the assets in which defendants had the opportunity to invest. However, with respect to the “Waterpark Portfolio Project,” the “CBRE 7 Loan Portfolio Project,” and the “Allegria Hotel Loan Purchase,” i.e., what are respectively denominated as project groups Nos. 1, 6, and 7, plaintiff alleges that it performed work that was used to assist in defendants’ negotiation of a business opportunity and that was conducted in anticipation of a possible purchase bid.

In lieu of answering, defendants moved to dismiss the amended complaint pursuant to CPLR 3211 (a) (7), contending that the claims for compensation for the “advisory services” plaintiff allegedly performed are subject to the statute of frauds (see General Obligations Law § 5-701 [a] [10]). Supreme Court granted the motion in part by dismissing the amended complaint to the extent it seeks recovery for work performed with respect to the “Waterpark Portfolio Project,” the “CBRE 7 Loan Portfolio Project,” the “Allegria Hotel Loan Purchase,” and the “Miscellaneous Projects,” i.e., what are denominated as project groups Nos. 1, 6, 7, and 9 (2012 NY Slip Op 33262[U] [Sup Ct, NY County 2012]). The court denied the remaining parts of the motion.

On appeal, the Appellate Division modified by granting the motion in its entirety and dismissing the amended complaint based upon its conclusion that “investment analyses and financial advice regarding the possible acquisition of investment opportunities clearly fall within General Obligations Law § 5-701 (a) (10)” (115 AD3d 591, 592-593 [1st Dept 2014] [internal quotation marks omitted]). The Appellate Division subsequently granted plaintiff leave to appeal and certified the question whether the order of Supreme Court, as modified, was properly made (2014 NY Slip Op 78658[U] [1st Dept 2014]).

IL

Having marshaled the relevant facts, our review turns to the pertinent principles of law. In addition to accepting the facts as alleged as true (see Leon, 84 NY2d at 87), we “must give the pleading a liberal construction . . . and afford . . . plaintiff the benefit of every possible favorable inference” (Landon v Kroll Lab. Specialists, Inc., 22 NY3d 1, 5 [2013], rearg denied 22 NY3d 1084 [2014] [internal quotation marks omitted]). In other words, “[w]here the allegations are ambiguous, we resolve the ambiguities in plaintiff’s favor” (Snyder v Bronfman, 13 NY3d 504, 506 [2009]) and, dissimilar to a motion for summary judgment, where we review the record to determine whether a cause of action or a defense has been established as a matter of law, here we “ ‘limit our inquiry to the legal sufficiency of plaintiff’s claim[s]’ ” (Davis v Boeheim, 24 NY3d 262, 268 [2014], quoting Silsdorf v Levine, 59 NY2d 8, 12 [1983]; see Leon, 84 NY2d at 87-88).

The statute of frauds is codified in General Obligations Law § 5-701. As a general matter, it “is designed to protect the parties and preserve the integrity of contractual agreements” (William J. Jenack Estate Appraisers & Auctioneers, Inc. v Rabizadeh, 22 NY3d 470, 476 [2013]). More precisely, the statute

“is meant ‘to guard against the peril of perjury; to prevent the enforcement of unfounded fraudulent claims’ (Morris Cohort & Co. v Russell, 23 NY2d 569, 574 [1969]). The statute ‘decreased] uncertainties, litigation, and opportunities for fraud and perjury,’ and primarily ‘discourage [s] false claims’ (73 Am Jur 2d, Statute of Frauds § 403). ‘In short, the purpose of the Statute of Frauds is simply to prevent a party from being held responsible, by oral, and perhaps false, testimony, for a contract that the party claims never to have made’ (id.)” (William J. Jenack Estate Appraisers & Auctioneers, Inc., 22 NY3d at 476).

Here we are specifically concerned with General Obligations Law § 5-701 (a) (10), which “applies] to a contract implied in fact or in law to pay reasonable compensation” and which provides that

“[e]very agreement, promise or undertaking is void, unless it or some note or memorandum thereof be in writing, and subscribed by the party to be charged therewith, or by his lawful agent, if such agreement, promise or undertaking . . .
“ . . . [i]s a contract to pay compensation for services rendered in . . . negotiating the purchase . . . of any real estate or interest therein, or of a business opportunity, business, its good will, inventory, fixtures or an interest therein . . . .” (Emphases added.)

The same paragraph further states that “ ‘[negotiating’ includes procuring an introduction to a party to the transaction or assisting in the negotiation or consummation of the transaction” (id.).

III.

Applying these principles, we conclude that the statute of frauds does not bar the causes of action to the extent they pertain to what the amended complaint characterizes as the “Innkeepers Project,” the “Fitchburg and Omaha Projects,” the “Towneplace Suites Metairie Project,” the “Hotel Victor Project,” and the “Crowne Plaza Somerset Project,” i.e., what are denominated as project groups Nos. 2 through 5 and 8. The fundamental question on this appeal is whether the services for which plaintiff seeks compensation were tasks performed so as to inform defendants whether to negotiate for the properties at issue, or whether those services were performed as part of or in furtherance of negotiation for the subject properties. As noted, General Obligations Law § 5-701 (a) (10) interdicts oral agreements to pay compensation for services rendered with respect to the negotiation of the purchase of real estate or of a business opportunity or business. Supreme Court recognized this in dismissing the causes of action pertaining to project groups Nos. 1, 6, and 7. The allegations pertaining to project group No. 1 include what Supreme Court correctly saw as a claim for compensation for work plaintiff performed in furtherance of defendants’ negotiation of a business opportunity, while the allegations pertaining to project groups Nos. 6 and 7 seek compensation for services rendered in anticipation of a possible bid by defendants, including preparation of documents for bidding.

Said another way, Supreme Court properly dismissed the parts of the amended complaint bound by the common thread of allegations pertaining to defendants’ negotiation of a business opportunity and declined to dismiss the parts of the amended complaint pertaining to project groups Nos. 2 through 5 and 8, which are not braided by such claims. Indeed, the allegations with respect to project groups Nos. 2 through 5 and 8 could be construed as seeking recovery for work performed so as to inform defendants whether to partake in certain business opportunities, that is, whether to negotiate. To the extent the causes of action are based on such allegations, they are not barred by the statute of frauds.

Our decision in Snyder (13 NY3d 504), which is among the authorities on which defendants rely in seeking affirmance of the Appellate Division order, does not compel a different result. In that case the parties allegedly engaged in what the plaintiff characterized as a joint venture wherein the plaintiff essentially was to have functioned as the defendant’s “consigliere” {id. at 506) in exchange for a share in the proceeds of any business transaction the defendant was able to consummate. In concluding that such “intermediary” work was covered by the statute of frauds, we invoked Freedman v Chemical Constr. Corp. (43 NY2d 260 [1977]), which provides that

“where [an] intermediary’s activity is so evidently that of providing ‘know-how’ or ‘know-who’, in bringing about between principals an enterprise of some complexity or an acquisition of a significant interest in an enterprise, the statute [of frauds] is entitled to be read both in accordance with its plain meaning, its evident purpose, and to accomplish the prevention of the mischief for which it was designed” (id. at 267; see Snyder, 13 NY3d at 509-510).

The work contemplated by the project groups that we have concluded survive the motion to dismiss arguably is not of an “intermediary” nature, so Snyder does not require that we affirm. Indeed, with respect to those project groups, plaintiff does not seek recovery for its “know-how” or “know-who,” i.e., the “use [of] ‘connections’, . . . ‘ability’, and . . . ‘knowledge’ to arrange for [defendants] to meet ‘appropriate persons’ ” in their business pursuits (Freedman, 43 NY2d at 267).

Plaintiff also contends that the Appellate Division order violates Morris Cohon & Co. v Russell (23 NY2d 569 [1969]), in that a memorandum writing may satisfy the statute of frauds (id. at 575-576). This contention is not properly before us inasmuch as the issue was raised for the first time on reply at the Appellate Division (see Bingham v New York City Tr. Auth., 99 NY2d 355, 359 [2003] [“this Court best serves the litigants and the law by limiting its review to issues that have first been presented to and carefully considered by the trial and intermediate appellate courts”]; see also Elezaj v Carlin Constr. Co., 89 NY2d 992, 994 [1997] [“(t)his Court has no power to review . . . unpreserved error” (internal quotation marks omitted)]). Finally, plaintiff’s remaining contention is unpreserved.

Accordingly, the order of the Appellate Division should be modified, without costs, by denying defendants’ motion to dismiss the amended complaint in part in accordance with this opinion, and, as so modified, affirmed and the certified question not answered as unnecessary.

Chief Judge Lippman and Judges Read, Pigott, Rivera, Abdus-Salaam and Stein concur.

Order modified, without costs, by denying defendants’ motion to dismiss the amended complaint in part in accordance with the opinion herein, and, as so modified, affirmed and certified question not answered as unnecessary.

      . The amended complaint denominates those project groups as follows:

      . To this point absent from our analysis is reference to project group No. 9. The omission is intentional inasmuch as plaintiff abandoned its appeal with respect to that project group by failing to raise any contention with respect to that group (see generally Webb-Weber v Community Action for Human Servs., Inc., 23 NY3d 448, 451 n 2 [2014]; New York Mut. Underwriters v Baumgartner, 19 AD3d 1137, 1140-1141 [4th Dept 2005]). We neither examine that project group nor grant relief with respect to that group herein.