Mars Holding Inc. owned passive minority interests, since the 1970s, in multiple partnership interests that own rental real estate in NYC. Based on this ownership interest, Mars filed NYC corporate tax returns and paid tax to the City on its share of income, gains, and losses from those partnerships. Both parties stipulated to the following facts: (a) neither was engaged in a unitary business with the partnerships, (b) neither had any other business in the City, and (c) the location of their only office is New Jersey.
At the end of 2011, Mars Associates merged into Mars Holdings, Inc. in a tax-free reorganization. In 2012, Mars Holdings sold its partnership interests and recognized a capital gain of $15.454 million, which was reported on its federal and corporate state tax return. The gain was excluded from City tax because the sale of the partnership interest was not related to a business in N.Y. Since the NYC corporate income tax is based on the Internal Revenue Code, the taxpayer argued that federal conformity (before the 2017 Tax Cuts and Jobs Act) mandated sourcing the receipts from the sale of the partnership interest to the commercial domicile. (See Grecian Magnesite Min., 926 F.3rd 819 (DC Cir 2019), affirming 149 T.C. 63 (2017)).
The administrative law judge (ALJ) determined that holding interests in partnerships doing business in NYC established nexus and subjected Mars to NYC corporate income tax. The ALJ also held that nothing in the City’s corporate tax law required excluding the gain from the disposition of partnership interest and required federal conformity.
Furthermore, the ALJ relied on the Commissioner’s statutory authority to adjust items of income and apportionment factors to include the capital gain. (NYC Administrative Code Section 11-604.8) However, it is unclear whether the allocation to NYC relates to the partnership’s factors, which flowed to Mars, or something else. In exercising discretion, the adjustment must provide a fair and proper allocation of income reasonably attributable to the City.