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Unity Wanted: New York Rejects Taxpayer's Proof of a Unitary Business




by:
Nicole D. Boutros
Sutherland Asbill & Brennan LLP - New York Office

Timothy A. Gustafson
Sutherland Asbill & Brennan LLP - Sacramento Office

 
April 30, 2014

Previously published on April 25, 2014

A New York State Division of Tax Appeals Administrative Law Judge (“ALJ”) upheld the denial of corporation franchise tax refund claims, determining the taxpayers were not engaged in a unitary business. The taxpayers and their subsidiaries (“Group”) provided services in what the ALJ found were “similar and related lines of business” to shared customer bases in overlapping business sectors. The parent corporation provided extensive services to members of the Group, often times without compensation or not at arm’s length pricing, including management and control of budgets and cash flow, insurance functions, audit functions, regulatory filings and tax reports, legal functions, record retention and related employee functions, centralized Group debt, purchasing functions, human resources and benefits, marketing, and technology. In addition, there was significant overlap among the Group members’ corporate officers, a number of which were responsible for high-level management, direction and control of the entire Group. Nevertheless, the ALJ found the Group was not engaged in a single unitary business for New York combined reporting purposes. The ALJ’s decision was largely based on the finding that the centralized operations and services provided by the parent corporation were “strictly oversight” and did not involve any “operational expertise” from the parent. The ALJ further found that the shared services did not result in flows of value that would give rise to functional integration among and within the Group’s different lines of business. Finally, without much analysis and despite the Group transactions identified above, the ALJ found little cross-selling and intercompany transactions between the various business segments, thereby determining that the Group lacked economies of scale. The ALJ’s decision has considerable implications for taxpayers in the wake of New York State’s corporate tax reform, which shifted to a unitary combined reporting regime as a result of the 2014-2015 Budget. The decision creates uncertainty for corporate taxpayers by rejecting indicia that courts have typically found to evidence a unitary business. The taxpayer has a right to appeal the ALJ’s decision to the Division of Tax Appeals Tax Appeals Tribunal. The ALJ’s decision foreshadows the controversy New York corporate taxpayers will face under the new unitary combined reporting regime. In the Matter of the Petition of Sungard Capital Corp., DTA No. 823631 (Apr. 3, 2014). For additional coverage, see our previous post, “New York Tax Reform Made Easy: Unitary Combined Reporting and Nexus.”

 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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Author
 
Nicole D. Boutros
Timothy A. Gustafson
Sutherland Asbill & Brennan LLP
 
New York Office
Sacramento Office
Practice Area
 
Business Law
Taxation
 
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