 with a royalty payer that is a taxpayer would pay tax on the royalty payments because the royalty payer would include the royalties in its income while, in this case, Disney pays the tax directly.
We think this is a close question, and, with respect, we would have fallen on the other side. To us, the use of the phrase "would not be" instead of "are not" in former New York Tax Law Section208.9(o)(3) indicates that the Legislature contemplated that nontaxpayer royalty payers would not preclude a royalty recipient from claiming the special exclusion.
We agree with the tribunal that the royalty payment add-back and exclusion was intended to combat the use of intercompany royalties to shift earnings out of high-tax states and into low- or no-tax jurisdictions.
But fairness dictates symmetry in tax provisions like this. So for every deduction denial, there ought to be a corresponding exclusion. Certainly, the tax department would not have permitted a New York royalty payer to avoid the deduction add-back requirement if the royalty recipient were not a New York taxpayer, since this is exactly the situation the law was intended to address.
But there is no symmetry unless the law is properly construed to permit an exclusion for a New York royalty recipient when the payer is a nontaxpayer. Otherwise, New York has a "heads I win, tails you lose" situation.
New York City administrative law judge holds gain from partnership sale taxable.
The New York City Tax Appeals Tribunal, Administrative Law Judge Division, held in the Matter of the Petition of Mars Holdings Inc.,[7] that the gain from the sale of interest in a limited partnership with property in New York City by a joint venture is subject to the city's general corporation tax.
The ALJ rejected the taxpayer's argument that the federal treatment of the sale of a partnership interest applies to the general corporation tax. The ALJ also rejected the taxpayer's argument that the federal treatment of the sale of a partner entire net income calculation.
The background of the sale involved the predecessor corporation to Mars Holding's joining with a construction company to form a joint venture that acted as a construction contractor doing business primarily in and around New York City. The joint venture then acquired minority interests in three limited partnerships that were engaged solely in the holding, leasing and managing of their respective real estate properties, which were located in New York City.
In 2012, Mars, through its interest in the joint venture, sold its interest in one of the limited partnerships to an unrelated third party. By this time, Mars maintained its only office in New Jersey and had no other place of business in New York City.
Mars reported the capital gain on its federal corporation income tax return and also reported the gain on its city general corporation tax return[8] but excluded the gain from its entire net income as a deduction from federal taxable income. The basis for the deduction was "gain on the sale of partnership interest — not used in trade or business in NY."
After the Department of Finance audited Mars's general corporation tax return, the department found that the gain should be included in Mars's entire net income because Mars did business within the city because of its ownership of the limited partnerships, which owned, leased and managed New York City property. The Department of Finance therefore exercised its discretion under Section 11-604.8 of the city's administrative code in order to include the capital gain in Mars's taxable entire net income.
On appeal, Mars argued that the city's proposed adjustment ran afoul of the federal conformity doctrine. Specifically, Mars argued that "as federal income is the starting point for ENI (Admin. Code§ 11-602.1), federal conformity requires treating the Capital Gain as it would be under IRC § 741."Section 741 provides that "[i]n the case of a sale or exchange of an interest in a partnership, gain or loss shall be recognized to the transferor partner. Such gain or loss shall be considered as gain or loss from the sale or exchange of a capital asset."
Mars then argued that prior to the 2017 Tax Cuts and Jobs Act, the entity approach could apply to the disposition of a partnership interest. Under this approach, it noted, the partner is treated as though it owns a partnership interest, an intangible asset, as opposed to a proportionate share of the partnership's assets.
And according to Mars, when the gain from the sale of the partnership interest, an intangible, is not used in a trade or business, the gain should be sourced to partner's domicile, and, in this case, excluded from entire net income. Mars argued that in order for the city to tax the transaction under the aggregate theory, "federal conformity requires that a legislative act be taken in order to use the aggregate approach."
The tribunal disagreed, however. According to the tribunal, the underlying limited partnership conducted business within the city because it leased, held and managed real property in the city. Interpreting "doing business," the tribunal noted that the term included "ownership in a limited partnership that does business in the City."
Therefore, the capital gain, which flowed from the joint venture's sale of its interest in the limited partnership was properly included in the petitioner's entire net income for the tax year ending Dec.31, 2012. Nothing in the federal conformity doctrine compel a different result.
New York continues updates to draft corporate tax reform regulations.
The updates are meant to incorporate the changes made by New York's corporate tax reform legislation, which was contained in the 2014-2015 and 2015-2016 enacted New York state budgets. Because these are draft regulations, New York rightfully instructs taxpayers that the "draft regulatory amendments are not final and should not be relied upon."
In practice, however, taxpayers should review the draft regulations in search of any helpful guidance. If the information is helpful, there's no need to look a gift horse in the mouth!
With regard to qualified New York manufacturers, who, since 2015 have been eligible for a business income tax rate of 0%, the draft regulations appear to attempt to narrow the definition of at least two key terms — "manufacturing" and "goods" — related to who qualifies as a eligible manufacturer.
These proposed amendments are not particularly taxpayer friendly. But, for the time being, remember what the tax department said, taxpayers are not required to rely on draft regulatory amendments. Especially if they conflict with the language of the underlying statute.
The tax department also updated its draft regulations regarding the metropolitan transportation business tax surcharge, both adding to the list of activities that are specifically deemed insufficient to subject a corporation to the tax surcharge and reflecting the fact that corporations previously subject to tax under New York Tax Law Article 32 (Franchise Tax on Banking Corporations) are now subject to tax under article 9-A (Franchise Tax on General Business Corporations).
New York Tax Department issues opinion on brownfield redevelopment tax credit.
New York state's brownfield redevelopment tax credits are comprised of several different credits under New York Tax Law Section 21. At issue in a recent advisory opinion[16] issued by the tax department was the tangible property credit component of Tax Law Section 21(a)(3).
Specifically, whether the tangible property credit component limitation or cap should be: (1) $35million or three times the sum of the costs included in the calculation of the site preparation credit component and the on-site groundwater remediation credit component, whichever is less; or (2) $45million or six times the sum of the costs included in the calculation of the site preparation credit component and the on-site groundwater remediation credit component, whichever is less.
Applying the usual connotation of the word "primarily" to the facts presented in the advisory opinion, and using other sections of the tax law and regulations as guidance, the tax department concluded that if 50,000 square feet of a property owner and business START-UP NY incubator's 80,000 square foot mixed use building is used for manufacturing activities, the building would be used primarily for manufacturing activities.
Accordingly, the higher tangible property credit limitation for manufacturing sites — i.e., the lesser of $45 million and six times the sum of the costs included in the calculation of the site preparation credit component and the on-site groundwater remediation credit — would apply.
New York City issues unincorporated business tax letter ruling.
The New York City Department of Finance has issued a letter ruling[18] on the application of the city's unincorporated business tax to the sale of a membership interest in a limited liability company that is taxed as a partnership.
The underlying facts described in the ruling are that in 2015, a developer entered into negotiations with a potential tenant to construct and lease to the tenant a commercial facility on property located in Queens, New York.
The developer formed a new investment limited liability company to purchase the land and then entered into a contract with the investment LLC to "initiate, coordinate and administer all planning, design and construction activities for all improvements related to the completion of the commercial facility."
Construction was completed in 2017, and the lease agreement between the tenant and the investment LLC commenced.
The issues presented were (1) whether the investment LLC would recognize gain on the sale of the membership interests by its members, and (2) whether a management LLC that owned the investment LLC would be subject to the unincorporated business tax on the gain realized from the sale of their membership interest in the investment entity.
The ruling concluded that (1) the investment LLC will not recognize gain on the sale of its members' ownership interests, and (2) the management LLC is not subject to the unincorporated business tax.
For federal purposes, under Internal Revenue Code Section 741, which was also analyzed by the New York City Tax Appeals Tribunal in Mars Holdings, the gain or loss from the sale or exchange of an interest in a partnership is recognized not by the partnership, but,