Jun 06, 2016
From KPMG TaxWatch
The New York City Tax Appeals Tribunal recently affirmed an Administrative Law Judge (ALJ) ruling that a non-nexus banking subsidiary could not be forcibly combined for City bank franchise tax purposes. Under New York City law for the tax years at issue, a non-nexus banking corporation could be included in a combined report if it was part of a unitary banking business and substantial intercorporate transactions existed between the entities, which was presumed to create distortion. Combination could also be required if the entities were unitary and there was an arrangement between the related parties that resulted in income being inaccurately reported. Following an audit, the City taxing authorities determined that the non-nexus subsidiary, should be included in the New York City banking combined group to avoid distortion. The subsidiary was formed to hold mortgages previously held by a New Jersey REIT, and continued the REIT’s business of purchasing and holding non-New York mortgages owned by its parent. The subsidiary had elected to be “grandfathered” as a general corporation for state purposes and was therefore subject to New York State general corporate franchise tax, rather than bank franchise tax. In addition, the subsidiary qualified as a Connecticut Passive Investment Company and was not doing business in New York City, because the subsidiary was not doing business in the City for the tax year at issue it could not have made an election for City purposes to be grandfathered as a general corporation. Thus, the issue for City purposes was whether the subsidiary could be included in the combined City bank franchise tax return for the years at issue. After a New York Administrative Law Judge ruled in favor of the taxpayer, the City appealed.
Before the ALJ both sides presented extensive expert testimony in support of their positions. On Appeal, the Tribunal reviewed the testimony before the ALJ and first determined that there was economic substance and a business purpose behind the formation and ongoing operation of the subsidiary. Although there were tax benefits to the arrangement, the subsidiary was not formed specifically to avoid New York City taxes, but was formed (1) to avoid the New Jersey tax consequences of leaving the assets in the REIT and (2) to enhance the parent’s federal Community Reinvestment Act rating. The transactions between the parties were also determined to be arm’s length, thus, the taxpayer had successfully rebutted the presumption that distortion existed. That did not end the inquiry, however, as the Tribunal next looked at whether there was some arrangement or agreement between the parties that resulted in an improper or inaccurate reflection of the taxpayer’s tax liability. Finding none—the mortgages were purchased at arm’s length prices and there was no clear circular flow of funds among the entities— and finding the City’s expert to be unpersuasive, the Tribunal concluded that the City had not established that there was an agreement or arrangement between the parties that caused the taxpayer’s New York City bank tax liability to be improperly or in accurately reflected. Please contact Russ Levitt at 212-872-6717 with questions on Matter of Astoria Financial Corp & Affiliates.
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