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In a reminder that there are limits on the retroactive application of tax laws, a California Superior Court rejected the Franchise Tax Board’s attempt to impose retroactive penalties on a tax shelter promoter. Quellos Fin. Advisors, LLC v. Franchise Tax Bd., Case No. CGC-09-487540 (San Francisco Super. Ct., Tentative Statement of Decision, Oct. 31, 2011).

Quellos was promoting the allegedly abusive tax shelter in 2001. California law tied the amount of the applicable penalty to that in I.R.C. § 6700, which established a maximum penalty of $1,000. Cal. Rev. & Tax Cd. § 19177. In 2003, California amended section 19177 to substantially increase the promoter penalty from $1,000 to 50% of the income derived by the promoter from the tax shelter promotion activity. The FTB assessed the 50% promoter penalty against Quellos in November 2009 for its promotion activities alleged to have occurred in 2001. Quellos argued that the pre-2003 law imposed a maximum penalty of $1,000 and the 2003 amendment could not be applied retroactively to Quellos’s 2001 activities.Continue Reading Promoter Finds Shelter in California Court: Court Rejects FTB’s Retroactive Imposition of Tax Shelter Promoter Penalty

The New York State Department of Taxation and Finance (Department) provided another example of its longstanding eagerness to force taxpayer combination—at least in cases where it results in increased tax revenue. In the Matter of Kellwood Co., No. 820915 (N.Y. Tax App. Trib. Sept. 22, 2011).

The Department (or taxpayer) must prove three elements to require a combined report: 

  1. Sufficient ownership 
  2. Existence of a unitary business 
  3. Distortion

Continue Reading New York Attempts to Take Taxpayer Out Behind the (Kell)Woodshed

The New York State Department of Taxation and Finance (the Department) recently released an advisory opinion analyzing the proper characterization and sourcing of various revenue streams derived from the facilitation of online trading activities. Petition No. C080222A, TSB-A-11(8)C (July 12, 2011).  Relying on our old friends, Deloitte & Touche, LLP, TSB-A-02(3)C (Apr. 18, 2002); Ins. Servs. Offices, Inc., TSB-A-99(16)C (Apr. 7, 1999); and New York Merchantile Exch., TSB-A-00(15)C (Apr. 18, 2002), the opinion represents the Department’s growing trend to expand the category of “other business receipts,” to source receipts on a market rather than on a cost-of-performance basis.

In the opinion, the Parent is a Delaware corporation headquartered in New York. It owns and operates an Internet-based platform (Exchange) that serves as a marketplace for over-the-counter (OTC) global futures markets. Although the Parent is not a registered broker-dealer, the Exchange serves as a marketplace for buyers and sellers of certain commodities contracts, financial contracts, and other derivatives contracts in futures and OTCs to meet and execute trades on a real-time basis. All of the Parent’s property and equipment associated with the Exchange is located outside of New York, and all of the clearing administration for the OTC is performed outside of New York. In addition to the Parent’s activities, its affiliates generate receipts from various transactions, including open outcry trading, digital auction, flat monthly subscriptions, and trades executed with the assistance of interdealer brokers.Continue Reading The Big Apple Goes to the Market for Online Trading Revenue

Recipients of qualified empire zone enterprise (QEZE) tax benefits beware: New York is reviewing your qualifications to receive a QEZE credit. On April 28, 2011, an administrative law judge upheld the Department of Taxation and Finance (Department) denial of the taxpayer’s QEZE credit claims because the taxpayer did not establish the credit for a valid business purpose. In the Matter of the Petition of Ward Lumber Co., Inc., Dkt. Nos. 823209, 823163 (N.Y. Div. Tax App. Apr. 28, 2011).

The taxpayer, Ward Lumber Co., was incurring substantial losses and appeared destined for bankruptcy. In an effort to prevent Ward Lumber, one of Essex County’s largest employers and businesses, from going under, several local officials recommended that Ward Lumber pursue QEZE credits to ease its financial difficulties. One state official told Ward Lumber that it would have to form a new entity to qualify for the QEZE program. Ward Lumber merged with a Delaware corporation in 2001, kept the original business’s name, and qualified for and received QEZE benefits for 2002 through 2004.Continue Reading New York Giveth, Taketh Away

The New York Tax Appeals Tribunal (TAT) affirmed a decision forcing the combination of a banking corporation and its “nontaxpayer” subsidiary. The combination was upheld based upon the existence of an interest deduction—taken by the banking corporation and attributable to assets held by its subsidiary—that created distortion of income. Interaudi Bank F/K/A Bank Audi (USA), DTA No. 821659 (Apr. 14,  2011).

Interaudi Bank (Interaudi), a commercial banking corporation organized and chartered in New York, formed and transferred its investment portfolio to an investment holding subsidiary, BA (USA) Investments Inc., (BA Investments) domiciled in Delaware. BA Investments limited its activities to the management and maintenance of marketable securities. During the 1997-1999 period, Interaudi filed a New York Article 32 (Bank Tax) combined return that included all of its subsidiaries, except BA Investments—which did not file a New York tax return. Interaudi then claimed interest expense deductions paid to BA Investments.Continue Reading Distortion Reigns in New York Article 32 Forced Combination Case

New York amended its False Claims Act (FCA) to allow whistleblowers to bring qui tam actions against taxpayers for false claims under New York tax law. If subject to the FCA, a taxpayer could be subject to civil penalties, treble damages, and reimbursement of the plaintiff’s costs including attorney fees. N.Y. STATE FIN. LAW § 189(1)(g), (3).

While the FCA has been in existence in New York since 2007, the recent amendment repeals a statutory preclusion for actions related to the tax law. Under the amendment, a taxpayer is subject to the FCA if it has at least $1 million in income or sales in a tax year and the whistleblower pleads damages in excess of $350,000. Id. § 189(4)(a). This dramatic change occurred quietly because the FCA is in the Finance Law rather than the Tax Law. Interestingly, Eric Schneiderman, New York’s Attorney General, was a chief proponent of the amendment while a member of the New York Senate, and he now has enhanced authority to investigate and commence civil actions under the amended FCA. Id. § 190(1).Continue Reading Rise of the Tax “Snitch”: How Amendments to New York’s False Claims Act May Ensnare Taxpayers and Practitioners Alike

The New York State Department of Taxation and Finance issued an advisory opinion regarding whether three different financial advice services are subject to New York sales and use tax. Section 1105(c)(1) of the New York Tax Law imposes sales tax on receipts from the “furnishing of information” by printed matter, including the collection, compilation, or analysis of information of any kind or nature and furnishing reports on the same. However, the statute excludes from the scope of “furnishing of information”: 

  1. Information that is personal or individual in nature; and 
  2. Information that is not or may not be substantially incorporated into reports furnished to others.

New York courts have further qualified the first criterion by requiring that an information service be “uniquely” personal or individual in nature.Continue Reading New York Issues (Another) Advisory Opinion on Taxability of Financial Advice Services

On November 18, 2010, the New York Division of Tax Appeals held that Dann Ocean Towing (Dann), a Florida corporation with no employees or property in New York State, was liable for New York’s petroleum business tax. In re Dann Ocean Towing, Inc., Determination DTA No. 822683 (Nov. 18, 2010).

Dann owned 12…