emigrant savings bank - determination/order...
TRANSCRIPT
EMIGRANT SAVINGS BANK - DETERMINATION/ORDER - 06/13/97
In the Matter of EMIGRANT SAVINGS BANK TAT(H) 94-130(BT) - DETERMINATION/ORDER
NEW YORK CITY TAX APPEALS TRIBUNALADMINISTRATIVE LAW JUDGE DIVISION
BANKING CORPORATION TAX - AS THERE W ERE NO MATERIAL TRIABLE ISSUES OF FACT, THEISSUE OF W HETHER A JOINT VENTURE W HICH DEVELOPED REAL PROPERTY IN NEW JERSEYW AS PART OF PETITIONER'S UNITARY BANKING BUSINESS COULD BE DECIDED BY MOTIONFOR SUMMARY DETERMINATION/THE JOINT VENTURE W AS NOT PART OF PETITIONER'SUNITARY BANKING BUSINESS AS THERE W AS NO: (1) UNITY OF OW NERSHIP; (2) UNITY OF USEAND OPERATION; (3) FUNCTIONAL INTEGRATION; (4) CENTRALIZATION OF MANAGEMENT; OR(5) FLOW OF VALUE W HICH COULD NOT BE MEASURED BY SEPARATE ACCOUNTING/THEINCOME FROM THE JOINT VENTURE W AS THEREFORE NOT TAXABLE BY THE CITY.JUNE 13, 1997
NEW YORK CITY TAX APPEALS TRIBUNALADMINISTRATIVE LAW JUDGE DIVISION__________________________________ : In the Matter of the Petition : : DETERMINATION/ORDER of : : TAT(H) 94-130(BT) EMIGRANT SAVINGS BANK : :
Murphy, A.L.J.:
Upon the motion of Emigrant Savings Bank ("Petitioner"),
dated June 15, 1995, for summary determination that for 1987 (the
"Tax Year"), there was no deficiency of New York City ("City")
Banking Corporation Tax ("BT") but an overpayment for which it is
entitled a refund (the "Motion"); and the affidavits, affirmation,
exhibits, memoranda of law and oral arguments submitted by Donald
B. Susswein, Esq., Petitioner's representative, and Martin
Nussbaum, Esq., Assistant Corporation Counsel, the representative
of the Commissioner of Finance ("Commissioner" or "Respondent");
for the facts and reasons set forth below, Petitioner's motion is
granted.
FACTS
Giving all reasonable inference to Respondent, the material
facts are as follows:
1. In the Tax Year, Petitioner, Emigrant Savings Bank, was
engaged in the banking business in the City. Petitioner was not
engaged in the banking business in New Jersey during this period.
2. During the Tax Year, Petitioner, through Embridge Company
("Embridge"), held a 55% beneficial interest in New Jersey real
property (the "Property"). Embridge, a trust created under the
The Joint Venture Agreement and a contemporaneous sales1
agreement were signed by William A. Donahoe, Petitioner's thenSenior Vice President, as trustee for Petitioner and as Embridge'ssole trustee. It is not disputed that Embridge was acting only onPetitioner's behalf and was disregarded for federal income taxpurposes. Therefore, it is not relevant, for purposes of thisdetermination/order, whether Petitioner acted directly through Mr.Donahoe as its employee or indirectly through him as Embridge'sTrustee. The term "Petitioner" is also used in this determin-ation/order to encompass actions taken by Embridge and by itstrustee with respect to Petitioner's 55% beneficial interest in the Property.
Some time after 1977, Robert J. O'Rourke, Petitioner'sExecutive Vice President, became Embridge's sole trustee. Duringthe Tax Year, Daniel C. Hickey, Petitioner's Senior Vice Presidentand General Counsel was Embridge's sole trustee.
2
laws of New Jersey in 1971, was a pass-through entity for Federal
income tax purposes. As the beneficial owner of the 55% interest
in the Property to which Embridge held legal title, Petitioner
(rather than Embridge) took the tax consequences arising from such
ownership into account on its tax returns for the Tax Year.
3. In the early 1970's, Lethbridge Associates ("Leth-
bridge"), an unrelated partnership, owned the remaining 45%
interest in the Property. Loans from Manufacturers Hanover Trust
Company (a bank unrelated to Petitioner) to Lethbridge, Lethbridge
Corporation, and George Lethbridge, were secured by a mortgages on
the Property (the "MHT Mortgages"). At that time, Lethbridge and
Petitioner, through Embridge, intended to develop the Property
through a joint venture.
4. In 1977, Lethbridge sold its 45% interest in the Property
to members of the McBride family (the "McBrides"). On March 31,
1977, the McBrides and Petitioner entered into an agreement (the
"Venture Agreement") to form a New Jersey joint venture known as
Ramapo Ridge-McBride (the "Joint Venture"). The purpose of the1
Joint Venture was to construct residential condominium units and to
Article 2 of the Venture Agreement provided that the initial2
capital contributions to the Joint Venture were $4,500 from theMcBrides and $5,500 from Petitioner's trustee.
The "prime rate of interest" was defined therein to be "the3
same rate of interest per annum publicly announced and publishedby Morgan Guaranty Trust Company as its `Prime Lending Rate.'"
The Note further provided that if Petitioner were required4
to purchase the MHT Mortgages pursuant to a prior agreement, thatthe McBrides would provide Petitioner with "an amount equal to 45%
3
develop other commercial property on the Property. Under the
Venture Agreement, profits and losses were to be shared, and
capital contributions and distributions were to be made, according
to the venturers' proportionate Joint Venture shares: 45% for the
McBrides and 55% for Petitioner's trustee. 2
5. No member of the McBride family was a stockholder, officer
or director of Petitioner. Article 1, §1.3 of the Venture
Agreement provided that the "relationship between the parties shall
be limited to the ownership, development and operation, sale or
leasing of the premises."
6. Prior to the creation of the Joint Venture, and in
furtherance of their acquisition of the Lethbridges' interest in
the Property, in September of 1976, the McBrides executed a
promissory note to Petitioner (the "Note") with respect to a
$2,000,000 line of credit. The Note was issued at the prime rate
of interest ("Prime") plus 1/4 of 1%, but was in no event to be3
less than 6.5% per year. The Note was secured by the Property. In
a schedule appended to and incorporated by reference in the Note,
the Property was identified as Block S69, Lots 1, 3, 8 and 9A;
Block S68, lot 24 and the Bed of Myrtle Avenue; and several named
commercial properties. $467,917 of the Note pertained to prior
advances and was to be repaid by July 1, 1979, while the repayment
of the balance was to be made by January 2, 1985. Under the terms
of the Note, the McBrides were to purchase the MHT Mortgages.4
of the funds required to perform said agreement."
4
7. The Note was subsequently amended: (a) on July 25, 1980,
to increase the loan amount to $5,465,000; (b) in March of 1984,
following the death of Frank McBride, to substitute his estate in
his place; and (c) on February 25, 1985, to increase the rate of
interest to Prime plus 1/2 of 1%, but in no event less than ll% per
year, and to extend the repayment date to January 2, 1988.
8. Articles 4.2 and 4.3 of the Venture Agreement provided
that all activities which involve the physical development and
operation of the Property, including site preparation and con-
struction, and all sales and leasing activities, were required to
be performed by entities owned or controlled by the McBrides, or by
McBride Enterprises, Inc. ("McBride Enterprises"), a company owned
and operated by the McBrides. Article 10 of the Venture Agreement
provided that the McBrides were also responsible for maintaining
the Joint Venture's books and records, including bank accounts.
9. On March 31, 1977 (the same date that the Venture Agreement
was entered into), the Joint Venture entered into a sales agreement
(the "Sales Agreement") granting McBride Enterprises the exclusive
right, on a commission basis, to sell or lease its residential
property and be the listing broker for the sale or lease of its
commercial or industrial property.
10. No services were required to be performed or were ever
performed by Petitioner with respect to the Joint Venture and its
Property. None of Embridge's trustees was an expert in the devel-
opment, management or sale of condominium units. Nor did any other
of Petitioner's employees have such expertise before or during the
Tax Year. However, during the term of the Joint Venture, one of
Petitioner's employees occasionally visited the Property to check
on the status of the development and on the sales of condominium
Neither party submitted a copy of the Tax Year BT return.5
However, Petitioner submitted copies of its Form NYC 3360B, BankingCorporation Tax Report of Change in Tax Base Made by the U.S.Internal Revenue Service and/or NY State Department of Taxation andFinance (the "Report of State Changes") for the that year with itsOctober 24, 1995 reply papers. See, infra, Facts ¶19.
5
units. That individual was deceased at the time the Motion was
made.
11. In computing City taxable income in its BT reports prior
to the Tax Year, Petitioner included its proportionate share of the
Joint Venture's income (the "Venture Income") or loss (the "Venture
Loss"), as well as the interest income received on the Note. In
1986, the year immediately preceding the Tax Year, the Venture Loss
effectively lowered Petitioner's bank tax liability by $36,348, or
less than 2%. For the five periods subsequent to the Tax Year
(1988 through 1993), Petitioner incurred Venture Losses which it
included in computing its City taxable income.
12. For the Tax Year, however, Petitioner did not include the
Venture Income, consisting of operating income of $5,860,138 and
capital gains of $13,514,341, in computing its City taxable
income. 5
13. Petitioner reported Venture Income for the Tax Year as
New Jersey income on a New Jersey corporation income tax return,
and paid New Jersey taxes thereon.
14. Petitioner disposed of its interest in the Joint Venture
in 1994. Petitioner realized income as a result of its interest in
the Joint Venture, but had not filed its 1994 BT as of the time the
Motion was filed.
15. The New York State (the "State") Department of Taxation
and Finance (the "State Tax Department") audited Petitioner's New
Petitioner excluded the Venture Income from its State6
franchise tax return, showing and identifying such income as "NewJersey partnership income."
6
York State banking corporation franchise tax return for the Tax
Year (the "State Audit").
16. As a result of the State Audit, the State Tax Department
required Petitioner to include Venture Income (which was identified
in the State Tax Department's audit workpapers as "New Jersey trust
income") in State entire net income ("ENI"). Although Petitioner6
requested permission at audit to separately account for the Venture
Income and Venture Loss, and the gain from the Venture, the State
Tax Department denied that request based on its interpretation that
relevant State regulations did not allow for any discretionary
allocation adjustment where Petitioner did not maintain branch
operations outside New York State. Respondent has not asserted
that a similar limitation exists for City BT purposes.
The State Tax Department also required Petitioner to file a
combined franchise tax report with two of its subsidiaries: Prustan
Corporation ("Prustan") and Prujas Corporation ("Prujas").
According to the State Audit workpapers, Prustan owned an interest
in an Ulster County real property venture which did not do business
in the Metropolitan Commuter Transportation District (which
includes the City). On June 28, 1991, the State Tax Department
issued a final determination reflecting these, among other,
changes.
17. On May 9, 1990, Respondent began an independent audit of
Petitioner's City BT return for the Tax Year (the "Audit"). During
the course of the Audit, Respondent's auditor, Stuart Auslander
(the "Auditor"), issued to Petitioner Information Document Request
Number 6 (the "IDR") which inquired:
With this payment, Petitioner's total combined BT payments7
for 1987, reported on NYC Form NYC-1A, were $4,137,819. Petitionerasserts that if its request for discretionary relief is granted,only $796 of the additional payment made of $975,935 would havebeen due for the Tax Year; i.e., a total BT liability of$3,162,680.
As a part of its request to separately account for VentureIncome and Venture Loss, Petitioner concedes that $470,759 ofdeductions taken with respect to the Joint Venture for 1986 shouldnot have been taken and that its 1986 BT liability should thereforeincrease by $36,348. Petitioner has maintained a similar positionwith respect to all open years. Those years, however, are not atissue and Respondent has not asserted the right of equitable offsetor recoupment.
7
Were there intercompany transactions between Emigrantgroup members (subsidiaries or other) and the RamapoRidge-McBride partnership venture [the Joint Venture] and/or the McBride organization.
The IDR also requested that Petitioner list specific transactions
between Emigrant and the Joint Venture including "lending, payment
of interest, provision of management or other services" and submit
supporting workpapers.
18. On March 14, 1991, Petitioner responded to the IDR.
Petitioner stated that there were no "intercompany transactions
between Emigrant group members and Ramapo Ridge-McBride and/or
[the] McBride organization except for Embridge Company."
Petitioner did not submit any other information at that time and
indicated, on the face of the IDR, that workpapers were "N/A."
19. On July 25, 1991, following the State Audit, Petitioner
filed with Respondent the required City Form 3360B, Banking
Corporation Tax Report of Change in Tax Base Made by U.S. Internal
Revenue Service And/Or NY State Department of Taxation and Finance
(the "Report of State Changes") and remitted additional City BT for
the Tax Year of $975,935. At the same time, Petitioner submitted7
conforming amended City Forms NYC-1, Tax Return For Banking
For the Tax Year, Petitioner concedes the application of a8
State Audit adjustment of $10,284 which corrected a subtractionerror made in computing interest on New York State obligations.
8
Corporations, and NYC-1A, Combined Tax Return for Banking
Corporations for the Tax Year (the "Amended Returns"). The Amended
Returns included Prujuas in a City combined return, but did not
include Prustan which did no business in the City. Petitioner's
combined City ENI reported on the Amended Returns was $53,489,666;
of which, $948,130 was attributable to Prujas.
Appended to the Report of State Changes and to the Amended
Returns were identical requests that Respondent not follow the
State by including Venture Income in City banking corporation ENI
for the Tax Year. Petitioner specifically requested that Respon-8
dent exercise the discretion granted him under New York City
Administrative Code (the "Code") section 11-642(a)(6) to adjust
Petitioner's allocated City income by allowing it to separately
account for the Venture Income for the Tax Year by excluding such
income from City ENI on the basis that the income had been earned
from a business wholly carried on outside the City. The Amended
Returns were reviewed during the course of the Audit.
20. The Auditor issued a Notice of Proposed Audit Adjustment
on or about May 5, 1992. On May 14, 1992, Francis R. May, Senior
Vice President and Controller for Petitioner, responded to the
Notice of Proposed Audit Adjustment by a letter in which he stated
Petitioner's disagreement with the proposed assertion of a BT
deficiency and renewed Petitioner's request for discretionary
relief.
21. The Auditor responded to Mr. May in a letter dated
October 1, 1992 (the "Auditor's Letter"). The bases stated in the
Auditor's Letter for denying Petitioner's request for a
9
discretionary adjustment were that owning real estate was a
"permissible activity," Petitioner had invested in the Joint
Venture, and that the Joint Venture's income was from Petitioner's
unitary business. Included in the Auditor's Letter were the
following factual findings: (a) Petitioner's "only holding of the
trust" was its 55% interest in the Joint Venture; (b) the "business
activity" of the Joint Venture was conducted in New Jersey; (c) the
business activities of the Joint Venture included "joint ownership
of the property and oversight over the property development
project;" (d) the partners in the Joint Venture had "jointly chosen
the McBride organization to develop and run the project;" (e) the
Joint Venture maintained separate books and records; and (f) there
were no inter-entity transactions between Petitioner and the Joint
Venture. The Auditor's Letter specifically stated:
[T]he bank did not lend money to the partnership or to the McBrides nor lend money in such a way as to aidthe purchase by the partners of their partnership sharenor finance the activity of the development project.
22. On March 11, 1993, Petitioner supplied certain infor-
mation which the Auditor had requested, including copies of its
1987 New Jersey tax return and the Note.
23. On September 29, 1993, Respondent issued to Petitioner a
Notice of Determination asserting a deficiency of BT in the
principal amount of $541,158.41, with interest computed to that
date of $370,337.53, for a total deficiency of $911,495.94 (the
"Notice").
24. Petitioner requested a conference before Respondent's
Conciliation Bureau. Following conciliation proceedings, the
Director of that Bureau issued a Proposed Resolution which
No formal letter denying Petitioner's refund request was9
submitted in the Motion papers. The Proposed Resolution issued byRespondent during the Conciliation proceeding, however, indicatesthat Respondent "denied [the] refund claim of Bank Tax . . .filed on 7/25/91 [sic] for tax year 1987."
In section (1) of the Petition (in the subsection,10
"Redetermination of a Deficiency"), on the line encaptioned "totaldue per notice," Petitioner transposed the Notice figures andasserted a Notice amount of $911,945.94, rather than the Noticeamount of $911,495.94.
10
indicated that Respondent "denied the refund claim" and sustained9
the Notice. On March 14, 1994, Petitioner responded that it did
not consent to the Proposed Resolution. On May 3, 1994, Respondent
issued a Conciliation Decision and Order discontinuing the concili-
ation proceeding based on Petitioner's "express disagreement" with
the proposed resolution.
25. On July 29, 1994, Petitioner filed a Petition with the
Tax Appeals Tribunal in which it protested the deficiency asserted
by Respondent and also requested a refund of BT paid in the amount10
of $975,935 "plus interest."
26. On June 15, 1995, Petitioner filed the Motion, accom-
panied by affidavits from Donald B. Susswein, Esq. and Francis R.
May, several documentary exhibits, and a supporting Memorandum of
Law, requesting summary determination that its participation in the
Joint Venture was not a part of its unitary business and, there-
fore, that it must be permitted to separately allocate and account
for the Venture Income and related deductions for the Tax Year.
27. On August 24, 1995, Respondent submitted a Memorandum in
Opposition and an affirmation from Martin Nussbaum, Esq. Appended
to that affirmation were several pages from the Index of Mortgages
of Bergen County for 1970 through 1981 (the "Index Pages") which
recorded mortgage agreements between several of the McBrides and
several financial institutions including Petitioner. According to
The record does not disclose who authored the handwritten11
notes on those photocopies, although those notes may have been madeby the City Auditor as indicated in his affidavit discussed, infra,Fact ¶29 (in which the Auditor states that prior to completing theAudit, he photocopied the Index Pages and cross-referenced theinformation contained on some of these pages with other unspecifiedBergen County, New Jersey deed books).
11
the photocopied Index Pages and the handwritten notes thereon: (a)11
a mortgage given to Petitioner by several of the McBrides in the
total amount of $91,157.85 was recorded in 1973 and borrowings in
the amount of $258,000 were consolidated into a single mortgage;
and (b) a mortgage of $3,500,000 given to Petitioner by several of
the McBrides was recorded in December of 1977 with respect to
"Rockleigh N J [sic]."
28. On October 24, 1995, Petitioner submitted a Reply
Memorandum to Respondent's Memorandum in Opposition, accompanied by
photocopies of: (a) correspondence between Petitioner and the
Auditor; (b) several pages from the Report of State Changes; (c)
pages from the State Audit workpapers; and (d) several pages from
the Amended Returns. Many of these documents had been submitted to
the Auditor during the course of his review. See, Fact ¶19, supra.
29. On February 9, 1996, Respondent submitted an affidavit of
the Auditor dated February 8, 1996 (the "Auditor's Affidavit")
accompanied by photocopies of: (a) the IDR; (b) the March 11, 1993
correspondence from Petitioner to the Auditor; (c) the Note; (d)
amendments to the Note; (e) Note Exhibits A-1 and C; (f) Note
Schedule C; (g) Note Extension Agreement; and (h) Internal
Revenue Service Forms 851, Affiliations Schedules, filed by
Petitioner for the Tax Year (the "Affiliations Schedules").
30. As indicated in the Auditor's Affidavit, the finding
expressed in the Auditor's letter that Petitioner did not lend
monies to the Joint Venture was based solely upon Petitioner's
March 14, 1991 response to the IDR because the Auditor had not, at
The other nine listed corporations are: Hamilton Center12
Corporation; Emex Corporation; Marschall Associates, Inc.; EmseyCorporation; P.S.B. Inc; E.T.H Inc.; ETH of Maryland Inc.;Londonderry Estates, Inc.; and Emisure Agency Inc.
12
that time, "independently investigated in any detail the financing
or other intercompany transactions between the Joint Venture and
Emigrant Savings." Before the Notice was issued, however, Peti-
tioner informed the Auditor of the existence and terms of the Note.
The Auditor then concluded, based on his examination of the Note,
that the loans were issued at "extremely favorable" rates.
31. The Auditor further stated in his Affidavit that his
examination of the Bergen County records indicated:
. . . a transfer of property in 1977 from Emigrant andLethbridge, in the ratio of 55%/45%, to Emigrant andMcBride in the ratio of 55%/45%. The stated considera-tion for the transfer was one hundred dollars. One ofthe blocks described in the deed was Block s-70 [sic].
32. In the Affiliations Schedules, Petitioner reported that
it held eleven wholly-owned subsidiaries, including Prustan and
Prujas. With respect to these subsidiaries' principal business12
activities, Petitioner reported that seven were engaged in "real
estate management;" two were engaged in "real estate investment;"
one was engaged in "insurance;" and one (which was owned indirectly
through another wholly-owned subsidiary) was engaged in "mortgage
banking." Footnotes to the State Auditor's workpapers also
indicate that Petitioner had two other subsidiary corporations:
Emigrant Capital Markets Corporation and Emigrant Mortgage Bankers,
Inc. which were "located entirely within New York . . . [but which
were] inactive and have no income." It is not clear from the
record whether these two corporations were included in the
Affiliations Schedules.
13
33. In furtherance of the Motion and in response to materials
submitted by Respondent, Petitioner, over a period of time,
submitted the affidavits of several of its employees: (a) Frank A.
Balzarini, its Senior Vice President of property management; (b)
Daniel C. Hickey, its Senior Vice President and General Counsel and
an Embridge trustee; (c) Charles Howe, its former Tax Manager; and
(d) Diane Hofmockel, its Tax Director (who gave two affidavits).
Petitioner also submitted a Supplemental Memorandum in Support of
Petitioner's Motion for Summary Determination on February 26, 1996.
34. Oral Argument was held on the Motion on March 6, 1996, at
which time the parties presented their direct arguments. The
proceeding was continued in order to afford Respondent an
opportunity, through discovery, to obtain additional information
from Petitioner which might contribute evidentiary support for its
assertion that material triable issues of fact exist.
35. On May 8, 1996, in a letter to Petitioner's represen-
tative, Respondent's representative submitted: (a) twenty-one
"Questions of Fact," (b) three "Requests for Production of
Documents;" and (c) ten "Requests for Production of Witnesses."
According to the letter, the requests for production were made
solely "in the event there is a hearing."
36. By letter to the undersigned, dated June 3, 1996,
Petitioner requested that Respondent explain the relevancy of
several of his "Questions of Fact" in the context of the legal
issue presented by the Motion.
37. By letter to the undersigned, dated June 12, 1996,
Respondent replied to Petitioner's June 3, 1996 letter, stating
that:
Respondent respectfully declines Petitioner's invitationto further elaborate and provide it with the exact legal
14
arguments Respondent intends to use in conjunction with eachitem of evidence. It is not our desire to assistPetitioner in its wish to "focus (its) [sic] responses appropriately," or to selectively reveal evidence whichcasts its position in the most favorable light.
38. On June 21, 1996, the undersigned wrote to the parties
and indicated that based upon the language in the June 12, 1996
letter quoted above, it appeared that Respondent did not desire
discovery from Petitioner prior to a ruling on the Motion (vis-a-
vis prior to a hearing on the merits). Respondent's represen-
tative confirmed this to be the case in a subsequent Telephone
Conference. As a result, the continued Oral Argument was scheduled
for, and held on, September 12, 1996.
39. At the September 12, 1996 session, the undersigned
questioned Respondent's representative on the record as to whether
he wished to pursue the previously proffered opportunity for
discovery. The representative responded:
It is my position that a formal discovery is relevantin the context of a hearing. [T. 45].
. . . .
It is our position that there is not discovery in theAdministrative Law Judge proceeding with reference to amotion for summary determination.. . . the obligationof the Respondent in that motion . . . is to show thatthere are material issues of fact. I believe I have donethat in my May 8, 1996 letter. [T. 49]
Respondent's representative further stated that he had
"withdrawn discovery proceeding" [T. 52] and that it was his
position that a formal discovery request was only relevant
"[w]ithin the context of a hearing on the record." [T. 59] When
questioned about the June 21, 1996 letter from the undersigned and
the subsequent Telephone Conference, he replied:
15
The litigation judgment that I made was that it was muchmore efficient and much better for the City in the contextof a hearing where I have an ongoing cross-examination ofwitnesses to further probe those witnesses to get documenta-tion or in the context of certain witnesses who can flushthis out to seek that kind of documentation, rather thanthe scope of this summary determination motion where I
view that as somewhat limited. [T. 70].
40. Following oral argument, the parties were offered an
opportunity to submit additional arguments in writing. Petitioner
and Respondent informed the undersigned, in writing, that there was
no need for additional briefing.
STATEMENT OF POSITIONS
Petitioner asserts that the Joint Venture was not a part of
its unitary banking business and therefore the Venture Income for
the Tax Year should be accounted for separately. Petitioner
contends that the undisputed facts establish that as between itself
and the Joint Venture there was no: (1) unity of ownership, (2)
unity of use and operation, (3) functional integration, (4)
centralization of management, nor (5) flow of value which could not
be measured by separate accounting. In the alternative, Petitioner
argues that separate accounting of the Venture Income is required
to properly reflect its City taxable income and BT liability.
Respondent argues that summary determination should not be
granted, and asserts that there are material triable issues of fact
which may only be determined after a full hearing. Respondent
maintains that Petitioner is engaged in "real estate management"
and, therefore, the Joint Venture was a part of its unitary
business. Relying primarily on the Note between Petitioner and the
McBrides (which he asserts was not made at arm's length) and the
information contained in the Index Pages and the Affiliations
Schedules, Respondent argues that the relationship between
Petitioner and the Venture is characterized by a "flow of value"
16
which supports a determination that the Joint Venture was part of
Petitioner's banking business. Respondent further asserts that
the Auditor had no authority to "bind" Respondent and, conse-
quently, that the facts as articulated in the Auditor's Letter must
be disregarded.
CONCLUSIONS OF LAW
Section 1-05(d)(1) of the Tax Appeals Tribunal Rules of
Practice and Procedure provides that any party to an action before
the Tribunal may make a motion for summary determination, supported
by an affidavit, copies of relevant pleadings, and "any other
available proof" which:
. . . shall be granted if, upon all the papers and proofsubmitted, the administrative law judge finds that it hasbeen established sufficiently that no material andtriable issue of fact is presented and that the adminis-trative law judge can, therefore, as a matter of law,issue a determination in favor of any party.
However, Rule section 1-05(d)(1) further states:
The motion shall be denied if any party shows sufficientbasis to require a hearing of any issue of fact.
To prevail on its motion, Petitioner must prima facie
establish that it is entitled to summary determination on the facts
presented, as a matter of law, and must tender "sufficient evidence
to eliminate any material issues of fact from the case." Winegrad
v. New York Univ. Med. Center, 64 N.Y.2d 851 (1985), citing
Zuckerman v. City of New York, 49 N.Y.2d 557 (1980). See also,
Alvarez v. Prospect Hospital, 68 N.Y.2d 320 (1986). Thus,
Petitioner must prove on undisputed facts that the Joint Venture's
business was not unitary with its business and that, as a matter of
law, it was entitled to separately apportion and account for the
Venture Income during the Tax Year. See, Allied-Signal, Inc. v.
17
Director, Division of Taxation, 504 U.S. 768 (1992); British Land
(Maryland), Inc. v. Tax Appeals Tribunal, 85 N.Y.2d 139 (1995).
See also, People ex rel. Sheraton Buildings, Inc. v. Tax Commis-
sion, 15 A.D.2d 142 (3d Dept. 1961).
Once Petitioner makes a prima facie case, in order to defeat
the Motion, Respondent must either rebut the prima facie showing
(Shapiro v. Health Ins. Plan, 7 N.Y.2d 56 (1959)) or establish the
existence of a material triable issue of fact. Zuckerman, supra at
562; Matter of McNamara, 97-1 NYTC T-138 (NYS Tax Appeals Tribunal,
January 30, 1997).
There can be no dispute that if the Joint Venture's business
was not unitary with Petitioner's business, discretion must be
exercised under Code section 11-642(a)(6) to allow Petitioner to
separately account for the Venture Income which has no connection
to the City, rather than require Petitioner to apply an allocation
formula which takes into account the income of both businesses.
See, British Land, supra, where the New York Court of Appeals held
that "the first prerequisite of a constitutionally valid
application of an apportionment of income formula" is a
determination that the examined activities were part of a unitary
business. 85 N.Y.2d 139, 147 (1995). The issue therefore is
whether Petitioner has established that the Joint Venture is not
unitary with its City banking business.
A "unitary business" has been found where the multi-entity or
multi-division operation was properly characterized by either the
"three unities" of ownership, operation and use (Butler Brothers v.
McColgan, 315 U.S. 501 (1942)), or there exist the three criteria
of "functional integration," "centralization of management" and
"economies of scale" (Mobil Oil Corporation v. Commissioner of
Taxes of Vermont, 445 U.S. 425 at 436-38 (1980); Asarco Inc., etc.
v. Idaho State Tax Commission, 458 U.S. 307 (1982); F.W. Woolworth
Co. v. Taxation and Revenue Department, 458 U.S. 354 (1982)).
18
There was no "unity of ownership" between Petitioner and the
Joint Venture as 45% of the Joint Venture was owned by unrelated
third parties (the McBrides). Nor was there a "unity of operation"
between the entities. Pursuant to the Venture Agreement, McBride
Enterprises was solely responsible for the day-to-day operations of
the Joint Venture, and Petitioner's employees and officers were not
involved in the Joint Venture's daily management. Finally, there
was no "unity of use" between the two entities. For example, there
was no common executive force between Petitioner bank and the Joint
Venture. Nor were there any other incidents that might character-
ize a unitary relationship, such as joint purchasing or shared
advertising. Therefore, the "three unities" test was not met.
See, Butler Bros. v. McColgan, supra.
The alternative analysis commonly used to identify a unitary
business involves determining whether the entities are function-
ally integrated, are centrally managed, and their relationship
benefits from shared economies of scale.
There was no "centralization of management" between Petitioner
and the Joint Venture. McBride Enterprises was solely responsible
for the Joint Venture's day-to-day operation and the Embridge
trustees brought no special expertise to the Venture. The most
Petitioner did was occasionally send one of its employees to the
development site to check on unit sales. This minimal oversight
was wholly consistent with monitoring its investment in the Joint
Venture.
There is no evidence, or even suggestion, that the Venture
benefitted from any "economies of scale" which would typify a
unitary relationship with Petitioner. Nor was the Joint Venture's
business of building New Jersey condominiums "functionally inte-
grated" with Petitioner's City banking business. There were no
substantial transactions undertaken between the two entities. Nor
With respect to the Note, the facts set forth in the13
Auditor's Affidavit are being accepted in the light most favorableto Respondent (see, Nojaim Bros. v. CNA Ins., 113 A.D.2d 109 (4thDept. 1985)); i.e., that: (a) Petitioner loaned monies toindividual members of the McBride family prior to the partiesestablishing the Joint Venture; (b) the Note was secured by theProperty; and (c) some of the proceeds were used by the McBrides toacquire their interest in the Joint Venture.
The factual inquiry whether two entities are part of a14
single unitary business may include an analysis as to whether therewere non-arm's length transactions between the entities. Allied-Signal, Inc. v. Director, Div. of Taxation, supra. See also,British Land (Maryland), supra.
19
were there any other incidents of functional integration, such as
common purchasing or the use of common services.
Thus, on the uncontroverted facts, Petitioner has made a prima
facie showing that the Joint Venture's business of developing
condominiums was not unitary with its core banking business. The
issue, therefore, becomes whether Respondent has contradicted that
prima facie case or has established a material triable issue of
fact which requires a hearing on the merits.
Respondent avers that there are material issues of fact
presented by the Note, the Index Pages, and the Affiliations13
Schedules, which defeat summary determination and require denial of
the Motion. Based on these facts, Respondent asserts that the
businesses are unitary (i.e., that Petitioner's prima facie case
is defeated) and/or that there are sufficient triable issues of
fact which compel a formal hearing.
First, Respondent argues that the stated interest rate of the
Note was inadequate and therefore not at arm's-length. Based on
this position, Respondent concludes that a unitary relationship
existed between Petitioner and the Joint Venture. 14
20
The Note, however, was not between the Joint Venture and
Petitioner, but between Petitioner and unrelated parties who, as
members of the McBride family, held a direct or indirect 45% Joint
Venture interest. Moreover, although Respondent disputes the
Note's stated interest rate, that rate was always above the Prime
rate and Respondent did not offer any facts whatsoever to rebut
this showing. This is sufficient for Petitioner to prove prima
facie that the Note was made at an arm's-length rate.
Nor does the fact of the Note demonstrate that the two
businesses were functionally integrated. Neither does it confirm,
as Respondent argues, the kind of "sharing or exchange of value not
capable of precise identification or measurement - beyond the mere
flow of funds arising out of a passive investment or a distinct
business operation - which renders formula apportionment a
reasonable method of taxation." Container Corporation of America
v. Franchise Tax Board, 463 U.S. 159, 161 (1983). Even if
Petitioner funded the entire Joint Venture through the Note and its
own contribution, that alone would not be enough to make the Joint
Venture's business unitary with Petitioner's banking business.
See, e.g., the July 27, 1989 Ruling of the Department of Finance,
Finance Quarterly Bulletin 89-46. vol.1 no.3, pp. 17-21 (an opinion
issued by Respondent's Office of Legal Affairs permitting
Respondent to require separate accounting where the activities of
the principal business of the corporation and of an oil well
venture in which the corporation invested were found unconnected,
and the corporation's initial capitalization of the venture was
determined to be insufficient to make the venture's business
unitary with the business of the corporation).
Neither are the Index Pages, which record mortgages between
Petitioner and individual McBrides on parcels ostensibly contingent
to the Property, evidence of transfers of "value" to the Joint
Venture, as Respondent also argues. At best, the Index Pages
demonstrate that various individual members of the McBride family
Respondent also argues that it is possible that Petitioner15
may have acquired its interest in the Property through foreclosure,and therefore the Joint Venture is part of the Petitioner's unitarybanking business. Any argument that Petitioner may have acquiredthe Property as a result of mortgage foreclosure is whollyspeculative and is not supported by the facts before me. See,Shapiro, supra. See also, DiSabato v. Soffes, 9 A.D.2d 297 (1stDept. 1959).
The Joint Venture Agreement specifically states that theMcBrides purchased their interest from Lethbridge Associates, anentity unrelated to Petitioner. It is silent as to Petitioner'sacquisition of its interest in the Property. Without more, thesource of Petitioner's contributed interest cannot be taken intoaccount for purposes of this motion.
21
obtained mortgage loans from several financial institutions,
including Petitioner.15
Finally, Respondent's reliance on the Affiliations Schedules
is similarly insufficient. These schedules simply indicate that
several of Petitioner's subsidiaries were involved in unspecified
real estate activities. Since only two of those entities, Prustan
and Prujas, were required to be included by the State Tax
Department in State combined franchise tax returns, and only Prujas
(with a reported business purpose of "real estate") was included in
the protested Amended Returns, insufficient factual information was
provided to indicate that the affiliated corporations were engaged
in Petitioner's banking business. This hardly suffices as a
rational basis for assuming that the separate operations of the
Joint Venture condominium development business were unitary with
Petitioner's banking business.
The undisputed facts do not indicate that there was a flow of
value between the Venture and Petitioner incapable of precise
measurement which would constitutionally justify treating the
business of the Joint Venture as being unitary with Petitioner's
banking business. Respondent, therefore, has failed to contradict
Petitioner's prima facie case.
Facts which appear in Petitioner's papers and are not16
controverted by Respondent, similarly are deemed admitted forpurposes of this motion. See, Kuehne & Nagel v. Baiden, 36 N.Y.2d539 (1975).
22
Respondent further argues that material triable factual issues
exist which may only be resolved at hearing. In determining
whether such issues exist, all proof offered by Respondent,
including that proffered through affidavit, must be accepted as
true and considered in the light most favorable to him. Museums at
Stony Brook v.Patchogue Fire Dep't., 146 A.D.2d 572 (2d Dept.
1989); Dowsey v. Megerian, 121 A.D.2d 497 (2d Dept. 1986). See
also, Glick & Dolleck v. Tri-Pac Export Corp., 22 N.Y.2d 439 (1968)
(the credibility of affiants generally may not be weighed in a
summary determination proceeding). 16
If contrary inferences reasonably may be drawn from undisputed
facts, a full hearing is required (Gerard v. Inglese, 11 A.D.2d 381
(2d Dept. 1960)), as summary determination is a drastic remedy and
"should be denied where there is any doubt . . . whether there is
a material triable issue of fact." Phillips v. Kantor & Co., 31
N.Y.2d 307, 311 (1972). See also, Glick & Dolleck Inc. v. Tri-Pac
Export Corp.; 22 N.Y.2d 439 (1968); Indig v. Finkelstein, 23 N.Y.2d
728 (1968); Museums at Stony Brook v. Village of Patchogue Fire
Department, 146 A.D.2d 572 (2d Dept. 1989).
However, it is equally true that unsubstantiated allegations
are insufficient to demonstrate the existence of a material triable
issue of fact. While an opponent of a motion for summary
determination is not required to lay bare his entire defense
(Cucalon v. State of New York, 103 Misc. 2d 808 (Ct. of Claims
1980)), the opponent must raise issues which are genuine (DiSabato
v. Soffes, supra). The opponent may not defeat the motion by
making only general allegations. Zuckerman, supra at 562. As the
The opposing attorney's affidavit may, however, serve as17
a "vehicle" for the submission of accompanying admissible evidence.Zuckerman, supra at 563.
The only indication as to those subsidiaries' precise18
activities is the comment in the State Audit Report that Prustanowned an "interest in Highland, New York. (Ulster Co.)" and was notdoing business in the City.
23
Court of Appeals held in Rotuba Extruders v. Ceppos, et al., 46
N.Y.2d 223, 231 (1978):
. . . only the existence of a bona fide issue raised byevidentiary facts and not one based on conclusory orirrelevant allegations will suffice to defeat summaryjudgment.
Neither the repetition or incorporation by reference of allegations
contained in the pleadings (Indig v. Finkelstein, supra at 729) nor
the mere submission of a hearsay affirmation by the opponent's
representative (Zuckerman, supra at 559) is sufficient to create17
a material triable issue of fact.
Respondent essentially posits that since unidentified
integrated activities between Petitioner and the Joint Venture
might exist, there are material triable issues of fact which would
defeat the Motion. For example, Respondent points to the fact that
several of Petitioner's wholly-owned subsidiaries were involved in
the "real estate" business. The record, though, does not indicate
that Petitioner's involvement with these entities was anything more
than as a passive investor. See, Mobil Oil, supra. Nor does18
Respondent allege with any specificity the nature of the alleged
intercorporate activities. Such mere speculation does not create
a triable issue of fact. Indig v. Finkelstein, supra; Zuckerman,
supra.
See, Bryan v. City of New York, 206 A.D.2d 448 (2d Dept.19
1994): "Allegations of mere hope that the discovery will revealsomething helpful to the City's case provide no basis forpostponing the determination of the plaintiff's motion.
24
While a motion for summary determination may be defeated if it
can be established that its opposition depends upon knowledge
within the exclusive control of the movant (White v. First Nat'l
Bank, 22 A.D. 2d 973 (3d Dept. 1964)), that rule only applies where
reasonable efforts were made by the opponent to discover facts
which give rise to a triable issue, and that those efforts were
unsuccessful. Marino v. Methodist Hosp. of Brooklyn, 185 A.D.2d
806 (2d Dept. 1992).
Pursuant to established authority, the undersigned continued
the summary determination proceeding to permit discovery by
Respondent of facts which might support his assertion that
Petitioner and the Joint Venture were engaged in a unitary
business. See, Rules Section 1-05(d)(2) which provides that, upon
review of affidavits submitted in opposition to a motion for
summary determination, if the administrative law judge determines
"that facts essential to justify opposition may exist, but cannot
then be stated," the judge may continue the proceedings for
submission of additional affidavits or admissions and "may make
such other order as may be just." See also, Blue Bird Coach Lines,
Inc. v. 107 Delaware Ave., N.V., Inc., 125 A.D.2d 971 (4th Dept.
1986). Such delay in ruling on the motion to allow for discovery
was a significant exercise of discretion in Respondent's favor.19
Despite being given the opportunity for discovery, Respondent
failed to make a good faith effort to obtain information arguably
within Petitioner's control. Marino v. Methodist Hosp. of
Brooklyn, supra. See also, Twining Nemia & Hill v. Read Memorial
Hospital, Inc., 89 A.D.2d 432 (3d Dept. 1982); Tausig & Son v.
Initially, in support of its opposition to the Motion,20
Respondent asserted that the Auditor had no authority to "bind"Respondent and therefore that the facts articulated in theAuditor's Letter must be disregarded. The majority of the factual
25
Providence Washington Ins., 28 A.D.2d 279 (lst Dept. 1967).
Respondent's representative specifically and repeatedly declined
the proferred discovery based on his misapprehension that discovery
was not appropriate prior to resolution of a motion for summary
determination. More important, in his June 12, 1996 correspon-
dence, he expressly stated that he would not engage in discovery
because he did not wish to "provide [Petitioner] with the exact
legal arguments Respondent intends to use in conjunction with each
item of evidence." This position is contrary to the purpose of
discovery and other pre-trial procedures articulated in the Rules,
which is to avoid surprise.
Mere speculation that some facts may possibly exist that would
support Respondent's position does not give Respondent an absolute
entitlement to require Petitioner to go through the formal hearing
process to obtain relief. See, e.g., Marriott v. Shaw, 151 Misc.
2d 938 (Civil Ct City of NY Kings Cty. 1991). Respondent engaged
in a detailed audit over the course of three years, as well as a
several-year litigation process where he has been afforded the
opportunity for pre-hearing discovery pursuant to our Rules.
Nevertheless, Respondent is unable to assert a single, material
triable issue of fact and is unwilling to communicate the bases for
his position. Under such circumstances, it is unfair and inequi-
table to force the Petitioner to go to formal hearing to gain
relief, rather than to have its case decided in a summary fashion.
Since Respondent has failed to raise a genuine, material
triable issue of fact and has failed to rebut the Petitioner's
prima facie case that the Joint Venture business was not unitary
with Petitioner's City banking business, Petitioner's motion is
granted. DiSabato, supra at 300. 20
conclusions contained in the Auditor's Letter are undisputed; e.g.,that Petitioner held a 55% interest in a Joint Venture whichtransacted business in New Jersey, and that the operations of theJoint Venture were carried out by the Petitioner's co-venturer, theMcBride organization. (See, Facts ¶21, supra). The subsequentAffidavit of the Auditor, submitted by Respondent, clarified thebasis for the Auditor's prior position with respect to the singledisputed fact, the existence and terms of the Note. (See, Facts¶¶30 and 31, supra). As noted, since the characterization of theNote is no longer disputed, there is no need to determine whetheror not the Auditor had authority to "bind" Respondent by theAuditor's Letter.
26
The deficiency with respect to the Tax Year, asserted in the
Notice of Determination dated September 29, 1993, is therefore
abated except to the extent of the undisputed adjustment discussed
in Footnote 8, supra, and Petitioner's request for a refund of BT
paid for the Tax Year is granted.
IT IS SO ORDERED.
June 13, 1997 New York, New York
______________________________ ANNE W. MURPHY Administrative Law Judge