In a case involving the sourcing of lump sum payments for the performance of services, the New York City Tax Appeals Tribunal took the unusual step of rejecting not only the respective sourcing methods being urged by the taxpayer and the Department of Finance, but also the methodology adopted by an Administrative Law Judge, and determined on its own a receipts factor based on a methodology that was not advanced by either party. Matter of Gerson Lehrman Group, Inc., TAT(E) 08-79 (GC) (N.Y.C. Tax App. Trib., Dec. 28, 2017, released Jan. 24, 2018). The decision serves as an important reminder of the scope of the City Tribunal's authority.
Facts. Gerson Lehrman Group, Inc. ("GLG"), has its headquarters and major sales office in New York City and also has offices worldwide. It enters into subscription agreements with clients, largely in the financial services industry, in which GLG provides access to a network of independent contractor expert consultants (termed "Council Members") in a variety of fields. In the vast majority of cases, clients access Council Members through telephone conference calls, in which clients typically pose questions developed with the assistance of GLG's Research Manager employees. The subscription agreements provide, however, that GLG is "not responsible for the content of consultations and Projects arranged by [GLG]." Clients pay GLG a fixed upfront fee, which varies based on the scope of the topics and industries sought by each client.
GLG employs Research Managers to identify appropriate Council Members for clients and to assist clients in formulating questions for the Council Members. GLG also employs Consulting Managers to locate the industry experts and recruit them as Council Members. It also employs salespeople to solicit client sales and renewals, and to manage the overall client relationship. It is the services of these salespeople, the vast majority of whom worked in New York City, that were the main source of dispute in the case.
GCT Filings and Audit. The case spanned an eight-year period (2003 through 2010) during which, for New York City general corporation tax ("GCT") purposes, GLG changed the way it sourced its client fees. In its originally filed GCT returns for the 2003 and 2004 tax years, GLG sourced its receipts based solely on the office locations of its salespeople. This resulted in receipts factors of 96% (in 2003) and 77% (in 2004). Later, GLG filed amended GCT returns for those years using a different sourcing method, this time based primarily on the locations of the Council Members, and to a lesser extent on the locations of its Research Managers, Consulting Managers and IT personnel, but not including its salespeople at all. This reduced its receipts factor to approximately 40% in each year, and resulted in refund claims. For the years 2005 through 2010, GLG filed its original returns using the methodology employed in its amended returns for 2003 and 2004.
The City Tribunal concluded that GLG's services resulted from the combined efforts of its employees (including its salespeople), as well as the third-party Council Members [and]. . . concluded that [the salespeople's] activities must also be reflected in the receipts factor.
Following an audit, the Department issued a Notice of Disallowance of refund claim and issued Notices of Determination using GLG's original sourcing methodology based on the location of GLG's salespeople. GLG had presented the auditor with alternative sourcing methods, but in its appeal to the City Tribunal, it advanced only one method: sourcing the receipts based solely on the location of the Council Members and its Research Managers and not taking into account the location of its salespeople.
The case proceeded to hearing before an ALJ. The Department maintained that the service being provided by GLG was to find, engage and manage the Council Members and not to provide the information that the Council Members furnished to clients. Therefore, the Department asserted that GLG's receipts should be allocated based on the activities of its employees, primarily its salespeople, who worked out of GLG's New York City sales office. In contrast, the taxpayer argued that the receipts should be sourced based on the activities of the Council Members and Research Managers, and not by the sales solicitation activities of the salespeople. Critical to the outcome was determining the nature of the service that GLG was providing to its clients.
ALJ Determination. After a hearing, the ALJ concluded that GLG was providing the service of "expert knowledge, analysis and views," which it rendered through the Council Members, with the assistance of GLG's Research Managers. Accordingly, the ALJ held that GLG's receipts should be sourced based on the locations of the Council Members and the Research Managers and not on the location of the salaried salespeople, noting that the GCT regulations only discuss sourcing relating to the activities of commissioned sales agents. The ALJ held that the Notices of Determination should be cancelled but rejected most of GLG's refund claims, based largely on a failure of proof.
Positions on appeal. The GCT rules provide that lump sum payments for services are sourced based on the relative values of, or time spent in the performance of, the services, "or by some other reasonable method." 19 RCNY 11-65(b)(3). The Department filed an exception, maintaining that the services should be sourced primarily based on the locations of the salespeople, pointing out that the subscription agreements provided that GLG was not responsible for the advice rendered by the Council Members. The taxpayer filed a cross-exception to appeal the ALJ's disallowance of its refund claims.
Holding. The City Tribunal modified the ALJ determination. First, it rejected the Department's characterization of GLG's services as being in the nature of an intermediary that merely matched clients with the appropriate Council Members. But it also rejected GLG's position that only the activities of the Council Members and Research Managers, and not those of the salespeople, should be taken into account, noting that GLG is not strictly a consulting firm, but provides a service consisting of research, professional services, and a network of experts. In that regard, the Tribunal also disagreed with the ALJ's conclusion that GLG was simply furnishing clients with information provided by the Council Members with the assistance of the Research Managers, stating that "GLG's clients do not pay for specific information but for an opportunity to speak to Petitioner's proprietary network" of experts.
The City Tribunal concluded that GLG's services resulted from the combined efforts of its employees (including its salespeople), as well as the third-party Council Members. Since the salespeople "play an integral role in generating [GLG's] service receipts," the Tribunal concluded that their activities must also be reflected in the receipts factor.
Citing City Charter 168(a), the City Tribunal concluded that it had the same authority as the Department to determine "a reasonable method" of allocating the subject receipts. It then stated that it found the methodologies advanced by the Department, the taxpayer and the ALJ all to be incorrect and proceeded to set out its own "reasonable method" for allocating a "lump sum . . . payment for services" under GCT Rule 11-65(b)(3). The Tribunal calculated a receipts factor for each year, based on the limited evidence in the record, taking into account the activities of the Council Members, Research Managers, and, critically, the salespeople. This resulted in a receipts factor ranging from 23% to 54% over the eight-year period. The Tribunal then remanded the case to the ALJ Division for the sole purpose of recalculating the resulting GCT liability using the Tribunal's recalculated receipts factors.
The City Tribunal held that, due to the nature of the services being provided, and the fact that the taxpayer was not strictly furnishing a consulting-type service, the "integral" role of the salespeople in generating the receipts must be reflected in the apportionment factor. However, a more far-reaching aspect of the decision is that the Tribunal considers the City Charter as giving it the same power and authority as the Department to determine the proper tax, and that the Tribunal is not limited to selecting among the legal positions advanced by the parties; indeed, here the Tribunal carved its own path different from that of the parties and the ALJ.
Also significant is that, after determining what it considered a "reasonable method" of allocating the receipts, and despite the ALJ having found insufficient evidence to support the taxpayers refund claims, the City Tribunal proceeded to find evidence in the record, some of it indirect, on which it computed a receipts factor for each year. While understandable, such an approach could put additional burdens on the parties, most often on the taxpayer that bears the burden of proof, to anticipate what factual evidence needs to be adduced to address legal positions that may not have been presented by the parties themselves or determined by the ALJ.