New York Law Review

Tag: Unincorporated Business Income Tax

  • Matter of Extrom Associates v. Commissioner of Finance, 82 N.Y.2d 553 (1993): Deductibility of Partnership Payments

    Matter of Extrom Associates v. Commissioner of Finance, 82 N.Y.2d 553 (1993)

    Payments made in liquidation of a partnership interest, representing the outgoing partner’s share in the amortization of player contracts, are deductible from the partnership’s unincorporated business gross income and are not considered payments “for services or for use of capital” under section 11-507 of the Administrative Code of the City of New York.

    Summary

    The New York Court of Appeals addressed whether payments made to retiring partners of the New York Yankees, representing their share of amortized player contracts, could be deducted from the partnership’s gross income for Unincorporated Business Income Tax (UBIT) purposes. The Commissioner of Finance argued that these payments were essentially for services or capital use, thus not deductible under the city’s tax code. The court disagreed, holding that the payments were not truly for services or capital, despite their treatment under federal tax law, and thus were deductible for UBIT purposes.

    Facts

    Extrom Associates, an Ohio limited partnership operating the New York Yankees, made payments to five retiring partners in 1978, 1979, and 1981, liquidating their partnership interests. These payments included the retiring partners’ share in player contracts that had been amortized by the partnership. For federal income tax, the partnership treated these payments as the retiring partners’ distributive share of partnership income and unrealized receivables, claiming a deduction for these guaranteed payments under Internal Revenue Code (IRC) sections 736(a)(2) and 707(c). The partnership sought the same deduction for New York City Unincorporated Business Income Tax (UBIT).

    Procedural History

    The City’s Department of Finance disallowed the deductions, assessing a deficiency. Extrom Associates filed a deficiency petition. The Commissioner of Finance denied the petition, but the Supreme Court annulled the determination, holding that the payments were not for services or capital use. The Appellate Division affirmed. The Court of Appeals granted leave to appeal.

    Issue(s)

    Whether payments made in liquidation of partnership interests, representing the outgoing partners’ share in the amortization of player contracts, are payments “for services or for use of capital” within the meaning of section 11-507 of the Administrative Code of the City of New York and, thus, not deductible from the partnership’s unincorporated business gross income.

    Holding

    No, because nothing in the statutory provisions restricts the payments to payments for services or the use of capital for City unincorporated business tax purposes. The Federal provisions are intended only to implement the “recapture rule” and prevent taxpayers from benefiting from differences in the tax rates between ordinary income and capital gains when the actual depreciation of an asset is less than the amount amortized.

    Court’s Reasoning

    The court emphasized that the plain language of section 11-507(3) of the Administrative Code disallows deductions only for amounts paid “for services or for use of capital.” The payments in question, representing unrealized receivables from amortized player contracts, did not fall under this prohibition. The court rejected the Commissioner’s argument that federal tax law characterization of these payments as “guaranteed payments” under IRC section 707(c) automatically made them non-deductible for UBIT purposes.

    The court reasoned that section 707(c) of the IRC doesn’t define guaranteed payments as payments for services or the use of capital. Instead, it provides a specific tax treatment for such payments under federal law, primarily to prevent tax avoidance related to depreciation. The court stated, “That Internal Revenue Code § 707 (c) gives guaranteed payments the same tax treatment as payments for services or the use of capital does not mean that the guaranteed payments attributable to amortized player contracts at issue here are in fact payments for services or the use of capital within the meaning of the Unincorporated Business Income Tax provisions of the Administrative Code.” The court emphasized that simply because payments receive a certain characterization under federal tax law for federal income tax purposes does not automatically dictate their characterization under the City’s UBIT provisions.

  • Shapiro v. City of New York, 39 N.Y.2d 1072 (1976): Upholding the Constitutionality of New York City’s Unincorporated Business Income Tax

    Shapiro v. City of New York, 39 N.Y.2d 1072 (1976)

    In taxation, legislatures have broad latitude in creating classifications, and a tax statute will be upheld unless the difference in treatment is an invidious discrimination, with the burden on the challenger to demonstrate the absence of any conceivable state of facts which would support the classification.

    Summary

    This case concerns the constitutionality of New York City’s Unincorporated Business Income Tax (UBIT). The Court of Appeals affirmed the lower court’s decision, holding that the UBIT does not violate equal protection or due process principles, nor is it barred by Section 1231 of the Tax Law. The court emphasized the broad discretion legislatures have in taxation matters and that the challenger failed to demonstrate that the tax classification was invidious or unsupported by any conceivable facts. The court also clarified that the UBIT, based on net income, is distinct from taxes based on gross income or receipts.

    Facts

    The case involves a challenge to the New York City Unincorporated Business Income Tax (UBIT). The specific facts regarding the challenger’s business or income are not detailed in the opinion, but the challenge centers on the law’s general application and constitutionality. The challenger argued that the UBIT violated equal protection and due process principles and was barred by Section 1231 of the Tax Law.

    Procedural History

    The case originated in a lower court in New York. The specific court is not mentioned in the opinion extract. The lower court upheld the constitutionality of the tax. This decision was appealed to the Appellate Division, which also affirmed the lower court’s ruling. The case then reached the New York Court of Appeals, which affirmed the Appellate Division’s judgment.

    Issue(s)

    1. Whether the New York City Unincorporated Business Income Tax Law violates equal protection principles?

    2. Whether the imposition of the UBIT constitutes a violation of due process?

    3. Whether Section 1231 of the Tax Law barred the enactment of the UBIT?

    Holding

    1. No, because legislatures possess broad freedom in taxation classification, and the challenger failed to demonstrate the absence of any conceivable state of facts that would support the classification.

    2. No, because the Legislature empowered the city to create the tax, and therefore its imposition does not constitute an unconstitutional taking of property.

    3. No, because Section 1231 of the Tax Law deals only with taxes based on gross income or gross receipts, whereas the UBIT is based on net income.

    Court’s Reasoning

    The Court of Appeals based its decision on well-established principles of tax law and constitutional law. Regarding equal protection, the court cited Madden v. Kentucky, stating that “in taxation, even more than in other fields, legislatures possess the greatest freedom in classification.” The court emphasized that the burden is on the party challenging the statute to demonstrate that there is no “conceivable state of facts which would support” the classification (citing Carmichael v. Southern Coal Co.). The court found that the challenger failed to meet this heavy burden, as the UBIT classification was not shown to be an “invidious discrimination” (citing Lehnhausen v. Lake Shore Auto Parts Co.).

    Concerning due process, the court noted that the Legislature had specifically authorized the city to impose the tax, citing Section 2 of chapter 772 of the Laws of 1966 and Matter of United States Steel Corp. v. Gerosa. This legislative authorization negated the argument that the tax constituted an unconstitutional taking of property.

    Finally, the court dismissed the argument that Section 1231 of the Tax Law barred the UBIT, explaining that Section 1231 applies only to taxes based on gross income or gross receipts, whereas the UBIT is based on net income. This distinction was crucial in the court’s reasoning.

    The court did not explicitly address dissenting or concurring opinions, implying a unanimous agreement on the decision.