Banking Affiliates' Inclusion within NYC Combined Tax Return
New York City Appeals Tribunal – Appeals Division released on May 19, 2016, that a non-nexus banking affiliate does not have to be included in the combined tax return.
The issue appealed to the New York City Tax Appeals Tribunal was whether a non-nexus subsidiary was required to be included in a New York City combined Bank Tax Franchise Tax Return.
For purposes of NYC filings, nexus is defined as a connection with the state, which may include property, rent, payroll or sales or potentially other activity. An entity with nexus is generally required to file income tax returns within the state or city where the nexus occurs. A non-nexus entity is one which has no such connection.
For the tax years at issue, 2006 to 2008, under New York City tax law, a non-nexus banking corporation could be included in a combined tax return if it was part of a unitary banking business and substantial intercompany transactions existed between the New York City taxpayer and the non-nexus subsidiary, which would be presumed to create distortion. If the New York City taxpayer and the non-nexus subsidiary were unitary and there was an arrangement between the parties that resulted in income being incorrectly reported, a combined filing would be required.
Astoria Financial Corporation (Astoria Financial), a publicly held holding corporation, is the parent company owner of Astoria Federal Savings & Loan Association (Astoria). Astoria is the parent corporation of several other subsidiaries, one of which was Fidata. In 2005, Astoria reorganized its structure. Regarding this particular banking entity, the non-nexus subsidiary, Fidata, was purchasing non-New York State mortgage loans from another subsidiary. The non-nexus subsidiary qualified as a Connecticut Passive Investment Company that did not do business in New York State or New York City. This subsidiary, for New York State purposes, was required to file the general corporate tax rather than bank tax. Since this subsidiary never did business within New York City, it could not elect such status for New York City and was, therefore, a banking corporation that could be includable in the New York City combined tax return.
In November 2014, the Administrative Law Judge (“ALJ”) ruled in favor of the taxpayer that the non-nexus subsidiary was not required to be included in the NYC combined tax return.
The ALJ determined that the non-nexus subsidiary was not a sham corporation and was formed for several business purposes, including purchasing non-New York State loans, to help the parent corporation’s lending test for the federal Community Reinvestment Act (“CRA”) ratings. The parent wanted to lend across the country, and if those loans were on the bank’s books they would dilute the lending test for CRA purposes. The parent company began originating mortgage loans through one of its subsidiaries, which would then sell those loans to the non-nexus subsidiary. Those loans would not be included in the parent’s lending test for the CRA.
The bank’s tax director, the author of this article, was the architect of this structure.
This decision was then appealed by New York City to the New York City Tax Appeals Tribunal. On May 19, 2016, the Tribunal agreed with the ALJ. The Tribunal’s decision stated, “We conclude that the Petitioner has rebutted the presumption of distortion by establishing that prices paid in the intercorporate transactions were arm’s length prices. We further conclude that the record does not support a finding that there was ‘any agreement, understanding or arrangement’ between the subsidiary and Petitioner that resulted in the improper reflection of the ‘activity, business, income or assets of’ Petitioner requiring the inclusion of the subsidiary in Petitioner’s Combined Bank Tax returns.” The Tribunal further stated that there was no “mismatch” of income between the entities.
This case is noteworthy because it focused on the validity of the transactions among members of the group, distortion and the sham transaction rules. Taxpayers in a similar situation may want to review filings in light of this decision.
Further, taxpayers should also review the combined reporting changes that are going into effect for New York State for tax years beginning on or after 2015. While New York City has not yet revised its provisions to resemble the state law changes, taxpayers may want to be on the lookout for similar action by the city with regard to the 2015 state changes.
Should you have any questions, please contact your Marcum tax professional.