Beginning in 2015, corporate tax reform has resulted in full unitary combination in New York State and City, which is intended to limit controversies over combination. However, for tax years beginning before 2015, there continues to be considerable controversy as to what taxpayers must show in order to achieve combination in the absence of substantial intercorporate transactions. A recent decision by the Tax Appeals Tribunal may turn out to be important precedent regarding combination, particularly for the ongoing unitary business standard for combination after corporate tax reform. Matter of SunGard Capital Corp. and Subsidiaries, et al., DTA Nos. 823631, et al. (N.Y.S. Tax App. Trib., May 19, 2015). In SunGard, the Tribunal, reversing an ALJ decision that rejected combination sought by the taxpayer, held that the taxpayer could file on a combined basis with certain affiliates based on a showing of a unitary business relationship and proof of actual distortion. The decision is also noteworthy inasmuch as, while unitary business determinations are particularly fact intensive, the taxpayer prevailed based on a stipulated evidentiary record, without witness testimony.

Facts. The SunGard group of corporations (“SunGard Group”) is engaged in providing information technology sales and services. It principally provides data processing and software services to the financial services industry, public sector entities, and colleges and universities, as well as other services for customers in various sectors of the economy.

During the first of the two tax years at issue (August 13, 2005 through December 31, 2005), SunGard Data Systems, Inc. (“SDS”) was the parent corporation for the SunGard Group. SunGard Capital Corp. (“SCC”) was the parent for the second tax year (calendar year 2006). SDS incurred more than $65 million of costs each year to provide various centralized corporate-level functions and services for all entities within the group. This included operation of a centralized cash management system, debt management, preparation of SEC and other public filings, and a host of other services. With certain limited exceptions, none of the costs for these services were charged out to the affiliated entities in the group.

In August 2005, the SunGard Group was acquired in a leveraged buyout (“LBO”) by a consortium of private equity funds. SDS financed the LBO through credit agreements and receivables securitizations. This resulted in, among other things, the consolidation of purchasing, marketing and human resources and other services in SDS. SDS paid a quarterly management fee to the LBO investors, which was not charged out to its affiliates.

Several entities within the SunGard Group having nexus with New York State originally filed their Article 9-A returns on a separate company basis. Subsequently, amended Article 9-A returns were filed on a combined basis, claiming refunds in excess of $2.5 million. The Department denied the refunds, and SunGard filed a petition challenging the refund denial.

ALJ Decision. The ALJ sustained the Department’s refusal to permit combination, finding that SunGard was not engaged in a unitary business despite the fact that the group members were all engaged in the business of technology sales and services. The ALJ concluded that SunGard did not adequately quantify the costs of the various intercompany services and, in particular, did not prove that the parent had the necessary operational expertise in the subsidiaries’ businesses. The ALJ also held that SunGard failed to meet the distortion requirement, in part finding that the unreimbursed expenses were not shown to be substantial or distortive. SunGard filed an appeal with the Tax Appeals Tribunal.

Tribunal Decision. Based on a de novo review of the stipulated record, the Tribunal reversed the ALJ decision, holding that SunGard was entitled to file combined Article 9-A returns because the entities (with certain exceptions) were engaged in a unitary business, and because SunGard proved that it met the distortion requirements for combination despite the lack of substantial intercorporate transactions.

The Tribunal decision goes into considerable detail in identifying the evidence of a unitary business, consistent with the unitary business factors set out in the Article 9-A regulations. 20 NYCRR § 6-2.3(e). Despite the absence of testimony, the Tribunal identified various facts supporting a unitary business determination, including that the entities were engaged in similar and related lines of business, and because, even if they were different lines of business, they were “complementary businesses,” both internally (by providing products and services to affiliates) and externally (by permitting cross-selling opportunities). The Tribunal noted that in Matter of Heidelberg Eastern, Inc., DTA Nos. 806890 & 807829 (N.Y.S. Tax App. Trib., May 5, 1994), it had concluded that complementary businesses were part of a unitary group.

The Tribunal also found evidence of “centralized management,” in part through the parent’s cash management system, with the interest-free component also resulting in a “flow of value” between the entities, yet further indicia of a unitary business. The Tribunal noted that SDS was responsible for all budgetary matters, management of the group’s debt and various central office functions, purchasing services, marketing services and technology services, all factors found to support a unitary business determination in both Heidelberg and IT USA, Inc., DTA Nos. 823780 & 823781 (N.Y.S. Tax App. Trib. Apr. 16, 2014). Centralized management was also evidenced by the overlap of corporate officers among the entities who performed their functions as part of a single business enterprise.

With regard to “flows of value,” the Tribunal noted that various non-arm’s-length transactions—specifically, services provided without charge—were “an obvious flow of value,” as were the centralized purchasing services which resulted in reduced costs. Moreover, most of the group’s affiliates guaranteed the LBO debt incurred, which was further evidence of a unitary relationship. One important exception was the Tribunal’s conclusion that certain holding companies in the SunGard Group were not unitary because there was no showing of their function or role within the group and no flows of value.

In evaluating the “distortion” criteria for combination, the Tribunal again cited Heidelberg for the proposition that the same factors indicative of a unitary business may also give rise to distortion. It noted that, under Matter of Silver King Broadcasting of N.J., DTA No. 812589 (N.Y.S. Tax App. Trib., May 9, 1996), it is necessary for the party seeking combination to “identify with particularity” the distortion allegedly present. The Tribunal concluded that SunGard had sufficiently identified the instances of distortion “which, taken together, give rise to a level of distortion sufficient to permit combined filing.” Among the distortive activities cited was the performance of services without any charge, which the Tribunal noted constituted greater distortion than it found to exist in both IT USA and Matter of Mohasco Corp., DTA Nos. 808901 & 808956 (N.Y.S Tax App. Trib., Nov. 10, 1994). The reduced costs resulting from the consolidation of certain functions were also found to be distortive because those savings would otherwise not have been realized without the centralized functions. Further evidence of distortion was the operation of a cash management system on an interest-free basis.

Additional Insights

The SunGard decision reflects a comprehensive unitary business analysis by the Tribunal. Many of the Tribunal combination decisions over the years have principally focused only on the distortion factor. For tax years beginning prior to 2015, the SunGard decision makes clear that while the unitary business and distortion combination factors are separate tests, certain elements of a unitary relationship may also be indicative of distortion, particularly with respect to the unitary “flows of value” concept. This may benefit parties seeking combination, whether the party is a taxpayer or the Department.

While the most immediate impact of SunGard will likely be for taxpayers seeking combination for years beginning prior to 2015, before corporate tax reform took effect, its most significant impact may be going forward, where the principal test for combination under corporate tax reform is whether the affiliated entities are engaged in a unitary business.