It's the New Year, and before we begin afresh, we look back at this past year with our list of the Top 10 New York tax highlights of 2016.

1. The New York State Tax Department continues to release draft regulations to implement corporate tax reform. This past year, the Department continued to make available for public comment comprehensive drafts of new regulations relating to the Article 9A corporate tax reform enactment. It released draft combined reporting regulations (in January 2016), followed by discretionary adjustment regulations (in March 2016) and regulations addressing various aspects of the new customerbased sourcing provisions (in September 2016). In light of the need to have final guidance in place, it is expected that the Department will begin the formal promulgation process for all of its draft corporate tax reform regulations in the upcoming year.

2. NYC Tribunal and NYS ALJ reach divergent conclusions on applicability of real property transfer taxes. Two divergent decisions were reached on the taxability of the same real estate transaction involving whether New York State and City transfer taxes were due on a transaction structured as a sale of a 45% membership in a newly formed limited liability company that owned real property in Manhattan. In one decision, the New York City Tax Appeals Tribunal held that the federal "step transaction" doctrine could be applied to tax the transaction as a direct sale of real property, rather than a sale of an economic interest in an entity that owns the property. Matter of GKK 2 Herald LLC, TAT(E) 1325(RP) (N.Y.C. Tax App. Trib., July 15, 2016). However, a New York State Administrative Law Judge held that the transaction was not taxable, concluding that New York State could not aggregate an acquisition of a 55% economic interest in a nontaxable "mere change in form" transaction with an acquisition of a 45% minority interest in that same entity resulting from a true sale on that interest. Matter of GKK 2 Herald LLC, DTA No. 826402 (N.Y.S. Div of Tax App., May 26, 2016). Both decisions are being appealed.

3. NYC Tribunal rejects forced combination of bank and its mortgage subsidiary. The New York City Tax Appeals Tribunal held that a bank was not required to file combined New York City bank tax returns with its Connecticutbased subsidiary that principally held nonNew York mortgage loans. Matter of Astoria Financial Corp. & Affiliates, TAT(E) 10 35 (BT), et al. (N.Y.C. Tax App. Trib., May 19, 2016). The City Tribunal found that the mortgage subsidiary had sufficient business purpose and economic substance, and that the substantial intercompany transactions between the subsidiary and the bank were made in exchange for arm's-length charges. Particularly significant was the City Tribunal's conclusion that the New York State Tax Appeals Tribunal decision in Matter of Interaudi Bank, DTA No. 821659 (N.Y.S. Tax App. Trib., Apr. 14, 2011), which found actual distortion based on a "mismatch of income and related expense" between a bank and its Delaware investment subsidiary, was not binding precedent and was factually distinguishable because in Astoria Financial there was no correlation shown between the mortgage loans and the bank's interest expenses. The Department of Finance had retained (and called to testify at the hearing) the same expert witness who had testified for New York State in Interaudi Bank. The City Tribunal decision is final.

4. NYS ALJ holds that corporation's payments to its captive insurance company are not deductible. The taxation of captive insurance companies and their corporate affiliates has long been a problematic issue for New York State and City corporate tax purposes, but until now there have been no litigated cases. However, this past year a decision of first impression was issued in Matter of Stewart's Shops Corp., DTA No. 825745 (N.Y.S. Div. of Tax App., Mar. 10, 2016). There, a New York State Administrative Law Judge held that a corporation that had operated a convenience store chain could not deduct the insurance payments made to its wholly owned captive insurance company because the payments did not qualify as valid insurance premiums under federal income tax law. In April 2016, Stewart's Shops filed an exception with the Tax Appeals Tribunal, and a decision is pending.

5. NYS Tribunal denies sales tax refunds to wireless carrier where amounts were not yet refunded to customers. The substantial hurdles facing vendors seeking sales tax refund claims were evidenced in New Cingular Wireless PCS LLC, DTA No. 825318 (N.Y.S. Tax App. Trib., Feb. 16, 2016). There, the State Tribunal upheld the denial to a wireless carrier of more than $100 million in claimed sales tax refunds, finding that the carrier had not complied with the stringent Tax Law requirement that a vendor first refund the sales tax to those customers that remitted the sales tax. The fact that the carrier had agreed to fund a prerefund escrow account, under court supervision, to receive and disburse sales taxes refunded by New York State (and other states) was held not to satisfy the statutory precondition for granting sales tax refunds. The Tribunal also affirmed the denial of the company's motion to reopen the record to show that it later did fund the escrow account, because the information constituted new evidence not in existence at the time of the administrative hearing. The taxpayer has filed an appeal with the New York courts.

6. NYC Tribunal holds that HMOs are not insurance corporations and therefore can be combined for corporate tax purposes. On a tax issue of first impression regarding health maintenance organizations ("HMOs"), the City Tribunal, reversing an ALJ determination, held that HMOs are not "insurance corporations" for general corporation tax purposes, because they are not "doing an insurance business." Matter of Aetna, Inc., TAT(E)123(GC) and TAT(E) 124(GC) (N.Y.C. Tax App. Trib., June 3, 2016). The City Tribunal thus held that the HMOs were properly includable in a combined GCT return with their parent holding company. Since 1974, insurance corporations have not been subject to the GCT, but the question of whether HMOs qualify as insurance corporations for New York City tax purposes had not previously been the subject of a court or City Tribunal decision. The decision is on appeal to the New York courts.

7. Appellate court upholds denial of UBT deduction for management fee paid to corporate partner of investment advisor partnership. In a memorandum decision regarding the unincorporated business tax disallowance for a partnership's payments to partners for services, the Appellate Division, First Department, affirmed a City Tribunal decision that an investment advisor partnership subject to the UBT was required to add back a management fee it had paid to its corporate general partner for the services of the partner's employees, who were also limited partners of the partnership. Tocqueville Asset Mgmt. L.P. v. N.Y.C. Tax App. Trib., et al., 2016 N.Y. App. Div. LEXIS 5183 (1st Dep't, July 5, 2016). The decision confirms that the New York courts (and the City Tribunal) will likely uphold the denial of a deduction for amounts paid to an actual partner for the services performed by employees of the partner, who are also partners in the taxpayer entity.

8. NYS Tribunal narrowly construes "personal and individual" exclusion for information subject to sales tax. The imposition of sales tax on the furnishing of retail supermarket pricing information was held to be subject to sales tax in two related State Tribunal decisions. Matter of Wegmans Food Markets, Inc., DTA No. 825347 (N.Y.S. Tax App. Trib., Mar. 10, 2016); Matter of RetailData, LLC, DTA No. 825334 (N.Y.S. Tax App. Trib., Mar. 3, 2016). The Tribunal narrowly interpreted the sales tax exclusion for information that is "personal and individual in nature," holding that so long as the information source is "widely accessible" -- here, the pricing information was obtained by auditing the prices of goods on the shelves of competitor supermarkets -- it did not matter that the information was not obtained from an electronic or otherwise published database, or that no two reports furnished to clients would be identical. An appeal has been taken to the New York courts.

9. Property owner not required to file annual protests to challenge 10-year property tax exemption. In an uneventful year for tax decisions emanating from New York State's highest court, the New York Court of Appeals held that a real property owner that filed a petition with the City of Schenectady challenging the assessed value of the property on the 2008 assessment roll -- the relevant year for determining the availability of a partial 10year business investment property tax exemption -- was not required to have filed separate petitions challenging the annual property tax assessments in subsequent years. Matter of Highbridge Broadway, LLC v. Assessor of the City of Schenectady, et al., 2016 N.Y. Slip Op. 03544 (N.Y., May 5, 2016). The Court observed that "it would be a waste of resources" to require the filing of annual challenges where the exemption amount for all 10 years depends on the property's assessment for the 2008 base year.

10.Qui tam actions continue unabated, creating significant uncertainty for New York businesses. The past year saw a continuation of lawsuits against businesses in which socalled "whistleblower" qui tam State and City tax actions are brought by private individuals (including former employees of the businesses being sued). In May 2016, the United States Supreme Court refused to hear an appeal of the New York Court of Appeals October 2015 decision rejecting Sprint Nextel's motion to dismiss a more than $100 million qui tam action brought by New York State Attorney General Schneiderman for alleged tax underreporting. People of the State of New York et al. v. Sprint Nextel Corp., et al., No. 127, 2015 NY Slip Op. 07574 (N.Y., Oct. 20, 2015), cert. denied, 136 S. Ct. 2387 (2016).

While that case proceeds on its path, yet another False Claims action brought by a former employee against Moody's -- which the Attorney General declined to join, but which is being handled by a private law firm whose website promotes its expertise in making False Claims Act tax claims against businesses -- was recently unsealed and survived a motion to dismiss. State of New York ex rel. Banerjee, et ano v. Moody's Corporation, et al., Index # 103997/2012 (Sup. Ct. N.Y. Cnty. Dec. 8, 2016). Although Moody's had entered into several closing agreements with the New York State and City Tax Departments involving the same issue raised in the False Claims Act complaint, concerning the treatment of a captive insurance company for State and City income tax purposes, the court found those agreements did not bar the False Claims Act case, except for one affiliate for one year. Meanwhile, a False Claims action brought against Citigroup Inc. by an Indiana college professor challenging Citigroup's use for New York State purposes of net operating loss deductions that were expressly permitted for federal purposes also proceeds unabated, with a Federal District Court judge recently refusing to dismiss the action and instead remanding the case back to the New York State court where the action commenced. State of New York ex rel. Eric Rasmusen v. Citigroup, Inc., 15cv07826(LAK) (S.D.N.Y., Dec. 2, 2016).

It can be expected that such qui tam lawsuits -- which also call into question whether resolving cases with the State and City Tax Departments adequately protects a business against a False Claims action for the same tax -- will accelerate, unless the illadvised New York qui tam tax legislation enacted in 2010 is repealed or significantly scaled back.