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To Be or Not to Be Investment Income? New York Division of Tax Appeals Rules on Nature of Dividend Income Used to Fund Equity Compensation Plan

By Christopher Chang and Jack Trachtenberg

The New York State Division of Tax Appeals (DTA) ruled that the dividend income rece

April 29, 2013

By Christopher Chang and Jack Trachtenberg

The New York State Division of Tax Appeals (DTA) ruled that the dividend income received by a taxpayer holding company from its minority ownership in a publicly traded corporation constituted “investment income” for purposes of New York’s Article 9-A franchise tax on business corporations. The holding company held stock in American International Group, Inc. (AIG), which functioned as an equity compensation plan by using the return on the stock to compensate its shareholders, all of whom were AIG senior executives. The State argued that the AIG dividends were not investment income because the holding company’s intent in acquiring the AIG stock was to benefit the AIG executives, not to “invest in” the stock “for its own account.” Using a common dictionary definition of the term “investment,” the DTA held that the dividends were investment income derived from investment capital because the holding company acquired the AIG stock in exchange for its own capital, held the stock for some 35 years, and during its period of ownership stood to gain or lose on the acquisition based upon the performance of the issuer of the stock. The DTA rejected the State’s attempt to read a “motive” requirement into the statutory and regulatory provisions, stating that “[n]either the motive for making an acquisition of a given type of item otherwise qualifying as investment capital, nor the investor’s subsequent use of the returns gained from that acquired item (i.e., dividends and capital appreciation over time) serve to negate that fact that such acquisition was an investment.” Matter of C.V. Starr & Co., Inc., Division of Tax Appeals, DTA No. 824121 (April 18, 2013).

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