The New York City Tax Appeals Tribunal held that a bank filing a combined New York City bank tax return properly excluded from its combined group a Connecticut investment subsidiary that primarily held mortgage loans secured by non-New York property. Where there are substantial intercorporate transactions among banking corporations or bank holding companies engaged in a unitary business, New York City law presumes that a combined return is required. The Tribunal held that although there were substantial intercorporate transactions, the combined report presumption was rebutted because the intercompany transactions were conducted at arm’s length, and the transactions and entities had non-tax business purposes and economic substance. The Tribunal determined that “[a]lthough it is clear that the tax purposes [of forming the investment subsidiary] were substantial, separating the non-New York loans from [the New York bank] was a sufficient non-tax business purpose to support the transactions.” As a result, New York City could not require the bank to include its investment subsidiary in its combined New York City bank tax return. In re Astoria Fin. Corp. & Affiliates, No. TAT (E) 10-35 (BT) (N.Y.C. Tax Appeals Tribunal May 19, 2016).
The New York State Tax Appeals Tribunal determined that a taxpayer subject to the Article 32 bank franchise tax must use its net operating loss deduction to reduce its entire net income to zero in years in which the bank franchise tax was paid by the taxpayer on an alternative, non-income tax base. The Tribunal reached its decision notwithstanding that the taxpayer would have paid the bank franchise tax on an alternative tax base even without applying the NOL deduction. While New York State tax reform changed the NOL computation for tax years beginning on or after January 1, 2015, taxpayers can still carry over pre-tax reform NOLs to post-tax reform years using the “prior net operating loss” subtraction. As such, New York State bank franchise tax and corporation franchise tax taxpayers may want to consider how this decision affects their unabsorbed NOL base in pre-tax reform years, as such NOLs will enter into their prior net operating loss subtraction pool. In the Matter of the Petition of TD Holdings II, Inc., DTA No. 825329 (N.Y. Tax App. Trib. Apr. 7, 2016).
A New York Tax Appeals Tribunal Administrative Law Judge (ALJ) recently determined that a federal savings and loan association was not required to include a subsidiary, which was formed as a Connecticut passive investment company, in its combined New York City bank tax return. In the Matter of the Petition of Astoria Financial Corporation & Affiliates, TAT(H) 10-35(BT) (Oct. 29, 2014, released Nov. 7, 2014). While it appears that the New York City Department of Finance audit focused on the three statutory criteria for requiring a combined return, it also raised a fourth criterion—whether the subsidiary or the savings and loan association’s transactions with the subsidiary were a “sham.”
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The Pennsylvania Supreme Court held that treating a merger between two in-state banks differently than a merger between an in-state bank and an out-of-state bank did not violate the Uniformity Clause of the Pennsylvania Constitution. If two in-state banks merged, Pennsylvania law formerly required the combination of the banks’ book values and deductions for purposes of calculating a six-year moving average used to determine the tax base for Bank Shares Tax purposes. For calendar years prior to January 1, 2014, this “combination” provision applied only to mergers between in-state banks. First Union Nat’l Bank v. Commonwealth, 867 A.2d 711, 716 (Pa. Commw. Ct.), exceptions dismissed, 885 A.2d 112 (Pa. Commw. Ct. 2005), aff’d, 901 A.2d 981 (Pa. 2006). The taxpayer, an in-state bank that merged with another in-state bank, claimed that the combination provision violated the Uniformity Clause by favoring mergers with out-of-state banks over mergers with in-state banks. Since the combination provision did not apply to mergers with out-of-state banks, the pre-merger book values and deductions of an out-of-state bank would not be combined with pre-merger book values and deductions of the surviving in-state bank. Thus, all else being equal, the six-year average share value of an in-state bank that merged with an out-of-state bank was lower than the six-year average share value of an in-state bank that merged with another in-state bank. The Pennsylvania Supreme Court held that this differential tax treatment did not violate the Uniformity Clause. The court reasoned that a merger between an in-state bank and an out-of-state bank brings previously untaxed assets into the Commonwealth’s taxing jurisdiction for the first time and “enriches the public coffers,” whereas a merger between two in-state banks does not. This distinction was sufficient for the court to conclude that the two scenarios were materially different and that the differential tax treatment did not violate the Pennsylvania Constitution. A law change effective January 1, 2014, made significant changes to the Bank Shares Tax, including adopting a reporting and payment standard based on whether a bank is “doing business” in the state and replacing the six-year moving average calculation with a one-year valuation formula. Lebanon Valley Farmers Bank v. Commonwealth, No. 78 MAP 2011, 2013 WL 6823061 (Pa. Dec. 27, 2013).