NYC: General corporation tax imposed on non-unitary corporate partner's sale of an LLC interest

The New York City Tax Appeals Tribunal recently held that City General Corporation Tax (GCT) applied to capital gain from the sale of a minority interest in an LLC. The taxpayer, a corporation that conducted no business activities in the City, owned an 88.91 percent interest in a limited partnership that likewise conducted no business activities in the City. The limited partnership, in turn, owned a 9.99 percent of an interest in an LLC that had business activity in the City for certain tax years.  During those tax years, the taxpayer filed GCT returns reporting its share of the LLC’s income, deductions, gains, and losses. After the 9.99 percent interest in the LLC was sold in 2010, the City asserted on audit that the taxpayer owed GCT on the gain. The taxpayer disagreed with this position and filed a petition for review with the Tribunal.

Before the Tribunal, the taxpayer argued that the gain should not be included in its entire net income computation because it owned a minority interest in the LLC and all parties had stipulated that neither the taxpayer nor the limited partnership was engaged in a unitary business with the LLC. In sum, the taxpayer argued that, absent the existence of a unitary business, taxing the gain violated the Due Process and Commerce Clauses of the U.S. Constitution.  The City, on the other hand, argued that, notwithstanding the lack of a unitary business relationship, the gain possessed a “sufficient nexus” to the City to permit the assertion of GCT. Notably, the LLC enjoyed many protections and benefits conferred on it by the City. After reviewing a line of cases addressing whether a jurisdiction can tax a non-domiciliary entity’s gain on the sale of an interest in an entity that is operating within the jurisdiction, the Tribunal noted that these cases generally held that for such taxation to be proper, nexus must exist between the taxing jurisdiction and the entity in which the interest is sold. Furthermore, in the Tribunal’s view, these cases “clarify that this analysis exists separate from the unitary business test.”  After reviewing these authorities, the Tribunal concluded that the City properly assessed GCT on the gain because the LLC had nexus with the City and enjoyed benefits provided by the City during the time when the taxpayer owned its minority interest in the LLC. The Tribunal noted that it did not need to analyze “other factors,” such as the existence of a unitary business, for taxation to be constitutional. Nexus, the Tribunal noted, is sufficient.  Furthermore, the Tribunal rejected the taxpayer’s argument that the LLC’s nexus should not flow up to it for purposes of taxing the gain. Please contact Russ Levitt at 212-872-6717 with questions on In the Matter of Goldman Sachs Petershill Fund Offshore Holdings Corp.