New York Law Review

Tag: General Corporation Tax

  • Varrington Corp. v. City of New York, 85 N.Y.2d 28 (1995): Retroactive Application of Tax Law Changes

    Varrington Corp. v. City of New York, 85 N.Y.2d 28 (1995)

    A retroactive tax law change is valid unless it is so unfair or reaches so far into the past as to constitute a deprivation of property without due process; a taxpayer’s reliance on a temporary alteration of a long-standing tax policy is not cognizable detrimental reliance.

    Summary

    Varrington Corporation, a Netherlands Antilles company, challenged New York City’s retroactive application of a tax rule. Varrington, a limited partner in a New York partnership, initially paid corporate taxes based on its partnership interest. After a temporary City ruling suggested it wasn’t liable, Varrington received a refund. The City then reversed course, enacting a rule stating that limited partners were subject to the tax, and sought to recoup the refund. The New York Court of Appeals upheld the City’s action, finding the retroactive application permissible because it did not constitute a deprivation of property without due process and because Varrington’s reliance on the temporary changed position was not a cognizable form of detrimental reliance.

    Facts

    Varrington Corporation, a Netherlands Antilles company, held a 97.5% limited partnership interest in Richfield Investment Company, Ltd., a New York limited partnership owning a commercial building in New York City. This investment was Varrington’s sole business activity in New York. For tax years 1984-1986, Varrington paid New York City general corporation taxes. In 1988, based on a new interpretation by the City, Varrington received a refund of these taxes. In 1990, the City reversed its position again, enacting General Corporation Tax Rules § 1-5, which stated that owning a limited partnership interest in a partnership doing business in the City constituted doing business in the City for tax purposes. The City then sought to recover the refund it had previously issued to Varrington.

    Procedural History

    Varrington filed an Article 78 proceeding to annul the Commissioner’s determination. The Appellate Division denied the petition, confirming the Commissioner’s determination. The New York Court of Appeals granted leave to appeal.

    Issue(s)

    Whether the Tax Commissioner’s determination imposing retroactive effect to Rules of the Commissioner of Finance Relating to the New York City General Corporation Tax § 1-5 (a) is justified and supported by substantial evidence, considering Varrington’s claim of detrimental reliance on the prior policy and the change in tax policy.

    Holding

    Yes, because the retroactive application of the tax rule did not constitute a deprivation of property without due process, and Varrington’s reliance on the City’s temporary changed position regarding the taxability of foreign limited partners did not amount to cognizable detrimental reliance.

    Court’s Reasoning

    The court reasoned that retroactive tax legislation is generally valid unless it reaches so far into the past or is so unfair as to violate due process. The court emphasized that tax laws are not governmental promises, and taxpayers have no vested right in a particular tax statute or regulation. The court distinguished Varrington’s situation from cases involving genuine detrimental reliance, stating that Varrington initially paid the tax believing it was legally owed and only later sought a refund based on a change in the City’s interpretation. The court noted that from 1954 until the temporary Finance Letter Ruling 67, it was the City’s consistent position that foreign limited partners were subject to the tax. The court found that Varrington’s payment of the tax in 1984, 1985 and 1986 without protest demonstrated its understanding of the City’s long-standing policy. Citing Welch v. Henry, 305 U.S. 134, 146-147, the court reiterated that taxation is simply a way of apportioning the cost of government and its retroactive imposition does not necessarily infringe due process. The court highlighted that the question of retroactivity turns on a “balancing of equities” to assess potentially harsh effects on the taxpayer (Clarendon Trust v State Tax Commn., 43 NY2d 933, 934-935). Therefore, the court concluded the Finance Letter Ruling 67 was a temporary “blip on the screen” and the City was within its right to reinstate the tax.

  • Matter of Weil, Gotshal & Manges v. Commissioner of Finance, 76 N.Y.2d 593 (1990): UBT Exemption Calculation for Corporate Partners

    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.