In yet another taxpayer victory, the recently reconstituted New York State Tax Appeals Tribunal determined that the New York State Department of Taxation and Finance improperly denied the taxpayers’ amended returns, which were filed on a combined basis for the 2005 and 2006 tax years (i.e., prior to the 2007 and 2014 law changes). At the lower level, the administrative law judge (ALJ) found that the group did not satisfy the combined reporting filing requirements because it failed to prove the existence of a unitary business and failed to prove that filing on a separate return basis resulted in a distortion of the group’s income (a required element for the tax years at issue).
In reversing the ALJ decision, the Tribunal applied the Mobil 3-factor unitary test (functional integration, centralized management and economies of scale) to determine that the entities were engaged in a unitary business. Specifically, the Tribunal found that the entities (1) were functionally integrated by engaging in the same activity of selling software and related services (in the same or related lines of business), despite the differences between the specific products and services; (2) had centralized management through the corporate strategic planning, budgeting and central office functions (accounting, tax, insurance, legal, human resources, purchasing, marketing and technology); and (3) obtained economies of scale through consolidated purchasing (achieving “significant discounts and reduced costs”), consolidated debt service (subsidiary guarantees, factoring receivables and negative borrowing covenants), and cross-selling of products and services.
Further, the Tribunal determined that distortion resulted from separate filings because the parent: (1) provided the centralized management functions to the subsidiaries without reimbursement; (2) provided the centralized cash management system without reimbursement and access to interest free loans; and (3) benefited from reduced borrowing costs because of factoring the receivables. The Tribunal acknowledged that many of the factors that demonstrated a unitary business also gave rise to a distortion of income. In the Matter of the Petitions of SunGard Capital Corp. & Subsidiaries et al., DTA Nos. 823631, 823632, 823680, 824167, 824256 (N.Y. Tax App. Trib. May 19, 2015).