By Zachary Atkins and Andrew Appleby

A New York appellate court held that the Department of Taxation and Finance could not retroactively apply a 2010 amendment to the Tax Law to a transaction entered into by a Florida couple nearly four years earlier. The nonresident taxpayers sold their stock in an S-corporation to a third party in 2007 for $20 million, plus certain additional contingent payments, to be paid in two installments. The taxpayers took promissory notes for the installment obligations. The taxpayers and the buyer also agreed to jointly make an election under IRC § 338(h)(10) to treat the sale as a sale of the S-corporation’s assets followed by a complete liquidation. The taxpayers reported the capital gains from the transaction on their 2007 and 2008 federal income tax returns; however, they did not pay New York State taxes on the gains. In 2009, the New York State Division of Tax Appeals decided Matter of Mintz, Nos. 821807 & 821806, 2009 WL 1657395, wherein it confirmed that gains from transactions of the type entered into by the taxpayers were not subject to New York State taxes. In 2010, the New York State Department of Taxation and Finance proposed legislation to overturn the Mintz decision and provide that such transactions would result in taxable New York State income. The legislation was enacted in 2010. Subsequently, the Department issued the taxpayers a notice of deficiency in respect of their 2007 and 2008 state income tax returns. The New York Supreme Court, Appellate Division, First Department, held that the Department’s attempt to apply the 2010 law change to the 2007 transaction violated the taxpayers’ due process rights. Balancing the equities, the Appellate Division found that the taxpayers had no actual forewarning of the 2010 change in law at the time they entered into the transaction, and they structured the transaction in reasonable reliance on the Tax Law as it existed in 2007. The court also found the three-and-a-half year retroactive period was excessive and that raising money for the state budget was not so compelling as to justify retroactivity under the circumstances. Caprio v. N.Y. State Dep’t of Taxation & Fin., No. 651176/11, 2014 WL 1356664 (N.Y. App. Div. Apr. 8, 2014).

On March 31, 2014, New York State Governor Andrew Cuomo signed into law the 2014-2015 New York State Budget (Budget), which results in the most significant overhaul of New York’s franchise tax in decades. The Budget brings about monumental change for corporate taxation in New York by eliminating the Bank Franchise Tax (Article 32), subjecting financial institutions to the Corporate Franchise Tax (Article 9A), and making significant changes to the Corporate Franchise Tax. For a comprehensive overview of those changes, read our New York Budget Legislation article.

The New York State Governor and Legislature recently enacted the 2014-2015 New York State Budget, Senate Bill 6359-D and Assembly Bill 8559-D (Budget), which results in the most significant overhaul of New York’s franchise tax on corporations in decades. In this edition of New York Tax Reform Made Easy, we will address the creation of the Prior Net Operating Loss deduction.

Continue Reading New York Tax Reform Made Easy: Net Operating Loss

The New York State Governor and Legislature recently enacted the 2014-2015 New York State Budget, Senate Bill 6359-D and Assembly Bill 8559-D (Budget), which results in the most significant overhaul of New York’s franchise tax on corporations in decades. In this edition of New York Tax Reform Made Easy, we will address the changes made to apportionment sourcing in computing a taxpayer’s apportionment factor.

Continue Reading New York Tax Reform Made Easy: Apportionment

The New York State Governor and Legislature recently enacted the 2014-2015 New York State Budget, Senate Bill 6359-D and Assembly Bill 8559-D (Budget), which results in the most significant overhaul of New York’s franchise tax on corporations in decades. In this edition of New York Tax Reform Made Easy, we will address how the Budget modifies the income tax base and changes various tax rates.

Continue Reading New York Tax Reform Made Easy: Business Income Base and Tax Rate

By Sahang-Hee Hahn and Timothy Gustafson

The Indiana Department of Revenue required an out-of-state clothing company and its subsidiary to file a combined Indiana corporate income tax return, determining that the taxpayer’s transfer pricing study was insufficient to establish that its intercompany transactions were conducted at arm’s length. The taxpayer was the parent of a multistate, multinational business that sold premium-priced clothing and fashion accessories. The taxpayer’s subsidiary operated a distribution and consumer service facility outside of Indiana, shipping the taxpayer’s products to the taxpayer’s own branded stores, other department stores and directly to consumers. The subsidiary owned all domestic trademarks used by the taxpayer in its stores and licensed the use of the trademark names to its parent. The Department found the taxpayer and its subsidiary had a “unitary relationship” because the taxpayer was involved in all transactions both before and after goods were sold to the subsidiary; the taxpayer was involved in the design of all products sold by both entities; and all corporate-wide decisions, including all corporate marketing, payroll, tax and technology-related decisions, were made solely by the taxpayer. The Department relied upon Ind. Code § 6-3-2-2(l) for its position. This statutory provision authorizes the Department to correct the inaccurate reflection of a taxpayer’s Indiana source income by requiring, if reasonable, separate accounting, the exclusion or inclusion of one or more factors, or any other method to equitably allocate and apportion the taxpayer’s income. As additional support for its position, the Department cited Ind. Code § 6-3-2-2(l), a statute modeled on IRC § 482 that allows for adjustments by the Department to fairly reflect income derived from sources within Indiana. The taxpayer argued unsuccessfully that Ind. Code § 6-3-2-2(p) limits the Department’s authority to require a taxpayer to file a combined report to instances where the Department is “unable to fairly reflect the taxpayer’s Indiana source income using any other method allowable under” the provisions cited by the Department. In support, the taxpayer produced a 12-year-old transfer pricing study to establish that its intercompany transactions were conducted at arm’s length. The Department disregarded the study, however, finding it was dated and limited in scope, did not account for brand value, and did not analyze proper or sufficient comparable business enterprises. In its analysis, the Department did not cite to IRC § 482 or apply an analysis consistent with federal tax principles. While acknowledging the transfer pricing study “may have had a certain, limited value at the time it was first issued and which may have assisted the parties in better understanding the financial and organizational relationship between the affected parties,” the study was “insufficient to establish the [Department] acted outside its statutory authority in requiring Taxpayer and [its subsidiary] file combined income tax returns.” Indiana Dep’t of Revenue, Ltr. of Findings No. 02-20130155 (Feb. 26, 2014).

The New York State Governor and Legislature recently enacted the 2014-2015 New York State Budget, Senate Bill 6359-D and Assembly Bill 8559-D (Budget), which results in the most significant overhaul of New York’s franchise tax on corporations in decades. In this edition of New York Tax Reform Made Easy, we will address how the Budget implements unitary combined reporting and expands the use of economic presence nexus.

Continue Reading New York Tax Reform Made Easy: Unitary Combined Reporting and Nexus

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The Sutherland SALT Team will release commentary on the revamped New York State corporate tax system that was reformed as part of the recently enacted Budget Legislation (“Budget”). By way of background, Governor Andrew Cuomo signed into law the tax provisions of the Budget on March 31. The changes will affect nearly every New York State corporate taxpayer and should be considered in preparing financial statements for the first quarter of 2014.

In the coming days, Sutherland will release targeted, concise commentary on each of the most significant aspects of the Budget, including:

  • Mandatory Unitary Combined Filing
  • Economic Presence Nexus
  • Income Tax Base Changes
  • Sourcing/Apportionment (market-based approach)
  • Net Operating Losses (NOLs) and other Tax Attributes
  • Rate Changes
  • Capital Base Changes
  • Financial and Insurance Industry Impact

By Ted Friedman and Prentiss Willson

The Indiana Department of Revenue determined that affiliated entities of an out-of-state manufacturing corporation were not unitary. The corporation conducted marketing operations as one business segment and production operations as a second business segment. The corporation included its marketing entities in its Indiana consolidated return. On audit, Department staff included the production entities in a combined Indiana return. In considering the corporation’s protest, the Department stated that, in order to require related entities to file a combined return to fairly reflect income, the Department must: (1) find that the entities form a unitary group; (2) make a finding that the corporation’s own method of filing distorts the corporation’s Indiana income or expenses; and (3) be unable to fairly reflect Indiana income using other methods before requiring the combined-filing method. The Department determined that the corporation had established that the production and marketing entities conducted inter-divisional transactions on an arms-length basis, that the transactions were financially and competitively market driven, and that the entities were separately managed. The Department also determined the inter‑divisional transactions were not self-serving and were not structured simply as a means of minimizing state tax obligations. Accordingly, the Department concluded that the marketing and production entities were not unitary and that the corporation had met its burden of establishing that the Department erred in requiring the corporation and its affiliates to file a combined return. Supplemental Letter of Findings, 02-20120008 (Ind. Dep’t of Revenue Mar. 26, 2014).