By Christopher Chang and Pilar Mata

The New Jersey appeals court ruled that BIS LP, Inc. (BIS) was entitled to receive a New Jersey Corporation Business Tax (CBT) refund in the ongoing BIS litigation saga. In 2011, BIS, an out-of-state limited corporate partner, prevailed before the appeals court, securing a decision that found BIS lacked sufficient nexus with New Jersey and, consequently, was not subject to CBT. The case was remanded to the New Jersey Tax Court to determine whether BIS was entitled to receive the CBT refund. The State contended that BIS was not entitled to the refund because a related entity (who was time-barred from seeking a refund claim) remitted the CBT on behalf of BIS, and BIS did not consent to New Jersey taxing authority or have nexus with the State. The appeals court again held in favor of BIS, determining BIS was entitled to the refund. The court reasoned that BIS had filed a CBT return, so the State’s argument that BIS did not consent to New Jersey’s taxing authority was unpersuasive. BIS LP, Inc. v. Director, Division of Taxation, Dkt. No. A-1647-12T3 (N.J. Super. Ct. App. Div. April 11, 2014).

By Jonathan Maddison and Andrew Appleby

The Commonwealth Court of Pennsylvania held that tax records detailing yearly totals of room rental tax and other occupancy data submitted by hotel taxpayers to a locality were not subject to disclosure under Pennsylvania’s Right-to-Know Law (RTKL). A newspaper, under the RTKL, requested that Lancaster County provide detailed tax records for all hotels in the county that paid the Hotel Room Rental and Excise Taxes. The County’s denial of the newspaper’s public records request was ultimately upheld by the Commonwealth Court. The RTKL starts with the presumption that a record in the possession of a local agency is a public record, and then several exceptions are provided, including records that constitute or reveal a trade secret or confidential proprietary information. The Commonwealth Court reasoned that the information sought by the newspaper was confidential proprietary information under the RTKL because the information necessary for the hotels to compute the Hotel Room Rental and Excise Taxes, including occupancy data and related information, is never shared between hotels or with the public. Further, the court held that the disclosure of such information would cause substantial harm to the competitive position of the hotels. Accordingly, the Commonwealth Court held that the County was not required to release any of the information sought by the newspaper. Thirty Inc. v. Smart, No. 805 C.D. 2013 (Apr. 14, 2014).

By Nicole Boutros and Timothy Gustafson

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.”

By Suzanne Palms and Tim Gustafson

In direct response to the Mississippi Supreme Court’s decision in Equifax, Inc. v. Miss. Dep’t of Revenue, wherein the court upheld the Department of Revenue’s use of market-based sourcing despite the taxpayer’s use of cost-of-performance sourcing in compliance with the governing statute, Mississippi’s Governor signed House Bill (HB) 799 into law. The most notable provisions of the bill set new conditions for the Department of Revenue to follow in applying alternative methods of apportionment and limit the Department’s authority to require taxpayers to file combined returns. HB 799 goes beyond the issues in Equifax to remedy a wide range of inequitable procedural provisions during the audit and appeals process. Specifically, the legislation codifies the ability of the Department or a taxpayer to use an alternative apportionment method but explicitly places the burden of proof on the party invoking the alternative method to prove by a “preponderance of the evidence” that 1) the statutory or regulatory methods do not fairly represent the extent of the taxpayer’s business activity in the state and 2) the method selected more fairly represents that activity than any other reasonable method available. The legislation also requires that alternative apportionment be invoked only in “limited and unique, nonrecurring circumstances” when the standard apportionment provisions “produce unanticipated results that do not fairly represent the extent of the taxpayer’s business activity” in Mississippi. Moreover, the bill prohibits the Department from invoking its forced combination authority until the Department adopts regulations which specify the “criteria and circumstances” it must use to meet the “preponderance of the evidence” standard necessary to support an assumption that intercompany transactions resulted in the improper shifting of taxable income. The bill’s effective date is January 1, 2015. HB 799, 2014 Leg., Reg. Sess. (Miss. 2014).

By Ted Friedman and Timothy Gustafson

The Supreme Court of Missouri reversed and remanded a decision of the Administrative Hearing Commission (see our coverage of the Commission’s January 28, 2013 decision here) and held that income from a “rabbi trust”—a trust established by a corporation to fund a nonqualified deferred compensation plan for company executives—constituted business income subject to apportionment and Missouri taxation. While agreeing with the Commission that the trust income did not satisfy the transactional test for business income, the Court held that the trust income was business income under the functional test. The Court reasoned that a successful business requires capable, productive management and executive leadership management just as it requires the tools of its trade, and by providing additional retirement compensation for its executives, the corporation attracted and retained top executives for the purpose of sustaining its current business operations. MINACT, Inc. v. Dir. of Revenue, No. SC93162 (Mo. Apr. 15, 2014), reh’g den., (Mo. May 27, 2014).

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