As we look forward to an exciting new year, here is our annual list of what we viewed as the Top 10 New York Tax Highlights of 2017.

1. Appellate Division finds error in denial of sales tax refunds to wireless carrier, and holds that the record should have been reopened to allow proof that sales tax was deposited in escrow account. The Appellate Division held that the Tribunal abused its discretion in not reopening the evidentiary record to admit evidence that a wireless carrier funded a pre-refund escrow account established to facilitate repayment to customers of improperly collected sales tax. New Cingular Wireless PCS, LLC v. Tax Appeals Trib., 153 A.D.3d 476 (3d Dep't, Aug. 3, 2017). The Tribunal had upheld the denial of more than $100 million in claimed sales tax refunds because the carrier had not established that it first refunded the sales tax to customers, as required under the sales tax law. The Third Department remitted the case back to the Tribunal in light of the evidence that an escrow account had been funded, and clearly indicated that in its view the denial of refunds would result in a "windfall" to New York State.

2. Appellate Division holds that pricing information, though publicly available, qualified for the "personal and individual" exclusion under the sales tax. In a second significant Third Department decision, the Appellate Division held that the furnishing of grocery store pricing information qualified for the sales tax exclusion for information services that are "personal and individual in nature." Matter of Wegmans Food Mktg., Inc. v. Tax Appeals Trib., et al., 2017 Slip Op. 08225 (3d Dep't, Nov. 22, 2017). According to the Third Department, while the pricing information was publicly available, it was tailored to the customer's specifications and separately maintained by the service provider solely for the particular client. The decision calls into question the Department's sales tax policy, expressed in a 2010 TSB-M pronouncement, that the "personal and individual" exclusion can never apply if the source of the information being furnished is accessible to the general public, even if not obtained from a common database or substantially incorporated into reports furnished to others.

3. First Department upholds application of federal "step transaction" doctrine to NYC real property transfer tax. The taxation of transfers of economic interests in real property became murkier after a First Department decision allowing the New York City Department of Finance to invoke the federal "step transaction" doctrine in order to impose New York City real property transfer tax on the transfer of a 45% membership interest in an LLC that owned a Manhattan office building. GKK 2 Herald LLC v. City of N.Y. Tax Appeals Trib., 154 A.D.3d 213 (1st Dep't, 2017). The decision may well lead to considerable uncertainty regarding the taxation of transfers of minority economic interests. It may also have sanctioned a significant narrowing of the "mere change in form" exemption, further complicating many real estate transactions in New York City involving entity transfers.

Meanwhile, a case remains pending before the New York State Tribunal on the applicability of the New York State real estate transfer tax to the same transaction. The case involves an appeal by the State Tax Department of a decision of an Administrative Law Judge holding that the transaction was not taxable because under the Department's own regulations the transfer or acquisition of a minority economic interest cannot be aggregated with one constituting a nontaxable "mere change in form." Matter of GKK 2 Herald LLC, DTA No. 826402 (N.Y.S. Div. of Tax App., May 26, 2016).

4. NYS Tribunal holds that the Tax Department impermissibly discriminated against foreign unauthorized insurance companies. Interpreting the scope of a U.S.-Germany tax treaty, the New York State Tribunal reversed two Administrative Law Judge decisions, and held that the Tax Department's use of an alternative apportionment formula for insurance franchise tax purposes impermissibly discriminated against two foreign insurers not authorized to engage in an insurance business in New York. Matter of Bayerische Beamtenkrankenkasse AG, DTA No. 824762 (N.Y.S. Tax App. Trib., Sept. 11, 2017); Matter of Landschaftliche Brandkasse Hannover, DTA No. 825517 (N.Y.S. Tax App. Trib., Sept. 11, 2017). The decisions are noteworthy in that the Tribunal agreed that the Department's application of an alternative non-premiums-based allocation formula was proper, but nonetheless found that its application was impermissible because it contravened the nondiscrimination provision of a federal tax treaty.

5. ALJ holds that executive changed his domicile to Paris and was not a New York resident. In the most interesting residency decision in recent memory and a compelling love story an individual who retired as chief financial officer of a Fortune 500 company in New York City in order to immediately move to Paris to be with his new wife, a French domiciliary with whom he rekindled a relationship after more than 40 years apart, was found by an Administrative Law Judge to no longer be a New York City domiciliary. Matter of Stephen C. Patrick, et al., DTA Nos. 826838 & 826839 (N.Y.S. Div. of Tax App., June 15, 2017). The fact that the taxpayer maintained a penthouse apartment in New York City, and continued to spend a significant amount of time in New York, did not change the result. The Tax Department did not file an exception with the Tribunal, and the decision is now final.

6. NYS Tribunal upholds denial of deductions for insurance payments made to captive insurance company. The New York State Tribunal, affirming a decision of an Administrative Law Judge, held that a corporation could not deduct insurance payments made to its wholly owned captive insurance company under Article 9-A because the payments did not qualify as bona fide insurance premiums for federal income tax purposes. Matter of Stewart's Shops Corp., DTA No. 825745 (N.Y.S. Tax App. Trib., July 27, 2017). The Tribunal held that the federal criteria for what qualifies as "insurance" which requires evidence of risk-shifting and risk-distribution were controlling for New York purposes, and by the taxpayer's own acknowledgment were unmet. In November 2017, Stewart's Shops filed an Article 78 appeal with the Appellate Division, Third Department.

7. Appellate Division confirms NYC Tribunal decision that HMOs are not insurance corporations and thus can be included in a combined return. The Appellate Division, First Department, confirmed a NYC Tribunal decision holding that health maintenance organizations are not "insurance corporations" for general corporation tax purposes because they are not "doing an insurance business," and therefore they can be forcibly included in a combined general corporation tax return with their parent holding company. Matter of Aetna Inc. v. N.Y.C. Tax Appeals Trib., 154 A.D.3d 542 (1st Dep't, 2017). While insurance corporations have not been subject to the GCT for decades, surprisingly the issue of whether an HMO qualified as an insurance corporation had not previously been the subject of a judicial challenge.

8. $2.4 billion qui tam suit against Citigroup dismissed by NY Supreme Court judge. In a welcome and significant taxpayer victory, a New York State Supreme Court judge, ruling from the bench, granted Citigroup's motion to dismiss a $2.4 billion false claims ("qui tam") action brought by an Indiana college professor challenging Citigroup's use for New York State purposes of net operating loss deductions that the Internal Revenue Service had expressly ruled were permitted for federal purposes. State of New York ex rel. Eric Rasmusen v. Citigroup Inc., No. 100175/2013 (Sup. Ct. N.Y. Cnty., May 17, 2017).

9. New York State follows New York City in precluding broker-dealer sourcing for "associated persons" of a registered securities broker-dealer. The New York State Tax Department issued a Tax Guidance that scaled back the availability of broker-dealer sourcing under Article 9-A for tax years beginning prior to 2015, providing that an LLC's status as a registered broker-dealer does not entitle its indirect owner to qualify for broker-dealer sourcing, even though the LLC is a disregarded entity for income tax purposes. Receipts Factor Methodology for the Owners of Single Member Limited Liability Companies that are Registered Broker-Dealers, NYT-G-17(2)C (N.Y.S. Dep't of Taxation & Fin., Aug. 2, 2017). The Guidance, following on the heels of an earlier New York City pronouncement that reached a similar conclusion, rendered unclear at least one prior unpublished pronouncement where the Department invoked its discretionary authority to adjust a business allocation percentage by allowing a taxpayer to use broker-dealer sourcing for its share of receipts from an "associated person" of a registered broker-dealer, in order to avoid an improper reflection of the taxpayer's income.

10. New York State files first appeal of adverse Administrative Law Judge decision involving Tax Department's policy on "other business receipts." Yet a third New York State Administrative Law Judge held that, for tax years prior to 2015, the Tax Department had no authority to characterize a corporation's receipts from services delivered to customers electronically as "other business receipts" and source them based on customer location, rather than where the services were performed. Matter of Catalyst Repository Systems, Inc., DTA No. 826545 (N.Y.S. Div. of Tax App., Aug. 24, 2017). The ALJ rejected the Department's claim that a relevant factor was the lack of "human involvement" at the time of sale, finding the tax law did not predicate classification of services receipts on whether there was "human involvement" at the moment of sale. Unlike in the earlier Expedia and CheckFree ALJ decisions, however, the Tax Department has appealed the Catalyst decision to the Tribunal.

Honorable mention: As we went to press, the signing into law of sweeping federal tax reform legislation (H.R. 1) on December 22, 2017, which dramatically changes the U.S. approach to domestic and international taxation, will undoubtedly lead to many New York tax highlights in the coming year.