New York City Tax Appeals Tribunal Finds Subsidiary Properly

The New York City (NYC) Tax Appeals Tribunal has determined that a federal savings and loan association was not required to include a subsidiary corporation in its combined NYC bank tax returns for the 2006-2008 tax years.1 The Administrative Law Judge (ALJ) held that the subsidiary was not a sham corporation, inter-corporate transactions between the subsidiary and its corporate parent were made at arm's length, and there was no distortion of income caused by the exclusion of the subsidiary from the parent's combined return. The Tribunal rejected the NYC Department of Finance's argument that the exclusion of the subsidiary from the combined return caused a "mismatch of income and expenses."

Background

Astoria Financial Corporation (Astoria Financial), is a publicly-held holding corporation for Astoria Federal Savings & Loan Association (Astoria). Astoria is the parent corporation of several subsidiaries including Astoria Federal Mortgage Corporation (Astoria Mortgage), Astoria Preferred Funding Corporation (Preferred Funding), and Fidata Service Corporation (Fidata). In 2005, Astoria reorganized its structure, which included contributing all of the assets of Preferred Funding to Fidata, a Connecticut passive investment company (PIC). These assets consisted primarily of non-New York real estate mortgage loans. Fidata then used the income generated by these loans to purchase mortgage loans from Astoria and Astoria Mortgage at face value. For the tax years at issue, Astoria filed NYC combined tax returns for banking corporations and did not include Fidata in these filings.

The NYC Department of Finance audited Astoria's NYC returns for the 2006-2008 tax years and determined that although Fidata was not doing business in the city, it was required to be included in the combined filing group because there was a "mismatch of income and expenses" between Fidata and the group, resulting in an improper reflection of income.

The Department also determined that there were "substantial" inter-corporate transactions between Fidata and the combined group. These transactions included the initial capital contribution to Fidata, Astoria's management of loan portfolios for Fidata, and Fidata's payments of "small management and custodial fees" to Astoria and Astoria Mortgage. Astoria filed a petition with the NYC Tax Appeals Tribunal to review the Department's determinations.

Banking Corporation Tax Combined Reporting

Under the NYC Administrative Code, a banking corporation doing business in the city is required to file its bank tax return on a combined basis with any banking corporation or bank holding corporation of which it owns 80 percent or more of the voting stock, either directly or indirectly.2 Combined filing may also be required if it is determined that a combined return is "necessary in order to properly reflect the tax liability ... because of...