Matter of Weil, Gotshal & Manges v. Commissioner of Finance, 76 N.Y.2d 593 (1990)
When a partner in an unincorporated business is a professional corporation subject to the General Corporation Tax (GCT), the Unincorporated Business Tax (UBT) exemption should be calculated using the method that accurately reflects the income subject to the GCT, avoiding double taxation.
Summary
This case addresses the proper calculation of the UBT exemption for law firms with partners that are professional corporations subject to the GCT. The law firms argued that the exemption should be based on the alternative method of calculating net income, which resulted in a higher GCT liability and a correspondingly larger UBT exemption. The City contended that only the entire income formula should be used. The Court of Appeals held that the exemption should be calculated to avoid double taxation, aligning the UBT exemption with the amount of income actually subject to the GCT using the alternative method.
Facts
Weil, Gotshal & Manges and LeBoeuf, Lamb, Leiby & MacRae are law partnerships in New York City subject to the UBT. Some partners in these firms were professional corporations subject to the GCT. In calculating their UBT liability for the tax years ending in 1984 and 1985, the law firms took an exemption based on the alternative method used in determining GCT liability. This method resulted in a higher net income base and a greater GCT liability. The City argued that the exemption should be calculated using the entire income formula, which would result in a lower UBT exemption.
Procedural History
The City issued deficiencies recomputing the tax based on the entire income formula. The law firms’ petitions for a redetermination of deficiencies were unsuccessful. The firms then commenced Article 78 proceedings to resolve the dispute. Supreme Court held that the City’s interpretation was erroneous, and the Appellate Division affirmed. The Court of Appeals granted the City’s motion for leave to appeal.
Issue(s)
Whether the UBT exemption for a partnership with corporate partners should be calculated based on the alternative method used to determine GCT liability when that method results in a higher tax liability for the incorporated partner.
Holding
Yes, because the purpose of the UBT exemption is to avoid double taxation by aligning the exemption with the amount of income actually subject to the GCT, and using the alternative method ensures that the income taxed at the corporate level is properly excluded from the partnership’s UBT liability.
Court’s Reasoning
The Court of Appeals reasoned that the UBT’s exemption provisions should be construed to avoid double taxation under the UBT and GCT, citing Matter of Richmond Constructors v Tishelman (61 NY2d 1). The court emphasized that the legislative history of the UBT indicates that it was intended to apply only where the GCT does not. It found the New York State Tax Commission decision in Matter of M.L. Weiss & Co. (TSB-H-87-[5]-I) persuasive, which interpreted the same exemption language and concluded that double taxation would frustrate the intent of the statute.
The court stated that “the plain language of the statute and the legislative history which preceded its enactment further support petitioner’s position that the purpose of the statute was to reach only income not taxed under the GCT and was not intended to tax the same business income twice.” The court found that the City’s interpretation requiring the use of the alternative method for GCT liability while using the entire net income method for the UBT exemption resulted in double taxation, which was contrary to the purpose of the statute.
The court noted the City’s shift in position in 1985, when it promulgated the regulation at issue, prior to which the City’s position was consistent with that of the petitioners. Because the regulation conflicted with the legislative intent, the court did not reach the question of deference to the agency’s interpretation.