On April 12, 2022, the Appellate Division, First Department dismissed a taxpayer’s appeal from the New York City Tax Appeals Tribunal, and held that the Tribunal’s decision to uphold a tax assessment on an out-of-state entity’s gain from the sale of a partnership interest was “rational.”[1]
The taxpayer was an investment vehicle that formed a master fund to invest in alternative investment management companies. Importantly, the taxpayer did not have property or payroll in the City, and it did not otherwise conduct business in the City. In 2008, the taxpayer’s master fund purchased an interest in an entity – Claren Road Asset Management, LLC – that conducted all of it business activities in New York City. In 2010, the taxpayer’s master fund sold Claren generating a capital gain of $54 million. New York City assessed tax on the entire gain on the sale of Claren.
Litigation ensued and the parties stipulated that the taxpayer and Claren did not engage in a unitary business. In 2018, a New York City administrative law judge upheld the tax, applying investee apportionment (i.e., the gain was apportionable using Claren’s 100% apportionment factor). In 2021, the New York City Tax Appeals Tribunal affirmed the ALJ decision, concluding that the capital gain was indeed subject to New York City’s General Corporation Tax.
Applying a rational basis test to the Tribunal’s decision, the Appellate Division, First Department explained, “[t]he Tribunal rationally determined that petitioner failed to demonstrate that the City impermissibly sought to impose the GCT upon income attributable to activities carried on outside its borders.” Relying on a 1991 Court of Appeals decision, Matter of Allied-Signal Inc. v Commissioner of Fin., 79 N.Y.2d 73 (1991), the Appellate Division observed that “[t]he nexus between the City and petitioner’s capital gain is Claren’s activities in the City, which generated petitioner’s investment income (on which petitioner paid taxes to the City).”
Although the taxpayer argued that the capital gain was earned outside of the City because its activities related to Claren were performed (entirely) in London, it was still “rational for the Tribunal to conclude that the capital gain was attributable to the value of Claren on the date it was sold.” (emphasis added). The decision ends with a quote from the Supreme Court’s 1940 opinion in Wisconsin v. J.C. Penney Co., 311 U.S 435 (1940): “The fact that a tax is contingent upon events brought to pass without a state does not destroy the nexus between such a tax and transactions within a state for which the tax is an exaction.”
The decision does not otherwise provide an analysis of the myriad constitutional issues potentially arising from cross-border sales of partnership interests.
[1] In the Matter of Goldman Sachs Petershill Fund Offshore Holdings (Delaware) Corp. v. New York City Tax Appeals Tribunal, 2022 N.Y Slip Op 02361 (N.Y. App. Div. 2022).