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Distortion Reigns in New York Article 32 Forced Combination Case

The New York Tax Appeals Tribunal (TAT) affirmed a decision forcing the combination of a banking corporation and its “nontaxpayer” subsidiary. The combination was upheld based upon the existence of an interest deduction—taken by the banking corporatio

June 16, 2011

The New York Tax Appeals Tribunal (TAT) affirmed a decision forcing the combination of a banking corporation and its “nontaxpayer” subsidiary. The combination was upheld based upon the existence of an interest deduction—taken by the banking corporation and attributable to assets held by its subsidiary—that created distortion of income. Interaudi Bank F/K/A Bank Audi (USA), DTA No. 821659 (Apr. 14,  2011).

Interaudi Bank (Interaudi), a commercial banking corporation organized and chartered in New York, formed and transferred its investment portfolio to an investment holding subsidiary, BA (USA) Investments Inc., (BA Investments) domiciled in Delaware. BA Investments limited its activities to the management and maintenance of marketable securities. During the 1997-1999 period, Interaudi filed a New York Article 32 (Bank Tax) combined return that included all of its subsidiaries, except BA Investments—which did not file a New York tax return. Interaudi then claimed interest expense deductions paid to BA Investments.

The New York Department of Taxation and Finance issued a Notice of Deficiency to Interaudi based upon a finding that the transfer of the investment portfolio to BA Investments was a distortive arrangement (a necessary prerequisite to filing a combined report). An administrative law judge (ALJ) upheld the Division’s forced combination, ruling that Interaudi distorted its income by claiming an interest expense deduction attributable to assets held by BA Investments. The ALJ reached this conclusion even after noting that the intercorporate transactions between Interaudi and BA Investments did not rise to a level that created a presumption of distortion. 

The TAT affirmed the ALJ determination because the Division demonstrated that the arrangement between Interaudi and BA Investments improperly or inaccurately reflected Interaudi’s income. Although this case was a loss for the taxpayer, it may prove helpful to other taxpayers desiring combination even if they lack the requisite level of intercorporate transactions to satisfy the distortion presumption. The decision provides an example of combination in an instance where the distortion presumption is not met, but transactions between related members still rise to the level where New York considers the activity, business, income, or assets of the taxpayer to result in the improper or inaccurate reflection of income. 

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