The New York State Tax Appeals Tribunal has just provided timely guidance respecting the unitary business rule in New York State. In SunGard Capital Corp. and Subsidiaries (DTA Nos. 823631, 823632, 823680, 824167, and 824256, May 19, 2015), the Tribunal found that a group of related corporations were conducting a unitary business and that they should be allowed to file combined returns, reversing an administrative law judge determination.
The unitary business rules have assumed increased importance in New York this year because of recently-enacted corporate tax reform legislation. Effective January 1, 2015, the only requirements for combination in New York State and City are that the corporations must be linked by 50 percent stock ownership and must be engaged in a unitary business. It is no longer necessary for the party seeking combination (whether the taxpayer or the Department of Taxation and Finance) to show that separate filing would distort the corporations’ New York incomes.
In a related but different context, the Department’s unpublished position with respect to when an acquiring corporation and a recently purchased subsidiary can begin filing combined returns (the so-called “instant unity” issue) generally is that combined returns can be filed from the date of acquisition only if the corporations were engaged in a unitary business before they became linked by common ownership. In a recent set of questions and answers about the new law, the Department indicated that instant unitary decisions would be done on a facts-and-circumstances basis, but we understand from conversations with the Department that the existence of a unitary business between the corporations before the acquisition will be of great importance.
The SunGard case involved prior law under which distortion was an issue, but the interesting aspects of the case involve the question of whether the corporations were engaged in a unitary business, as the taxpayers contended. The corporations’ primary business involved providing information technology sales and services information, software solutions and software licensing. The administrative law judge had concluded that there were similarities among the different business segments but that the different segments operated autonomously. Although the parent provided general oversight and strategic guidance to the subsidiaries, the judge concluded that centralized management, one of the traditional criteria for a unitary business, was not present because the parent’s involvement was not operational. The centralization of certain management functions such as human resources and accounting did not involve operational income-producing activities. The judge held that holding companies, inactive companies, and companies with little or no income or expenses could not be viewed as unitary with the active companies. The judge noted that there were few cross-selling or intercompany transactions. Although programs had been developed to encourage cross-selling, they were not initiated until after the taxable years at issue.
The Tribunal reversed the administrative law judge’s decision and engaged in a detailed discussion of the elements of a unitary business that will provide useful guidance to both taxpayers and tax administrators in the future.
Although there were differences among the different segments of [...]