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TaxRAPP 2009

TaxRAPP 2009. Discretionary Authority: What is “Fair and Equitable”?. Moderator: Dara Jaffee Assistant Commissioner, Legal Affairs Division, NYC Finance Panelists: Mark Klein Partner State and Local Taxes, Hodgson Russ, LLP Michael Newmark Director, Tax Advocacy & Resolution, Legal

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TaxRAPP 2009

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  1. TaxRAPP 2009 Discretionary Authority:What is “Fair and Equitable”? Moderator: Dara JaffeeAssistant Commissioner, Legal Affairs Division, NYC Finance Panelists: Mark KleinPartner State and Local Taxes, Hodgson Russ, LLP Michael NewmarkDirector, Tax Advocacy & Resolution, Legal Affairs Division, NYC Finance

  2. DISCRETIONARY AUTHORITYWHAT IS “FAIR AND EQUITABLE” ? • Bill and Barney’s Eyewear (BBE) is a Connecticut S corporation established in 1970. Over the years, business grew as demand for high-quality designer eyewear increased. • By 2005, the Company had sales of $10 million and the owners thought it might be time to open a new location. • In 2006, the business opened a store on Park Avenue in Manhattan. • Because of the NYC real estate market, the annual rent in Manhattan was about five times the cost of the rent at the “flagship” store in CT. • Even though the stores were identical in size, payroll and sales, the NYC location had a business allocation percentage to New York City in excess of 70%.

  3. DISCRETIONARY AUTHORITYWHAT IS “FAIR AND EQUITABLE” ? • Is BBE eligible for a discretionary adjustment to account for the NYC rent disparity?

  4. DISCRETIONARY AUTHORITY WHAT IS “FAIR AND EQUITABLE” ? • At the end of 2006, BBE sold the flagship store in CT at a gain of $10 million. • Is NYC entitled to over 70% of this gain?

  5. DISCRETIONARY AUTHORITY WHAT IS “FAIR AND EQUITABLE” ? • At the end of 2006, BBE sold the right to their designer eyewear to Megamart for $10 million. • Is NYC entitled to over 70% of this gain?

  6. DISCRETIONARY AUTHORITY WHAT IS “FAIR AND EQUITABLE” ? • What if BBE closed the NYC location after five years (on 12/31/10) and, two weeks later, sold their brand to Megamart? • Can NYC claim that it is entitled to tax some of the gain?

  7. DISCRETIONARY AUTHORITY WHAT IS “FAIR AND EQUITABLE” ? • BBE rents a shop in NYC from a “distressed” entity that requires a significant up-front payment, but then has substantially below-market rent over the life of the lease. • As a result, the allocation to NYC in the second year of the lease is only 30% even though the other factors (wages and receipts) are the same in NYC & CT. • In years three through five, no rent is paid. Is this subject to a discretionary adjustment?

  8. DISCRETIONARY AUTHORITY WHAT IS “FAIR AND EQUITABLE” ? • BBE leases its store and other “hard assets” in CT from a related partnership. • The rent is fair market value, but the value of the assets computed at eight times the annual rent is substantially higher than the actual fair market value of the assets if they were owned directly by BBE. • As a result, BBE would only allocate 30% of its income to NYC even though its other factors (wages and receipts) are the same in NYC & CT. • Is this subject to a discretionary adjustment?

  9. DISCRETIONARY AUTHORITY WHAT IS “FAIR AND EQUITABLE” ? • BBE’s CT corporate offices house ten full-time officeemployees, but the sales people are considered independent contractors. • As a result, the NYC store has only one employee, even though the store has more sales people than the CT location. • Can NYC challenge this?

  10. DISCRETIONARY AUTHORITY WHAT IS “FAIR AND EQUITABLE” ? • What about the opposite situation? Does a discretionary adjustment exist here? Due to certain union concerns, the NY sales force must be treated as employees while their identical counterparts in CT are independent contractors.

  11. DISCRETIONARY AUTHORITY WHAT IS “FAIR AND EQUITABLE” ? • How will things evolve as we move to a single-factor formula?

  12. DISCRETIONARY AUTHORITY WHAT IS “FAIR AND EQUITABLE” ? • Bill and Barney each own 50% of the corporation, so all compensation paid to them must be added back under the alternative tax base. • Is a discretionary adjustment appropriate where:

  13. DISCRETIONARY AUTHORITY WHAT IS “FAIR AND EQUITABLE” ? • Bill and Barney took salaries and BBE paid a significant amount of compensation to Bill and Barney’s spouses for their work at the store?

  14. DISCRETIONARY AUTHORITY WHAT IS “FAIR AND EQUITABLE” ? • Bill and Barney transferred their interests in BBE to their spouses, and BBE paid Bill and Barney substantial salaries?

  15. DISCRETIONARY AUTHORITY WHAT IS “FAIR AND EQUITABLE” ? • Bill and Barney took salaries and BBE paid a significant amount of compensation to their children?

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