Alvin Nathel, a shareholder of an S corporation that never made New York's separate S-corporation election, failed for years to claim the offsetting subtraction that would have kept his corporation's income from being taxed twice - once at the corporate level and again on his personal return. By the time he discovered the error, the ordinary refund deadline had passed for the earlier years. Can the Department use its discretionary special refund authority under Tax Law § 697(d) to refund those time-barred years anyway?

Plain-English summary

Alvin Nathel was, for taxable years 1981 through 1990, a shareholder of Wishnatzki & Nathel, Inc. ("Wishnatzki"), a New York corporation that elected federal S-corporation status but never made the separate New York S-corporation election under Tax Law § 660. Because Wishnatzki hadn't made that New York election, New York law didn't pass the corporation's income through to Nathel's personal New York return the way federal law did to his federal adjusted gross income - instead, Wishnatzki itself paid New York corporate franchise tax under Article 9-A on its own income. To avoid taxing that same income twice, the law required Nathel to make an offsetting subtraction modification on his personal New York return (under Tax Law § 612(c)(22) and its successor provisions, along with a parallel adjustment to itemized deductions under § 615(c)(6)) to back out the S-corporation income already taxed at the corporate level.

For taxable years 1981 through 1987, Nathel did not make that subtraction on his timely-filed original returns, so Wishnatzki's already-corporate-taxed income was also included in his personal New York taxable income - a double-tax result. He eventually caught the error and timely filed amended returns for 1988, 1989, and 1990, correctly claiming the subtraction and receiving refunds for those three years. But by the time he petitioned the Department on December 28, 1992, the ordinary refund deadline under Tax Law § 687(a) - three years from filing or two years from payment, whichever is later - had already run out for 1981 through 1987. Nathel asked the Department to use its discretionary "special refund authority" under Tax Law § 697(d) to refund those earlier years anyway, notwithstanding the expired limitations period.

The Department declined. Section 697(d) lets the Tax Commission refund money at any time, without regard to any limitations period, but only where no questions of fact or law are involved and the Commission's own records show the money was either erroneously or illegally collected, or paid under a mistake of fact. A mistake of fact is where someone misunderstands the actual facts - an arithmetic error, an accidental overpayment, or a duplicate filing. A mistake of law, by contrast, is where someone knows the facts perfectly well but doesn't understand the legal consequences that follow from them, and New York law (citing Mercury Mach. Importing Corp. v. City of New York) generally bars recovering taxes voluntarily paid under a mistake of law. Here, Nathel knew all the relevant facts - that Wishnatzki was an S corporation, that its income passed through to his federal return, that Wishnatzki paid New York corporate tax - he simply didn't realize he was legally entitled to the § 612(c)(22) subtraction. That is a mistake of law, not fact, so § 697(d)'s threshold requirement wasn't met, and the Commissioner could not exercise discretionary authority to refund the 1981-1987 overpayments. The Department decided a companion opinion the same day, involving a different taxpayer who had failed to claim a pension exclusion, reaching the identical conclusion that ignorance of a legal entitlement is a mistake of law rather than fact.

What this means for you

Shareholders of federal S corporations that never made a separate New York S-election

If your corporation elected federal S-corporation status but did not separately elect to be a New York S corporation under Tax Law § 660, the corporation - not you - generally owes New York franchise tax on its own income, and you are entitled to a subtraction modification on your personal return to avoid being taxed on that same income again. If you discover years later that you never claimed this subtraction, New York's ordinary statute of limitations (three years from filing, or two years from payment, whichever is later) will bar a refund for closed years, and the Department's discretionary special refund authority almost certainly will not rescue you, because forgetting to claim a modification you were legally entitled to is treated as a mistake of law, not a mistake of fact.

Accountants who discover a missed NY subtraction/addition modification years after the fact

When a client's S-corporation shareholder never made the New York S election, double-check every prior year's return for the required § 612(b)(19)/§ 612(c)(22) add-back or subtraction and the parallel § 615(c)(6) itemized-deduction adjustment. Catching the error within the Tax Law § 687(a) window (three years from filing or two years from payment) lets you file an amended return and get a refund, as Nathel successfully did for 1988-1990. But once that window closes, this opinion shows that arguing the client simply didn't know the law won't unlock the Department's § 697(d) special refund authority - that authority is reserved for factual errors like arithmetic mistakes, accidental double payments, or overpayments by miscalculation, not for a taxpayer's unawareness of a deduction or subtraction they were entitled to claim.

Common questions

Q: What is the difference between a "mistake of fact" and a "mistake of law," and why did it matter here?
A: A mistake of fact is where someone misunderstands what the actual facts are - for example, an arithmetic error on a return, an accidental overpayment, or filing two returns for the same year and paying tax on both. A mistake of law is where someone knows the facts correctly but doesn't understand the legal consequences that follow from them. Nathel knew exactly what the facts were - Wishnatzki was an S corporation, its income passed through to his federal return, and Wishnatzki paid New York corporate tax - he just didn't know the law entitled him to subtract that income on his New York return. Because Tax Law § 697(d)'s special refund authority only reaches mistakes of fact (or erroneous/illegal collection), and not mistakes of law, the distinction was outcome-determinative.

Q: Nathel successfully amended his 1988-1990 returns and got refunds for those years. Why didn't the same fix work for 1981-1987?
A: The 1988-1990 amendments were filed within the ordinary Tax Law § 687(a) deadline (three years from filing or two years from payment, whichever is later), so the Department processed them as timely refund claims under the normal rules. By the time Nathel petitioned in December 1992, that same deadline had already expired for 1981 through 1987. The only way to reach those older years would have been through the discretionary § 697(d) special refund authority, which requires a mistake of fact rather than a mistake of law - and since Nathel's error was a mistake of law, that path was unavailable regardless of how the 1988-1990 years were handled.

Q: What specific tax benefit did Nathel forget to claim?
A: For 1981-1982, Tax Law § 612(c)(22) (as it then read) required a shareholder of an S corporation without a New York S election to subtract from federal adjusted gross income any amount included in federal gross income under IRC § 1373. For years after 1982, the successor § 612(c)(22) required the same kind of subtraction for income passed through under IRC § 1366 (with a parallel § 612(b)(19) add-back for any passed-through losses or deductions, and a § 615(c)(6) adjustment to itemized deductions). Nathel never made these adjustments on his original 1981-1987 returns, so Wishnatzki's income - already taxed to the corporation under Article 9-A - was taxed to him again personally.

Q: Does § 697(d) ever allow the Department to refund a time-barred year?
A: Yes, but only in narrow circumstances: there must be no questions of fact or law involved, and the Department's own records must show the money was either erroneously or illegally collected, or paid under a mistake of fact - things like a computational error on the return, an accidental overpayment, or duplicate returns filed and paid for the same year. It does not cover situations where a taxpayer correctly understood the facts but was simply unaware of a legal entitlement, as was true here.

Q: Could Nathel have avoided this outcome?
A: The opinion suggests the only real safeguard was timeliness - filing amended returns claiming the subtraction modification within the Tax Law § 687(a) window (three years from filing or two years from payment). Once that window closed for 1981-1987, no discretionary relief was available because the underlying error was legal, not factual, in nature.

Citations and references

• Tax Law § 612(c)(22) (1981-1982 version) - required an S-corporation shareholder without a New York S election to subtract federal § 1373 pass-through income from federal adjusted gross income
• Tax Law § 612(b)(19) (1982 forward) - requires an add-back for S-corporation losses/deductions passed through under IRC § 1366 where no New York S election was made
• Tax Law § 612(c)(22) (1982 forward) - requires a subtraction for S-corporation income passed through under IRC § 1366 where no New York S election was made
• Tax Law § 615(c)(6) - requires a parallel adjustment to federal itemized deductions for S-corporation items
• Tax Law § 660 - the New York S-corporation election that Wishnatzki never made
• Tax Law § 687(a) - sets the ordinary three-year/two-year refund claim deadline, already expired for 1981-1987
• Tax Law § 697(d) - the discretionary "special refund authority" allowing refunds outside the limitations period only for erroneous/illegal collection or a mistake of fact
• Mercury Mach. Importing Corp. v. City of New York, 3 NY2d 418, 429 (1957) - taxes voluntarily paid without protest under a mistake of law generally cannot be recovered

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1993.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a93_9i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-93 (9) I
Income Tax
July 15, 1993

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I921228B

On December 28, 1992, a Petition for Advisory Opinion was received from
Alvin Nathel, 27 Craig Street, Jericho, New York 11753.
The issue raised by Petitioner, Alvin Nathel, is whether a refund of the
overpayment of New York State personal income tax for taxable years 1981 through
1987 should be allowed pursuant to section 697(d) of the Tax Law.
Petitioner, for all taxable years at issue, was a shareholder of Wishnatzki
& Nathel, Inc. (hereinafter "Wishnatzki") a New York corporation with its
principal place of business at 305 New York City Terminal Market, Hunts Point,
Bronx, New York. Wishnatzki, for all taxable years at issue, elected to be taxed
as an S corporation for Federal income tax purposes. Wishnatzki did not make a
New York S corporation election for the taxable years at issue. All tax returns
were timely filed.
For Federal income tax purposes for taxable years 1981 through 1990,
Wishnatzki's items of income and deduction passed through Wishnatzki and were
included on a pro rata basis in Petitioner's Federal adjusted gross income. On
Petitioner's New York State personal income tax returns for all years at issue,
Petitioner did not make any modifications to take out Wishnatzki's items of
income and deduction. Therefore, these items were included in Petitioner's New
York taxable income. In addition, Wishnatzki paid New York franchise tax on its
income pursuant to Article 9-A of the Tax Law.
Petitioner timely filed amended New York State personal income tax returns
for taxable years 1988, 1989 and 1990. On these returns, Petitioner adjusted his
New York taxable income by making a subtraction modification for the net income
of Wishnatzki. Such amended returns reflected an overpayment of New York taxes
and Petitioner has received refunds for these years.
For taxable years beginning on or after January 1, 1981 and on or before
December 31, 1982, section 612(c)(22) of the Tax Law provided that a shareholder
of an S corporation that has not made the election pursuant to section 660 of the
Tax Law, to be treated as a New York S corporation, must subtract from the
shareholder's Federal adjusted gross income any amount included in the
shareholder's Federal gross income pursuant to section 1373 of the Internal
Revenue Code.
For taxable years beginning on or after December 31, 1982, section
612(b)(19) of the Tax Law provides that a shareholder of an S corporation that
has not made the election pursuant to section 660 of the Tax Law, to be treated
as a New York S corporation, must add to the shareholder's Federal adjusted gross
income any item of loss or deduction of the corporation included in the
shareholder's Federal gross income pursuant to section 1366 of the Internal
Revenue Code.
TP-9 (9/88)

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TSB-A-93 (9) I
Income Tax
July 15, 1993

For taxable years beginning on or after December 31, 1982, section
612(c)(22) of the Tax Law provides that a shareholder of an S corporation that
has not made the election pursuant to section 660 of the Tax Law, to be treated
as a New York S corporation, must subtract from the shareholder's Federal
adjusted gross income any item of income of the corporation included in the
shareholder's Federal gross income pursuant to section 1366 of the Internal
Revenue Code.
For taxable years beginning after December 31, 1982, section 615(c)(6) of
the Tax Law provides that a shareholder of an S corporation that has not made the
election pursuant to section 660 of the Tax Law, to be treated as a New York S
corporation, must subtract from the shareholder's Federal itemized deductions,
an amount equal to any S corporation items of deduction included in the
shareholder's Federal itemized deductions to arrive at the shareholder's New York
itemized deductions.
Section 687(a) of the Tax Law provides that a claim for credit or refund
of an overpayment of income tax shall be filed within three years from the time
the return was filed or two years from the time the tax was paid, whichever
period expires later.
Section 697(d) of the Tax Law provides as follows:
Special refund authority.--Where no questions of fact or law are
involved and it appears from the records of the tax commission that
any moneys have been erroneously or illegally collected from any
taxpayer or other person, or paid by such taxpayer or other person
under a mistake of facts, pursuant to the provisions of this
article, the tax commission at any time, without regard to any
period of limitations, shall have the power, upon making a record of
its reasons therefor in writing, to cause such moneys so paid and
being erroneously and illegally held to be refunded and to issue
therefor its certificate to the comptroller.
Accordingly, before the special refund authority under section 697(d) of
the Tax Law can be implemented, the following two requirements must be met:
1.

There are no questions of fact or law involved.

2.

A determination can be made from the records of the
Commissioner of Taxation and Finance that moneys have been
(a)erroneously or illegally collected from a taxpayer or other
person, or
(b) paid by a taxpayer or other person under a mistake of
fact.

A mistake of fact exists where a person understands the facts to be other
than they actually are, as where some fact which really exists is unknown, or
some fact is supposed to exist which really does not or did not exist. (54 Am
Jut 2d Mistake, Accident or Surprise §4; Wendell Foundation v Moredall Realty
Corp., 176 Misc 1006, 1009). A mistake of fact includes such things as where an
arithmetical or other error of computation is made on the return, where the tax
liability has been overpaid in error, and where two or more returns are
erroneously filed for the same year and tax paid on each. But a situation which

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TSB-A-93 (9) I
Income Tax
July 15, 1993

has resulted from ignorance of the law will not be recognized as a mistake of
fact.
A mistake of law has been defined as a mistaken opinion or inference
arising from an imperfect or incorrect exercise of the judgment upon the facts
as they really are. Such a mistake has been said to occur where a party, having
knowledge of the facts, is ignorant of the legal consequences of his conduct or
reaches an erroneous conclusion as the effect thereof. (54 AM Jur 2d Mistake,
Accident or Surprise §8; Wendell Foundation v Moredall Realty Corp., supra, at
1009). There can be no recovery of taxes voluntarily paid, without protest,
under a mistake of law (Mercury Math. Importing Corp. v City of New York, 3 NY2d
418, 429).
Herein, for taxable years 1981 through 1987, Petitioner's Federal adjusted
gross income included Wishnatzki's income. When Petitioner computed his New York
taxable income for such years, he didnot know that he was entitled to a
deduction pursuant to section 612(c)(22) ofthe Tax Law because Wishnatzki was
not a New York S corporation. Ignoranceof the law is a mistake of law not a
mistake of fact. Therefore, the Commissioner of Taxation and Finance may not
exercise his discretionary authority, under section 697(d) of the Tax Law, to
issue refunds to Petitioner for taxable years 1981 through 1987.

DATED: July 15, 1993

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.