Petitioner Michael Mihale ("petitioner") commenced this Article 78 proceeding seeking to annul the decision of respondent, New York State Department of Environmental Conservation ("DEC") denying petitioner a full share category of striped bass tags. The DEC determined that petitioner failed to meet his burden of establishing that 50% or more of his income was earned by direct participation in commercial fishing, which would have allowed him a full quota of striped bass tags pursuant to 6 NYCRR §40.1(j)(8)(v). The petition is determined as follows.

On or about April 11, 2005, the DEC issued a determination denying petitioner a full share of striped bass tags and notified petitioner of his eligibility to participate in the partial share category of striped bass tags.^[FN1] The DEC afforded petitioner the opportunity to submit additional income tax documents for their consideration by June 1, 2005. On April 15, 2005, Mayer & Company, LLP, the independent certified public accountants for petitioner's investment companies, submitted to the DEC a "Sales and Profit Analysis" reflecting petitioner's investment [*2]income, which allegedly demonstrated that fishing income constituted 87.51% of his total income. On April 26, 2005, the DEC sent petitioner a letter notifying him that the accountant's submission was unacceptable under 6 NYCRR §40.1(j)(8)(v), and confirmed their denial of petitioner's application for a full share of striped bass tags.

Where an administrative agency makes a determination without an evidentiary hearing, the Court must examine the question of whether the agency's determination was arbitrary and capricious. See CPLR §7803(3); Matter of Ball v. New York State Department of Environmental Conservation, 35 AD3d 732; Matter of Sasso v. Osgood, 86 NY2d 374. The Court may not substitute its judgment for that of the agency responsible for making the determination; rather, the Court must determine whether or not the agency's action lacked a sound basis in reason and was taken without regard to the facts. Matter of Ball, supra at 733; Pell v. Board of Education, 34 NY2d 222, 231. Judgments of administrative agencies are generally afforded great weight and deference in factual evaluations due to their expertise within a particular field and statutory authorization to further particular policies and goals.

The Environmental Conservation Law provides that the general purpose and policy of the DEC is to "conserve, improve, and protect the natural resources and environment of the state in order to enhance the health, safety and welfare of the people of the state and their overall economic and social well being." ECL §1-0101(1). Furthermore, the DEC shall "create and maintain conditions under which man and nature can thrive in harmony with each other, and achieve social, economic and technological progress for present and future generations." ECL §1-0101(3). In regards to striped bass, the DEC may regulate measures for the management of striped bass, including "size limits, catch and possession limits, open and closed seasons, closed areas, restrictions on the manner of taking and landing, requirements for permits and eligibility therefor, recordkeeping requirements, requirements on the amount and type of fishing effort and gear, and requirements relating to transportation, possession and sale." ECL §11-0303(3). The general regulations for the management of striped bass, including the size limits and open and closed seasons are provided in ECL §13-0347. The special regulations regarding striped bass commercial fishing, including the requirements for obtaining permits to commercially harvest striped bass are provided in 6 NYCRR §40.1(j).

Prior to 2005, permits to take a full quota share of striped bass were issued at no cost to persons who held a New York State license to sell striped bass during 1984, 1985, 1990, 1991, 1992, 1993, 1994, or 1995, and submitted tax records from any one year between 1994 and 2004 demonstrating that 50% of his earned income derived from the direct participation in the harvest of marine fish. 6 NYCRR §40.1(j)(8)(ii). Beginning in 2005, and continuing at five-year intervals thereafter, a commercial fisherman of striped bass in the full share category had to file a complete copy of his Federal or State income tax records from one of the preceding three years, in order to demonstrate that he has maintained the 50% earned income level required to be in the full share category. 6 NYCRR §40.1(j)(8)(v). (emphasis added).

The DEC has submitted petitioner's 2004 Federal and State tax records that provided the basis for their final determination. The records reveal that petitioner is a one third share holder in several related businesses, including the Point Lookout Fish Dock ("PLFD"), Point Lookout Clam Bar ("PLCB") and Fisherman's Catch Corp ("FCC"). Petitioner is employed at the PLFD as a purchaser, and sells his fish to the company. The PLCB purchases fish from the PLFD and sells fish through the market. The FCC also purchases fish from PLFD.

Petitioner earned $49,450 in 2004, according to his W-2 Wage and Tax Statement ("W-[*3]2"). The Court notes that this figure coincidentally matches the "compensation of officers" for the PLFD provided in its 1120S federal income tax forms. The "Other" box ("Box 14") of petitioner's W-2 contains petitioner's alleged fishing income of $34,500. Petitioner's W-2 was supplemented with an unsigned letter from the PLFD stating that the amount stated in Box 14 "represents monies included in Box 1 [Wages, tips, and other compensation], which represents income from fishing." Petitioner contends that his W-2, along with the supplemental letter, demonstrates that the 50% earned income requirement was satisfied. 6 NYCRR §40.1(j)(8)(ii). However, the DEC contends that petitioner's shareholder pass-through income should be calculated as part of petitioner's earned income. Petitioner's Schedule K-1 of the 1120S for the PLFD provided that petitioner's shareholder pass-through income was $37,178, which in conjunction with petitioner's $49,500 in wages, defeats the 50% earned income requirement under 6 NYCRR §40.1(j)(8)(ii).

Petitioner contends that "earned income" under 6 NYCRR §40.1(j)(8)(ii) should not include pass-through income earned by a shareholder in an S corporation, according to "traditional tax definitions." The Court ordered the parties to appear for a conference on October 17, 2006, to discuss the issue regarding the definition of earned income in respect to the DEC's determination. During the conference, petitioner alluded to a preemptive definition of earned income, and was directed to provide authority for his assertion. Petitioner subsequently submitted §C:20.61[1] of the CCH Federal Tax Service, providing, "although income derived from a partnership or sole proprietorship can be earned income [Code, Secs, 401(c)(2)(A), 1402(A)], pass-through income earned by a shareholder in an S corporation is not classified as earned income [Durando v. United States, 70 F.3d. 548]." The DEC argued that they are not bound by traditional tax definitions because the purpose of the striped bass tag allocation scheme is to foster New York's commercial fishery by favoring those who fish full-time over those who fish only part-time. Although there is no general definition of earned income within the NYCRR, the special regulations for flounder define earned income as "income derived from labor, professional service, or entrepreneurship as opposed to income derived from invested capital, retirement pay or pensions." 6 NYCRR §40.1.

Federal law will not displace state law unless preemption was the clear and manifest purpose of Congress. Nealy v. U.S. Healthcare HMO, 93 NY2d 209. Preemptive intent may be expressly provided in the language of the federal legislation, or established implicitly by either field preemption or conflict preemption. Perez v. Mini-Max Stores, Inc., 231 AD2d 162, 164. Implied field preemption may be found when the federal legislation is so comprehensive in its scope that it is inferable that Congress wished to fully occupy the field of its subject matter. Implied conflict preemption may be found when it is impossible for one to act in compliance with both the Federal and State laws, or when the state law "stan[ds] as an obstacle to the accomplishment and execution of the full purpose and objectives of Congress." Id. at 164, citing Guice v. Charles Schwab & Co., Inc., 89 NY2d 31, 39.

The Court shall examine the statutory construction of the Internal Revenue Code sua sponte, since petitioner failed to cite any binding authority to support his argument for preemption. Earned income is not defined within 26 U.S.C. §1366, which outlines the characterization of pass-thru items to shareholders of S corporations. Earned income is defined in 26 U.S.C. §401(2) as "the net earnings from self-employment (as defined in section 1402(a)), but such net earnings shall be determined: (i) only with respect to a trade or business in which personal services of the taxpayer are a material income-producing factor, (ii) without regard to [*4]paragraphs (4) and (5) of section 1402(c)." Net earnings from self-employment, as defined in 26 U.S.C. §1402(a) includes gross income derived by an individual from any trade or business carried on by such individual, which includes the shareholder's pro rata share of income from an S corporation under 26 U.S.C. §1366(c). Courts have held that the federal S corporation provisions do not preempt state income tax treatment of S corporations. Kemp v. Raudabaugh, 76 Ohio App.3d 488, 602 N.E.2d 389 (3d Dist. Auglaize County 1991); Com. v. N.I., Inc., 31 Pa. Commw. 235, 375 A.2d 898 (1977), order aff'd without opinion, 482 Pa. 261, 393 A.2d 653 (1978).

The Court finds that the DEC is not bound by the Internal Revenue Code's definition of earned income for the purposes of determining eligibility for the full share category of striped bass fish tags. Petitioner's cited authority (Durando v. United States, 70 F.3d 548 (9th Cir. 1995)) is inapplicable because the issue in Durando was whether S corporation pass-through income can be treated as net earnings from self-employment for Keough plan deduction purposes. The Internal Revenue Code does not contain any express preemptive language regarding the definition of earned income, nor any implication that the definition of earned income exceeds the bounds of a tax liability determination. 26 U.S.C. §1366, 26 U.S.C. §401(2), 26 U.S.C. §1402(a). Considering the policy of the DEC to conserve and protect the natural resources of this state, it was not arbitrary and capricious for the DEC to consider petitioner's shareholder income as earned income for the purposes of determining his eligibility for the full share category of striped bass fish tags. ECL §1-0101(1). Ultimately, there is no indication that the definition of earned income within the Internal Revenue Code is intended to expand to such obscure state matters wholly unrelated to the computation of tax liability.

The Court has examined petitioner's federal and state tax forms and finds that the DEC's determination was reasonable. The only evidence within petitioner's tax forms that evinces any income from fishing is the self-serving statement within the W-2, supplemented with the unsigned letter from the PLFD. The DEC gave petitioner ample opportunity to support the statement in the W-2 with additional records, such as the business records of fish purchased from him at the PLFD, which would reflect the value of the fish the corporation allegedly acquired from petitioner. The DEC noted that petitioner's tax forms did not contain the deductions reflecting the costs generally incurred in commercial fishing, such as fuel and boat maintenance costs, loan or rental payments on the boat, costs for ice, and license fees. The DEC offered petitioner the opportunity to submit copies of the numerous explanatory Statements referenced on petitioner's federal and state tax returns, which were never provided. Therefore, the DEC's determination rejecting petitioner's application for a full share of striped bass fish tags had a sound basis in reason and was not arbitrary and capricious. Matter of Ball v. New York State Department of Environmental Conservation, 35 AD3d 732; Pell v. Board of Education, 34 NY2d 222.

We have examined petitioner's remaining contentions and find them to be without merit.

Based upon the foregoing, it is

ORDERED, that petitioner MICHAEL MIHALE'S application for a judgment pursuant to Article 78 of the CPLR is denied. Petitioner shall serve a copy of this Order upon respondent NEW YORK STATE DEPARTMENT OF ENVIRONMENTAL CONSERVATION within 15 days after entry of this Order in the records of the Nassau County Clerk.

This constitutes the Order of the Court. [*5]

Dated:, 2007ENTER:

___________________________

J.S.C.