Professional Documents
Culture Documents
State and Local Outline
State and Local Outline
State and Local Outline
3) TAT (Tax Appeals Tribunal) Only has 3 commissioners/judges Also a separate division Last level of administrative review in NYS o o 4) ALJ Really the division of Tax Appeals (DTA) Issues written decisions Independent, quasi-judicial tax court o Accounts & lawyers who have been appointed as judges. Appellate level court Has de novo review (unlike most appellate courts) but wont overturn credibility of witness, will just change findings of fact Vast majority of cases get affirmed These decisions are binding.
Decisions are only binding against other ALJs o But TAT will look to ALJ decisions for current thinking on an issue
5) BCMS (Bureau of Conciliation & Mediation Services) Division of Tax Dept Can go to this division to get your audit cancelled. Does not issue written appeals.
Some where along the process, there can be a TSB-A Issues advisory opinions Similar to private letter rulings of IRS Not binding on ALJs or court just Tax Depts current thinking on an issue.
In some cases you can go directly to state court for certain issues.
1) Residency o NYS has the most aggressive residency policy (Calif. is second) o People want to claim residency in FL b/c it has not income tax o Commuters who have an apt in NYC used occasionally for work. NYC Commuter Tax is unconstitutional!!! NYC cannot tax people who are not residents. NYS can tax non-residents through source income 2) Income Allocation o NY wants to tax things that originate in the state (i.e. rental income on apt in NYC, non-compete clauses).
B) Domicile
There are 2 ways to make someone a resident of state:
1) Domicile where you intend to be your home (where your heart is) 2) Statutory Residency spend more than 183 days in the state
Domicile Concepts
1) Intention + Residence = Domicile
Must intend for it to be your permanent home and actually be present in the state (i.e. have a house there)
5) Question of Fact
Domicile can only be determined by very specific fact patter for each TP.
Have to show either: Separation by law i.e. legally divorced Separation in fact harder to show
7) Dont have to severe all ties with old domicile to change to new domicile
But the value and amount of these ties are determinative.
Policy: Dont want to push people out of NYS still want them to donate to NY institutions and own
property (pay property taxes). o There is a statutory exception that auditors cannot consider charitable donations as indicative of domicile.
9) Domicile of Origin
Everyone starts with this place of birth, where family is, etc. If you dont establish a new domicile, this is presumed to be your domicile.
If you die while domiciled in NYS NY can tax all. But if your domicile is somewhere else, then NY can only tax the estate assets present in NY.
Her original domicile was in NJ and also NYC. Wants to leave her money to Tulane Univ. (memorial for her daughter) and she is advised her to change her domicile and she could make an express declaration that effect. o She had declared NJ to be her domicile in several documents so she executed a New Orleans declaration that she intended NO to be her permanent home and domicile. She sent these announcements to several people, including the person to become her executor.
Your stated intentions are relevant, but they are self-serving and are not enough need affirmative acts. Must be a union of residence + intention
There must be a present, definite and honest purpose to give up the old and take up the new (page 9)
Court affirmed surrogates ruling that Mrs. Newcomb was competent and free from restraint to changer her domicile.
o Did not allow testimony that she was healthy and thus, could have gone to NO more than she
did.
3) Time Factor
o o One of the most important courts look at how much time was spent in NY vs. New Orleans. Concept: People spend more time in their home/domicile than anywhere else. But this gets tricky with people of means b/c they have homes all over the place.
4) Business Factor
o o Where is your active business involvement? Passive business does not matter (i.e. being a partner in LLC or owning stock)
[these all made clear his intention to abandon NY + move to FL in Feb. 1996]
So long as you have the intention to make somewhere your home, as soon as you take up residence there anywhere (even if just staying with a friend while looking for a home) then you have changed your domicile.
Burden is on the TP in this case (in previous cases it was on Tax Dept and they lost b/c burden of challenging domicile = hard) Her only home, job and personal stuff was in NYC. o o Then how did she win?!?!?
Wealth permits individuals to live in a manner that is unlike the average person
Normal person would only have one home, but she travels a lot and has enough money to have many homes. She didnt do anything in her rich world that showed she intended to make NYC her new domicile. It was only a transient place until she figured out what to do with her life.
Judge also believed her b/c she was not paying fewer taxes in NJ (so domicile was not motivated by tax evasion).
There were 2 apts in NYC that he stayed in the city he didnt have free and unrestrained
Girlfriends apt there were 2 locks and he only had a key for one (gf let him have access on the days she wanted him there)
Goes towards statutory residency He was in the process of a divorce and happened to stay with his gf (transient) o o They eventually got married and they lived in Connecticut As a matter of law, never left and gave up his Conn. domicile. His kids were there. Auditors tried to take it out of context of the divorce.
The presence of an suburban commuter at work or play in New York on most days, without more, does not create a New York domicile. (p.30)
Quotes Aetna (see above)
Court says although its a subjective standard, the following objective factors can be applied: o o o o o (1) Retention of permanent place of abode in NYC (2) Location of business activity (3) Location of family ties (4) Location of social & community ties (5) Formal declarations of domicile.
The court finds that TP did not change domicile b/c o TP maintained and made frequent use of NYC apt o TP spent more time in NYC than Westhampton o His general habit of life was not centered around Westhampton TP used NYC address for virtually all bills (including utility bill for WH house) Used NYC dry cleaner and doctor o Even though he had retired from firm the # of days spent in NYC did not change.
Court says domicile is not the place you intend to be forever, but the place you are presently in with no intention of leaving at any definite time in the future.
Thus, NYC is still domicile b/c there is a present intent to remain for an indefinite time (even though there is also a floating intention to return to old domicile.
NY Tax Law 605(b)(1)(A). EXCEPTIONS TO NY RESIDENCY RULE 1) 30 Day Rule (a) Must have a PPA outside of NY (b) There can be NO PPA in NY (c) Must be in NY for less than 30 days 2) 548 Day Rule (a) 450 days must be spent in a foreign country (out of 548 days) (b) No spouse (unless legally separated) or minor children can be anywhere in NY for more than 90 days.
THIS LAW HAS CHANGED Used to be the rule that they just couldnt be in a PPA that you maintained but wives could just move out of the home and into a new one to avoid this.
C) Credits
Matter of Gianturco (2005): Involves Resident Tax Credit get a credit for the amount of tax already paid to the other state attempt to avoid double taxation o Must have income earned/sourced in the other state. o Imposed under Tax Law 620(a) applies to tax imposed by another state, D.C. or Canadian province. o Get credit for: Income taxes imposed by another state upon compensation for personal services performed in such other state 7
Income from real or tangible personal property situated in other state. o Would also get credit if intangible income earned in Conn. while TPs were residents of NY.
TP had income from capital gains receiving royalty income from royalty agreement from Nevada LLCs (so this was intangible income)
D) Statutory Residency
TEST for statutory residency (1) Must maintain and have a permanent place of abode for substantially all of the taxable year in NY, AND (2) Spend more than 183 days in NYS/NYC per year. STATUTORY RESIDENCY CONCEPTS: 1) PPA + 183 days 2) Camp or cottage exception (physical aspects) 3) Ones relationship to the abode must include conducive living arrangements 4) Investment property is not a PPA. 5) Voluntary non-use may not be enough 6) 11 month rule must acquire or dispose of a piece of property during the taxable years in order to be applicable. 7) If you lack free & continuous access then not your PPA. o Cannot argue you dont have free & continuous access if it is selfimposed or not explicit in a lease. 8) If something is uninhabitable, it is not a PPA during the period of uninhabitability. 8
o If its not for substantially part of the year, then doesnt meet 11 month rule so not PPA. 9) Maintenance of an abode for 3rd partys exclusive use is not your PPA. o i.e. case where grandparents kept home, but daughter & grandson live there. 10) Maintenance payment/contribution of expenses is only ONE factor. o Must be whatever is necessary to maintain a conducive living arrangement
Statutory residency creates the potential for double taxation, especially if its capital income.
o Ability of a State to tax its own residents is a traditional aspect of state sovereignty
Could not get a credit from NJ b/c it was his domicile and not from NY b/c he was a resident.
p. 101 - Credit is generally unavailable for intangible income b/c it has no identifiable situs o Mere investment income recognized under mobilia sequuntur personam (movables follow the person) is subject to tax of state of residence/domicile. o Except where TP can show intangible income is derived from TPs activities in another state, then entitled to credit.
Note that language about the 548 Day exception is outdated here has not been changed since the statutory amendment.
TP used the Camper/Cottage Exception (20 NYCRR 105.20[e][1]) o Looks to habitability and whether suitable for other uses
o Used to say Place should be considered a permanent place of abode so long as it can be used all year round focus on physical characteristics. But dont do this as much.
HOLDING: It was not suitable for use all year round property is accessible only by an easement and is not maintained so not readily accessible in winter o Thus, not accessible all year round so falls into Camper/Cottage exception was only used for vacations.
o Without evidence that petitioners did not or could not have resided in the apartment during the years at issue
did not submit ANY evidence to support their case also hard to prove that a place once used as PPA is no longer PPA.
Tax Dept likes to cite this case to say voluntary non-use of what is otherwise a PPA means it still is a PPA.
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Investment property is not a PPA, nor is an abode that your legitimately rent out (i.e. Landlord cannot have free access to the abode by lease).
He was over 183 days b/c he commutes and NYS trying to say hes a statutory resident by saying his wifes apt was his PPA HOLDING: for TP. o o Even though suitable for year-round living, it was not his PPA Even though he owned it, he never stayed there.
Must look at the personal relationship to the abode that is necessary to create a PPA. o The only reason he got the apt was for his wifes mid-life crisis and he never stayed there, he hated NY.
Therefore, PPA look at Whether suitable for living all year-round Personal relationship to abode (personal belongings, actually stayed there)
o Says you will not be deemed to have maintained a PPA for substantially all of the year unless it was for 11 months. o Must acquire or dispose of property during that year!
ALJ does not agree with TP o 11 month rule is just a guideline (ALJ and courts not bound by it) Furthermore, even if guidelines do apply, TPs didnt acquire or dispose of a property in that year Also, they used it for 10.5 months hard for a judge not to say substantially all of the year (different if it was only 6 months)
Not clear there wasnt free & continuous access b/c no formal agreement since doing family a favor.
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o If you maintain a PPA of abode for someone elses permanent use then its not your PPA!
o Didnt rent it out to anyone, but was occupied by their daughter & grandchild by necessity If they had merely rented out NY home then there would be no question it wasnt their PPA.
Seminal case for maintaining very fact intensive inquiry. o Means doing whatever is necessary to continue ones living arrangements in a particular dwelling place. Permanence must encompass the physical aspects of the place as well as the individuals relationship to the place
o o o o TP had been living there for 12 years He was free to come and go as he pleased and have guests Could use any area of the rectory Had put his own furnishings and personal effects in there.
Mr. Moed designed and built Conn. home and bought new furnishings for it.
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He generally drove to work from Conn. but sometimes spent the night in his wifes NYC apt or sons.
ALJ It is not the amount of time that is determinative---but the regularity and certainty of the overnight arrangement that is essential. o Separate domiciles reflect their respect for each others privacy but they were still married and he still slept at his marital home. Tax Trib. Overrules ALJ b/c they find that Mr. Moed was not maintaining the apt. in the same was as TP in Evans. o He did NOT have free & continuous access to the apt. The fact that restrictions on TPs access to apt were imposed by mutual agreement between TP and his wife does not alter the fact that his access was limited.
If you do not have free & continuous access then it is not your PPA o Restriction can be explicit (lease) or implicit (dont want to impose on family member)
E) Temporary Stays
Regulations used to have a Temporary Stay exception If a place was maintained only during a (1) temporary stay and to achieve a (2) particular purpose.
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Tax Dept used to say if you were here for less than 3 years (absent evidence to the contrary) = temporary. Had to be ascertainable when your purpose would be achieved. 20 NYCRR 105.20(e)(1).
HYPO: You have a million $ apt and are here on 2 year K for a particular purpose.
Can still argue that you are here temporarily b/c the Regulations are just Administrative interpretations. Regulations cant contradict the law only a statutory resident if you maintain a permanent place of abode argue it was temporary. o However, the courts will give a lot of deference to the Tax Dept regs.
o Length of employment for wife seemed to be tied more to length of her visa than
any temporary activity.
Since they did not leave NYC when their training was complete and instead got new jobs and stayed for 7 years = NO temporary stay b/c no longer in NY for a particular purpose.
o Her intent throughout her training was to return to NJ to start her practice. Had made no choice to move to NYC. NEVER wanted to raise family in NYC.
Taxed on NY income but the tax rate is based on the ENTIRE income earned (in and out of NY)
As if resident tax base NY state will first pretend that you are a resident (even though you are not) in order to get your tax base. 14
o Hypo:
$10,000.wages in NY $500,000.rental income NJ $510,000.worldwide income Treat you as if you made $510,000 in NY to determine the income tax rate. This puts you in a HIGER tax bracket 6.85% Tax base = $510,000 x 6.85% = $34,935 (approx. 2% of this is nonresident income)
o GOAL: to ensure everyone is paying tax at the same progressive rate. Using out of state income to jack up tax base. Constitutional as long as the rates are applied in non-discriminatory way and only taxable to NY source income.
non-work days do not count can argue half-days (if well documented) see
employees
MATTER OF ITTLESON (2005):
Change domicile/residence from NYC to South Carolina. Trying to claim that source income from painting sold at Sothebys should not be taxed by NY. ISSUE: Whether the painting had obtained a NY situs/minimal connection.
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o o
For most of the time they were non-residents, the painting wasnt in NY. Trying to argue the 11 years it was in the apartment was not relevant. ALJ bought this argument but it was reversed.
Unable to just forget the 11 years the painting was in NY it was in NY for the time of sale and substantial period before sale.
Must consider the time painting was in NYS + time there for auction 11 years satisfies minimal connections with the NY so the state can tax.
EXCEPTION: One of the only ways income from an intangible can become taxable by NY is if its used for business in NY. o i.e. if you put if up as collateral for business.
o HERE TPs never used the partnership interest for business in NY so the gain derived from sale of intangible is not NY source income!!!
Convenience
worked outside of NY as NY workdays, unless you can show that you worked out of NY out of the necessity of the employer, instead of convenience o Look to the NATURE of the work could it have been performed in NY? See Matter of Unterweiser worker locked out of her office (claimed it was not conducive to her work), thus required to work at home, but job was same as before so found for NYS. 16
Contrast with Matter of Donovan had to work at home or jobs would be loss held for TP (only example of this).
o Purpose: To prevent commuters from abusing nonresident income and from claiming weekends as 2/7 days worked out of NY.
o Since he chose to work in TN and it was not for convenience of employer then he does not get the exception.
MATTER OF FREIDMAN (1999):
Every year Mrs. F gets $100,000 from NY company she is a majority owner in. Company was able to deduct this as wages. o She says she didnt work in NY, it was all done in FL.
Exception: CONVENIENCE
OF THE EMPLOYER DOCTRINE DOES NOT APPLY UNLESS YOU SPEND ONE DAY IN NEW YORK! o Thus, must work one day in NY in order to trigger this doctrine.
Judge says she wasnt really paid to do anything (could have just been dividends) o She was making herself available for consultations. So, when she was in NY for vacation, she was just as available (unless she can prove otherwise). o She performed passive services in NY (held for NYS)
4) Intangibles 0/800 5) Business Income 100/100 Income % = NY AGI (NY source income w/ adjustments) 500 = 25% NY tax owed Fed AGI (Federal income w/ adjustments) 2000
Just because it accrued in value over a multi-year period, you look at the year of exercise b/c that is the year that matters for stock options. o So, only the year exercised counts wasnt NY resident in that year. Thus, held for TP.
See p. 303-04 for explanation of stock options (ISO vs. capital gains)
20 NYCRR 132.24 - NY then passed a regulation that says you have to look at the total number of days worked in NY from Grant Vest period. 20 NYCRR 132.4(c) Bonus Rule
If you get paid a bonus in year 2, for work performed in year 1, you MUST allocate that money to year 1 Compensation for services rendered in year 1
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o Income is includible in gross income when ALL events have occurred which fix right to receive that income and it can be determined with reasonable accuracy. o NQOs income realized when option exercised. o Thus income accruable to years when TP didnt work so NY cant tax. This is really deferred compensation very similar to a bonus!
If you exchange money in exchange for K not to compete this is NOT NY source income!!!
o o Covenant not to compete is an intangible Must get consideration for non-compete clause.
o Out of the old and into the new he gave up old stock options b/c he retired early anyways (these were given for past services rendered). But he got new stock options in exchange for promise not to compete.
o So the old and new services were severed must argue that the quid pro quo has been severed.
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Just b/c you have a non-compete clause, does not mean the stock, etc. will not be taxable must severe ties with the past employment (like Colitti).
o Promise not to compete must be given for new payment (not for prior services)!
J) Termination Pay
Matter of McSpadden (1994):
Had an actual employment K for a period of years contractual right to work in the future, but he negotiates his termination in 1990 (years left on K). Termination agreement: Gets $1.85 million (relinquishment of his right to keep working) o Court decided it was the present value on amount left on employment K.
HOLDING: This was not NY source income b/c the remaining term value (lump sum payment) was relinquishment of future employment and an intangible asset. o o Employer was buying out his employment K for remaining years. Tax Division failed to show the future employment would have occurred in NY.
Public Law 104-95 (or USC 114): As a matter of federal law, no State may tax the retirement income of someone who is domiciled or a resident of that State. Retirement Income is defined as 1) Certain qualified plans under the IRC (i.e. 401K) 2) Non-qualified plan (so long as its paid out as an annuity) substantially equal periodic payments for at least 10 years or the life expectancy of the recipient Public Law 109-264: Amends Pub. Law 104-95(b)(I) to make it applicable to payments to employees and former partners.
20 NYCCR 132.4(d). Pensions or other retirement benefits constituting an annuity NYs own annuity exception that is more detailed and difficult to qualify for. DONT HAVE TO KNOW THIS FOR EXAM!
L) Accrual Rule
Matter of Schibuk (2001):
Residents of NY until September 1988 o Claim accrued in 1986.
Then changed domicile to VT. Why is this important? o Received payments from Partnership during their non-resident period, but saying the income actually accrued in 1986 (when they were residents of NY)
ACCRUAL RULE: Any income received for services rendered for employment in NY are taxable as NY source income (despite when income is paid).
How does the court deem this 1989/1990 payment accrued in 1986?
o There was a buyout agreement in 1986 that had an original lump sum, but then deferred the rest of payment of 5 years.
NY Tax Law 639(a): Forces you to go on accrual method of accounting if you change your status for resident to non-resident.
IRC: Accrual
method right to receive income had become (1) fixed and (2) determinable.
ELEMENTS OF ACCRUAL:
(1) Look for change of residency (2) Look for payments that span non-residency period that relate back to residency period.
o Look for installment sale!
HYPO: Year 1 = resident (gets $1 million up front); Year 2-5 = non-resident (receives remaining $4 million on installment sale. Should TP pay tax? There is NO way this person doesnt pay NY taxes as a resident on all $5 million b/c the 3 elements above are met. HYPO: If you reverse it and get the first $1million as a non-resident. Then TP is not taxed by NY b/c attributable to non-residency period
So if property is in NY, even if you accrue the payments while not NY resident, then still taxable by NY.
Contingencies prevent accrual until the K becomes finalized! Employment Ks are not considered fixed and determinable /c you dont know how long you will live and work.
M) Constitutional Considerations
1) Privileges & Immunities Clause
Only the Article 4 Priv. & Immunities Clause has been triggered in tax (not 14 )
th
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this clause ensures that citizens of one state are treated the same in other states (in terms of jobs, tax, etc.)
Tries to say: you can tax the land but not the crop, the tree but not the fruit.
o Court disagrees: If it can tax the land within OK, then should be able to tax the business being done in OK.
MAIN POINTS: o 1) Priv. & Immunities Clause does not ensure immunity from taxation in another state (there just has to be some legitimate basis for the tax) no inherent exemption if you are doing business within the state o 2) There is not a more onerous tax burden.
Residents are actually paying more tax.
See formalistic argument on p. 4-6 (dissenting judge) o At the end of the day the non-residents are being taxed on their property and business in that state and residents arent o BUT this wont fly now at the end of the day, just taxing income.
TEST: Court is setting forth a reasonable ground basis that NY must meet for law to be justified. o NY says that NJ and Conn. could pass income tax laws and afford the same exemption for their residents but NY is basically legislating for the other states and saying if they all had discriminatory tax schemes, it would make NYs less discriminatory.
Would be better if they said it was to entice ppl to move to NY.
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HOLDING: NYs law is discriminating against non-residents. o You cant excuse it b/c the other state could retaliate against you to fix it.
TEST: substantial equality of treatment for the citizens of the taxing state and nonresident taxpayers This scheme is unconstitutional b/c the tax falls exclusively on the income of nonresidents; and it is not offset even approximately by other taxes imposed upon residents alone (p.4-13).
o Close to a blatant violation of P&I Clause. Only justification is to divert to NH tax revenues that would otherwise be paid to Maine (not a justification in the Courts view)
NY gets rid of non-resident deduction in 1987 Tax Reform Act (same act that created as if
tax)
o as if x
o So, if he gets the alimony deduction, his federal AGI will be lower than his NY source income so he will pay more NY income tax.
o However, this would cause nonresident to pay significantly more tax than similarly situated residents. o There is a problem with this as if b/c they dont put a cap on the maximum tax (so that NY isnt too great) In Travis and Shaffer court says States may effectively limit nonresidents deduction of personal expenses based on the fact that those expenses are related to residence in another state. o State is trying to argue Shaffer but there NY had a legit. policy reason (to encourage residents to get life insurance)
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HERE, they dont have any reason they dont think that alimony is only attributable to the home state.
1) there is a substantial justification for the difference in treatment? And 2) the discrimination practiced against nonresidents bears a substantial relationship to the States objective.
[This is prob. a bit above intermediate scrutiny but not quite strict)
ANOTHER TEST: What is the practical effect of the law?? Is the practical effect of what the state is doing is to actually tax nonresidents more onerously?
Matter of Baum: Business Allocation Percentage (BAP) calculation to determine the % of business a corporation does in the state.
IRC 338(h)(10) election that can create a stock sale as if it were an asset sale.
o o If this had been a STOCK sale, non-residents would not be taxed. But since this election has been made, the non-residents must pay tax b/c assets located in NY.
NY argued: You made the election and wanted it to be treated as an asset sale so it must now be taxed as an asset sale.
In a liquidation, each s/h gets distributions is deemed to give up their stock in exchange for a
share in the sale proceeds. o FEDERAL INCOME TAX on the deemed asset sale, s/h recognized gain from asset sale. But b/c of the liquidation, there was a capital loss b/c had very high basis and sale price = low. o NEW YORK VT corp. does not get the capital loss (pay 2x as much tax) b/c the s/h are giving up stock in exchange for proceeds STOCK is an intangible asset and thus, cant get benefit of NY capital loss.
2) Commerce Clause
Kentucky v. Davis (2008):
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Intangible assets of a trust are deemed to be located in the domicile of the trustee.
ISSUE: Can NY tax the trust income that has been accumulated (not distributed)? o NY tries to do that by claiming it was a resident trust b/c grantor was NY resident.
Although the court finds this is a resident trust by letting NY tax the trusts accumulated income (which is in MD) would violate Due Process b/c NY would be going beyond its taxing powers.
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If the LLC makes $100 in the year o o Laura makes $1 and pays tax on that Trust makes $99 and pays no NY tax b/c it qualifies for the exemption Its only asset is intangible (the LLC) and it is deemed located in Delaware of where the nonresident truqstee is. Trustee in NJ And any income earned through LLC not in NY.
Laura managed to set up the trust and LLC so that she avoids 99% of the tax!
o This was a tax evasion scheme! TRUSTS ARE TAXED THE SAME WAY AS INDIVIDUALS!!!
Petition of JP Morgan Chase: (ADVISORY OP)
Involved the Rockefeller trust hadnt paid NY tax Removed Trustee (to avoid NY tax) and appoint successor trustee who is a bank incorporated under DE laws. o Were going to argue there were no NY trustees but the ppl that own the bank were an advisory panel (all former NY trustees on this panel) o Thought it was a mechanism where they could have all the same ppl in charge but not have to pay NY tax. Advisory Opinion says:
o 1) For Corporations, domicile is not necessarily its state of incorporation. Look where principal place of business is.
A) Introduction
1. Sale/Retail Sale Transaction Tax
Sales Tax a tax on any purchase of tangible property
o o Applies unless specifically exempted. In NY, all retail sales on tangible property is taxable unless exempted.
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2. Measure of Tax
Pay 8.75% of the sale price What about trade-ins?
o If you buy a car worth $10K but trade-in car worth $3K? You only pay tax on remaining $7,000 (amount of purchase price reduced after
trade-in) Theory that once the dealer sells your trade-in car, there will be tax on that $3,000.
If you buy something for egregiously below FMV, then NY can come in and re-determine tax by saying good was actually sold at FMV
3. Destination Tax
Pay the tax based on the rate in place where the service is consumed or product delivered.
5. Exemptions/Exclusions
Idea of the sales tax is that we dont want to tax at every level 1) Resale As Such Exclusion
o Dont want to tax items for resale
2) Manufacturing Exemption
o Dont want to tax inputs all the costs of production You dont pay tax if the thing youre buying becomes a physical component part of something that you then resell.
4) Item Specific
o o i.e. you cant tax newspaper periodicals or Bibles (as per Constitution) some states dont tax their state flower.
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TEST: When
a transaction involves the transfer of tangible personal property along with the
performance of a service, the true objective of the purchaser must be considered to determine whether such transaction is a sale of tangible personal property or the performance of service with the transfer of personal property merely incidental to performance of service.
o If merely incidental to service do not pay tax. Here, law firm is not a retailer of copies so no sales tax imposed.
TEST: Whether the buyer intended to buy an individuals skills or tangible end product of those skills.
o The movie is the real object sought by the buyer (not the services of making the movie).
The motion picture is licensed out for showing to public. Payment is based on how likely it is for ppl to watch the movie.
Often incorporates inventory and is defined as an exempt retail sale. o Other common exemptions are: purchase of machinery used in manufacturing purchase of items that will become ingredients or component parts of manufactured/produced products.
resale wither as such or as converted into or as a component part of a product produced for sale by the purchaser.
In order to be eligible for this exemption, have to be buying the product exclusively for resale!
If an item is purchased and will be resold without changing form or without becoming part of another object.
Conn. sales tax does not extend to sale of intangible assets. o If what the sells and what the members purchase is the RIGHT to free
meals and knowledge of restaurants that provide them club membership fees are not subject to sales tax. o Looked at true object of the transaction. See Barnes & Nobles v. TN Tax Dept B&N sells card entitling customers to discount on books. No tax b/c no obligation to purchase books in future (merely an intangible right to get discount in future)
p. 7-37 = pre-paid calling cards taxed at point of sale or as telecom. service or both. Warranties are a type of insurance, which is not taxed under sales tax.
Contractor engaged in constructing pre-fabricated homes is engaged in IMPROVING (not selling) real property and thus taxed (but only on materials used in construction).
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4. Manufacturing-Related Exemptions
So long as that machine is used predominantly and directly in the manufacturing of goods for sale, then its exempt from tax.
o If you tax at every level, then they will be passed down to consumer.
o Clearly an essential component that entered into the chemical process of making
steel.
o It did not become a part of the end product but remained after the
manufacture.
OAMCO v. Lindley
Asphalt manufacturing plant careful combination of cement done by computer. TEST: When does the actual manufacturing process being & end?
o Found that the equipment used to preserve required product state + holding bins &
front-loading vehicles are tax exempt b/c directly involved in transforming product into finished product. o Truck scales are taxable however.
Transfers all McDonalds assets (from his sole proprietorship) to S Corp for 10 shares.
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o o
Has accomplished getting all McDonalds into corp. Instead of transferring to his other S corps he should just have started a NEW S Corp and transferred those assets Non-taxable contribution of capital under 351 (re-organization) Also could have done a contribution of capital to the existing S corps and not taken any shares!
What is the sales tax for tax consequences of this??? o o Arguing in form its a taxable sale but in substance he didnt get anything. Remember sales tax is always form over substance. Must pay $65K on sale of shares.
Transfer of assets from sole proprietorship to a corp. in exchange for stock, where both entities are wholly owned by the same TP is a sale subject to sales tax (Sunny
Vending Co. v. State Tax Commn)
when a single invoice charge includes taxable and nontaxable components, the entire charge is subject to tax.
Applying the cheeseboard rule, the ALJ held that
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Cheeseboard Rule If you have a transaction in which you are buying taxable and non-taxable items
bundled as one, you pay tax on EVERYTHING! o You dont pay sales tax on cheese but will pay tax on pre-made cheeseboard. But if you make your own cheeseboard, then whole thing tax-free.
EXCEPTION (regulation)If the following 3 are met, then you CANNOT charge tax on the nontaxable item
o 1) Separately stated amount? o 2) Separate amount has to be reasonable? o 3) Can you purchase items separately?
Finch, Pruyn & Co. v. Tully (1979):
Made really nice paper and didnt want to pay tax on the chemicals they used in the making of paper. o Necessary part of paper manufacturing process.
Argument that the vast majority of the chemical is consumed in manufacturing the paper (and only trace amounts remain in the paper) o If 100% had been consumed then not for resale
Court says there is nothing in the statute that says a certain amount must be left in the final product just that it must be a component part (no quantity element)
Contrast American Stores Packing v. Peters (Pomp, 7-49) Transfer of some part of glycerin used in manufacturing was incidental and not enough to be component part of product.
The fast food industry wouldnt survive if you had to give ppl real glassware and plates disposable containers are a critical element of the
item being resold.
The Division would argue that the fast food restaurants pay tax on other things (such as electricity, property taxes) so why not the containers?
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Celestial Foods
Stirrers and utensils are not closely connected enough to be a critical element
Only when, as in Burger King, such items are necessary to contain the product for delivery
can they be considered a critical element of the product sold, and excluded from sales tax.
Matter of Dunkin Donuts Mid-Atlantic Distriubtion (1994):
Cant sell the fries/soda without the container but can sell the donuts without the wax paper. o So Dunkin Donuts had to pay tax on the wax paper since it was used to pick up each donut and line the box not essentially the same function as in Burger King. o This is like the Celestial Foods case.
RULE: As a general matter in sale tax, if what you are doing is consuming something in order to provide something else for sale, what you consume is not for resale (i.e. electricity) Exceptions: o actually reselling electricity o component part o critical element.
SPECTRUM: Consumption Finch Pruyn Burger King (container cases) Component Part/Resale as such
you often see sale of an item with a service (i.e. law firm photocopies)
o Difference between what the NY tax is and what you paid in the other state. (Form ST-120 (do within 90 days of buying)
i.e. if you buy a DVD in Mass. (6.5%) and NY tax is 8.75% then you would pay 2.25% use tax.
REQUIREMENTS: o 1) No NY sales tax was paid or could be paid o 2) Must have use in NY of the taxable service or TPP Any act of control or possession in state, including storage for any amount of time. o 3) Must be a NY resident maintain a permanent place of abode. o 4) You have to be the purchaser donees are not subject to use tax!
Want to go after to be personally responsible for use tax Pierce Corp. Veil requires showing of:
o 2) such domination was used to commit a fraud or wrong against that resulted
in s injury.
EXEMPTION If a foreign corp. was not carrying on any employment, trade, business or profession in NY then it qualifies for use tax exception
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Bought gifts back from Europe declared on customs form and paid duty NYS audited customs form and decided he owed a use tax even though he sent the items out of state as gifts o If he had mailed the stuff to his grandkids from Europe instead of NY then he would not have to pay use tax.
Petition of WTAS:
Art collector living in Free Trade Zone (Geneva, Switzerland) no sales tax can be imposed in this area. o X buys artwork from auction house in NY but it is delivered to him in FTZ
ISSUES:
o 1) Does he have to pay sales tax on artwork bought in NY
NO b/c delivery of artwork and transfer of title occurred outside NY However, if the purchaser bears risk of loss then NYS will challenge that delivery occurs outside NY
o 2) Do the kids have to pay sales or use tax on the artwork they inherited from the estate?
NO sales tax b/c did not purchase artwork from estate NO use tax b/c did not buy the artwork (not required to give any consideration for artwork) B/c they are not purchasers (they are donees) they are not liable for use tax.
526.8(c)(2). o 4) Does ex-wife have to pay use tax on furniture she brings from France to NY?
NO she was not a resident of NY at the time she purchased the items, so she does not have to pay tax on it when she brings it into NY years later.
HYPO: Guy buys earrings for his wife and wants them delivered to her in NYC. He arranges for FedEx to deliver it.
He has to pay tax b/c he did not use US Postal Service = common carrier FedEx was an agent of the TP.
2. Nexus
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Minimum connections that an out-of-state vendor/company must have on the taxing jurisdiction before they can impose sales tax obligations. o NY cant require an out-of-state vendor to file a return or register if they do not have a nexus with NY.
If your only connection is soliciting sales and delivering orders through common carriers insufficient amount of presence for nexus.
In todays day and age with the expansion of the market and globalization, everyone is on fair notice that you can get taxed
no longer a due process issue)
(so
Only a commerce clause restraint this gives Congress broad power b/c states cant interfere in federal commerce even if federal govt hasnt acted or else it can be invalidated (dormant
commerce clause)
Orvis (1995):
o In order not to impose tax without violating Commerce Clause, the TPs activities in NY had to be more than a slightest presence Does not need to be substantial physical presence.
BRIGHT LINE RULE For nexus must have a physical presence It must be more than a slight presence.
THINGS THAT GIVE YOU NEXUS & MAKE YOU SUBJECT TO TAX IN MOST STATES Independent Contractors esp if they are soliciting sales o o In NY it doesnt matter whether theyre soliciting sales. i.e. doing warranty repair services.
Employees
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o o o o
Who generally are soliciting sales Real -- Office or manufacturing Inventory Staturory exception: fulfillment house just holds inventory.
Property
ISSUE: Would the brick & mortar retail store in NY give the Catalog LP nexus so that they have to pay sales tax in NY??? o NO they are not alter
respect the corporate form. Keep a separate inventory, separate accounting & legal staff. Advertising and solicitation were not so co-mingled Are the officers & directors the same?
In order to pierce the corporate veil, must show: o 1) the owners exercised complete domination of the corp. in respect to the transaction attacked; o 2) such domination was used to commit fraud or wrong against which resulted in s injury
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EXCEPTION: Transfers made to satisfy a secured lien (20 NYCRR 537.1) o Only when the transfer is made directly to the bank (holder of security) or assignee to satisfy the debt.
Credit cards are unsecured vs. mortgage is secured
Here the exception did not apply b/c the property was transferred by (not bank) to buyer
o Bank did not solicit, direct or in any way control the sale of the assets to .
Matter of EON J&P Corp. (2004):
[didnt go over in class]
Attorneys here were confusing RETAIL sale with BULK sale. o NYS says there has been a transfer of business assets outside of regular course of business doesnt matter that there was no sales tax due on liquidation.
20 NYCRR 537.1(a)(2): The fact that a sale is or is not a retail sale does not determine whether such sale is a bulk sale 40
also tries to argue there was no consideration o doesnt matter there is no consideration.
Where a person is both a limited partner and an officer/director/shareholder of a corp. GP that person must prove that any relevant actions were performed solely in the capacity of director/etc. of general partner. Limited partner like here (who was actively involved) is responsible. There is NO distinction in statute between GP and LP.
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Whether an individual is under a duty to act for a corporation with regard to its tax collection responsibilities so that the individual would have personal liability for the taxes not collected or paid depends on the facts.
FACTORS INDICIA OF RESPONSIBILITY: o Individuals status as officer, director or s/h o Authorization to write checks on behalf of corp o [finish these]
This was a shareholder and did have check-signing authority but his role was that of a minority investor and supervising employee o He had no control over the business. o o He could not do anything without the majority shareholders approval Did not have sufficient authority.
Usually you gives NYS a waiver when they havent completed their audit and the client has not been cooperating.
Dont give NYS an audit if they have an estimated assessment but they have wasted time starting audit
NYS often mess it up and assess the tax to the corp. but not the RP and by the time they figure out who RP is, the SOL has run
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State has generally 3 years from the date return is filed to assess additional tax. SOL is tolled until return is filed. If there is fraud in sale tax no SOL at all for assessment of tax If there is a substantial understatement in income taxes no SOL.
If you are in a position of authority and you turn a blind eye you will still be liable BUT if the wrongdoings of 3rd parties impede you from carrying out your duties then you are off the hook. THIS DOES NOT APPLY TO LLC and PARTNERSHIPS B/C PER SE LIABILITY
A) Historical Background
Franchise Tax based on companies net income Income Tax direct tax on income of the business.
Under COMMERCE CLAUSE state couldnt tax the privilege of doing business (formalistic approach) But you could directly impose tax on the income of the business b/c it wasnt a tax on the privilege of doing business. This has now been done away with and Franchise = Income Tax.
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B) Conceptual Overview
Methods for Dividing, Sharing, or Assigning the Tax Base of a Corporation Engaged in Cross-Border Transactions
PURPOSE OF CORPORATE TAX: Trying to figure out how much interstate companies much pay to each state.
o Need to make a determination between their business income vs. non-business income (i.e. investments) o Apportion that income based on separate accounting or formulary
Transfer pricing Pretend that each phase is a separate entity (figure out how much that
entity would charge to manufacture)
Seeks to isolate the activity and attribute the activity to the isolated state o However it doesnt take into account 1) interdependencies 2) integration 3) synergies. o Things happen in one part and other parts feed off this action i.e. Manufacturing occurs in State A but research in State B (call back and forth to make widget) All this is transferred into the price of State A so State B gets no benefit.
EVERYONE USED TO USE THIS METHOD But is unfair to some states b/c it doesnt reflect all the profit of some states So most states require formulary unless it would result in some injustice
o (3) Sales/Receipt [Looking at amount of each of these factors within the state vs. worldwide]
But not every state uses the formula and not all states use the same formula. o o Often they double up sales formula NY single factor formula (sales only) Only makes you pay taxes to the extent you have sales. Dont want to penalize by merely having a job in NY or owning property in NY encourage new business and new jobs.
a) THE FORMULA
TIA = TIWW x 1 3
SalesA + SalesWW
PayrollA + PayrollWW
SalesA SalesWW
Figures out the income allocated to the state by taking the worldwide sales and multiplying them by fractions of the factors above. o Once you figure
P.L. 86-272 o Federal law o Only applies to income taxes o Prevents states from taxing the income of a corporation whose only business activities
within the state are
1) Solicitation solicitation of orders 2) TPP for personal tangible property 3) Out-of-state fulfillment orders must go out of state to be approved and goods are delivered from
outside state
EXAMPLE: State A has property and payroll. State B is only the site of sales solicitation. State A tax 2/3 (payroll and property)
o So pay 66.67% of taxes on the $100 million income.
State B NO tax b/c P.L. 86-272 applies and prevents tax on mere solicitation of sales
o So 33.3% of the tax has disappeared (like disappearing wealth phenomena) States do a lot of things to prevent this from happening!!! 45
State A may not allow you to apportion your income among states (unless you will be subject to tax in State B and P.L. 86-272 wont prevent them from taxing your sales)
Throw-back Rule Make you throw-back all your income to the originating state o Version #1:You must throw back your sales, unless
1) You are subject to tax in the other state, and 2) The other state must have jurisdiction to tax you (P.L. 86-272 doesnt apply), regardless of whether they choose to exercise this juris. o
Throw-Out Rule Make you throw out sales in the non-taxing state
o Take the sales out of denominator and numerator o so ends up being 1/1 fraction
NOT ON EXAM!
Unitary-Business Principle looks at all elements of the business that make up the unitary
business. o i.e. if Corp. has subsidiary X in State A and sub. Y in State B they are both part of the pie b/c X and Y are both integral parts of Cs business. [see diagram on p.10-27] o If we didnt have this rule, then State A would tax only X and State B would tax only Y
If any portion of that pie has nexus with NY, then NY can tax ALL of it. The income a state apportions must be attributable to the activities of a unitary business, part of which is conducted in the taxing state.
WE DO NOT NEED TO KNOW THAT FACTORS INDICIA OF UNITARY BUSINESS o o He will just tell us its a unitary business. He will also tell us whether something is business (results from the operation or sales of business) vs. non-business income (stock investments)
OVERRIDING FACTORS
1) Does the corp. have NEXUS with the state? o
State needs nexus to tax the corp.
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o o
NY is moving towards saying that an economic presence will be enough to give you nexus to tax.
company whose "only business activities" in that state consisted of "solicitation of orders" for interstate sales.
o Term "solicitation" in the statute included not just explicit verbal requests for orders, but also any speech or conduct that implicitly invited an order. The court concluded that the replacement of stale gum, the supplying of gum through "agency stock checks," and the storage of gum were not o
ancillary.
Because the activities served an independent business function quite separate from requesting orders, it did not qualify for 381 immunity.
Since the company's business activities within Wisconsin were not limited to those specified in 381, the prohibition on net-income taxation contained in the provision was inapplicable.
Mobile's arguments:
Lack of nexus 47
As a matter of law, the very source of the income means it can't be deemed to have any presence in a state that has nexus over the unitary business. The dividends are at best deemed to be located in NYC where they're managed or they're derived entirely by foreign sources because they're owned by subsidiaries from foreign countries. The court rejects this argument. The contention is rejected as long as the intra state and extra state activities contribute to the unitary business. If it's part of the unitary business and it is business income, as long as any of the states have nexus over the pie, they can apportion the investment income and tax it on an apportionment basis. You can't remove it from the unitary business pie unless the source of the assets are solely outside the state. You have to prove that it was a wholly discreet business. You can't just look at the form of the investment.
Business: includes income from intangible property when acquisition, management or disposition of the property constitutes integral or necessary parts of the taxpayer's trade or business operations.
Test is based on whether the intangible property relates to or contributes to the business. The problem with this test is that it's too broad. Almost everything relates or contributes to the business. "this limitation becomes no limitation at all"
2 possibilities: 1) Entity holding the assets was not part of the unitary business or 2) It is part of the pie but it's not business income
Holding: o The links were not sufficient to justify unitary business treatment.
Even though the mineral company was challenging the tax potentially had power to control its subsidiary there was NO evidence it actually had done so. THUS INSUFFICIENT NEXUS 48
Want to look at the function of the intangible business assetis it collateral? Do capital gains benefit the business? All indications must point that the holding of the investment is not purely for investment purposes and is part of the unitary business.
IMPORTANT CONCEPTS:
1) Income from intangible property is not necessarily non business income
Some states will say income from intangibles is deemed to be at the situs of the holder and not part of the business. For the most part, it can be business income if it's not derived from a discrete business enterprise.
For corporate tax purposes, physical presence will certainly get presence but it's not clear that it's required.
Geoffrey:
Parent Corporation was Toys R Us and Geoffrey was second tier subsidiary. Toys R Us dropped into the 2nd tier all of the intangible holdings of Toys R Us (mostly trademarks & Trade name- Geoffrey the Giraffe & Toys R Us name). The structure was for Geoffrey (DE company) to license use of the trade name back to Toys R Us with Toys R Us paying royalties to Geoffrey. Toys R Us has retail stores all over the country including SC. The royalties aren't taxed in DE and Toys R Us is taking a business deduction. SC wants to tax the royalties in SC The auditor initially tried to disallow the deduction and just put the money back to the parent company. SC said by virtue of toys r us doing business in SC and having physical presence in the state, Geoffrey has nexus. Geoffrey's attorneys said this can't be so. Geoffrey doesn't have offices, property, employees, or any type of physical presence in SC. It was only holding intangibles in DE. First argument, under Quill you need physical presence to have corporate income tax.
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SC said the nexus requirement can be satisfied if the corporation is purposely directing its activities of the forum. 2 prongs for nexus: 1.) Due process 2.) Commerce Clause Under due process, physical presence is not required but it is for commerce clause.
Holding: SC has conferred benefits upon Geoffrey to which the taxes rationally related. (Commerce Clause) The corporation has directed its activities to the forum (due process)
"Economic Nexus": This case says no physical presence is required, all Geoffrey had to do was avail itself to the benefits conferred by SC (which it did through the parent corporation).
With regard to unitary business, does the state have some nexus over the unitary business? i.e.: Parent company with subsidiaries in NY, Tx & PA. There's a unitary business. NY wants to apportion the income and tax the entirety. In order for NY to do so, it has to have some nexus with the business. o If something gives physical presence, there's nexus over the entire thing.
Suppose NY has no nexus (under the fulfillment exception). Under NY law, NY has no nexus with any portion of the unitary business. There's something going on in NY that has to do with the unitary business but it doesn't give rise to nexus.
Complete Auto Transit TEST DORMANT COMMERCE CLAUSE State taxation of interstate commerce is not prohibited by commerce clause if o 1) The tax is applied to an activity with substantial nexus to taxing state o 2) The tax is fairly apportioned o 3) The tax does not discriminate against interstate commerce, and o 4) The is fairly related to the services provided by the State.
E) NYS Cases
Matter of Premier National Bankcorp (2007):
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Primary differences between Article 32 and 9-A apportionment of taxes 9-A = uses apportionment formula we have been talking about. If you are primarily a manufacturer you pay very little taxes to NY under this article. Transportation Tax = based on miles driven in NY Bank = non-favourable to banks so they pay much higher apportionment of their income to NY than general business corps.
Before 1985 or 1986 (when the law changed) o o There used to be no prohibition on Article 32 banks owning Article 9-A subsidiaries BUT at some point the legis. realized that this was a way for banks to avoid taxes.
Got away with buying Article 9-A corp. b/c they had excess liquidity so they had a nontax reason for buying the corp. o By putting their investment in a 9-A corp. it would get more tax advantages and this was seen as a business purpose.
They moved intangible assets into 9-A subsidiary o o If these assets had been in the bank, then most of them would have been taxable. By being in 9-A subsidiary gives them a more favorable investment allocation % so almost 95% of the income was not taxable.
(p.537) Forced o
combination
NY can force related companies to file ONE return. So here all the assets would be owned by the bank instead of subsidiary and would be taxed.
transaction doctrine.
What they did had the effect of a forced combination (which would have been illegal???) but said they could do that b/c it was a sham.
Usually need (1) business purpose AND other than obtaining tax benefits (2) economic advantage b/c no reasonable possibility of profit exists.
o o
[Judge finds it passes these two tests] HERE THERE WAS A VALID BUSINESS PURPOSE Valid to seek to reduce taxes (so federal courts dont agree with that) Allows them to manage their assets with more flexibility.
Why was Disney saying that Video did not have to include any of its $90 million in NY receipts??? o Trying to say they were merely soliciting business in NY and thus, under P.L. 86-272 precluded NY from taxing this. Orders have to be fulfilled and shipped outside of NY (this is what Disney was doing b/c no offices in NY) o IF THERE IS A UNITARY BUSINESS THEN EXCEPTION DOES NOT APPLY!
Apportionment formula was not a tax on video but a representation of Disneys overall income. Since the unitary group as a whole are doing more than mere solicitation, then P.L. 86-272 does not apply. Video was part of synergies of Disney and could not be separated. HAVE TO LOOK AT WHETHER UNITARY GROUP AS A WHOLE SATISFIES PL 86-272!
If you have substantial inter-corporate transactions (i.e. loans) then could possible be required to file a combined report o TEST FOR COMBINED REPORTING: 1) Common ownership (80% voting stock) 2) Unitary Business. 3) Distortion if separate reporting allowed
o TP can combat this by showing it was arms length transaction and they were paid a reasonable amount of money for the transaction b/c it was necessary as part of the business. Can overcome presumption of distortion by showing arms length SHOW THIS BY TRANSFER PRICING what is FMV for a transaction in certain region and evaluate if this transaction was really FMV or sham.
All of the income would be on one return, then NY must determine what is the business allocation fraction and allocate to NY
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