RIBNER, KLUFT & BERG, P.C. - DECISION - 05/20/97
In the Matter of RIBNER, KLUFT & BERG, P.C.TAT (E) 93-958 (GC) - DECISIONTAT (E) 93-959 (GC), TAT (E) 93-960 (GC)
NEW YORK CITY TAX APPEALS TRIBUNALAPPEALS DIVISION
GENERAL CORPORATION TAX - ALTHOUGH PETITIONER'S SHAREHOLDERS HAD CEASEDPRACTICING LAW TOGETHER, PETITIONER'S CORPORATE EXISTENCE W AS RETAINED TO FULFILLA RELATED BUSINESS PURPOSE; THE RECEIPT AND DIVISION OF REVENUES FROM REFERRAL OFITS CLIENT BASE AND ITS W ORK IN PROGRESS. ALSO, PETITIONER DID NOT ESTABLISH THAT ITHAD A REGULAR PLACE OF BUSINESS OUTSIDE THE CITY DURING THE TAX YEARS. LASTLY, THEDEPARTMENT CORRECTLY INCLUDED AMOUNTS PAID TO THE ESTATE OF ONE OF THESHAREHOLDERS IN THE ALTERNATIVE TAX BASE AS SALARY AND OTHER COMPENSATION PAIDTO A CORPORATION'S STOCKHOLDERS OW NING IN EXCESS OF FIVE PERCENT OF ITS ISSUEDCAPITAL STOCK.MAY 20, 1997
By letter dated November 21, 1996, the Tribunal offered1
Petitioner the opportunity to request that the oral argument berescheduled; Petitioner did not respond to such letter.
New York City Tax Appeals Tribunal-----------------------------------x
:In the Matter of :
: DECISIONRIBNER, KLUFT & BERGER, P.C. :
: TAT (E) 93-958 (GC): TAT (E) 93-959 (GC)
Petitioner. : TAT (E) 93-960 (GC)::
-----------------------------------x
Ribner, Kluft & Berger, P.C. ("Petitioner") filed an Exception
to that part of an Administrative Law Judge ("ALJ") Determination,
dated June 21, 1995, which sustained a general corporation tax
("GCT") deficiency asserted by the New York City Department of
Finance (the "Department") for the fiscal years ended July 31, 1986
and July 31, 1987 and the short period ended December 31, 1987
(collectively, the "Tax Years").
Petitioner appeared by Michael Strauss, C.P.A. of Strauss &
Comas, P.C. The Commissioner of Finance of the City of New York
("Commissioner" or "Respondent") appeared by David M. Steiner,
Esq., Assistant Corporation Counsel, Law Department of the City of
New York. Both parties filed briefs and Petitioner's request for
oral argument was granted. However, no oral argument took place
because Petitioner's representative did not appear at the scheduled
date and time.1
A hearing was held before Conferee Melissa S. Siegel of the
Department's former Hearings Bureau. Pursuant to the provisions of
In this decision, the ALJ's findings of fact have, for the2
most part, been adopted. Where necessary, such findings have beenamplified and/or paraphrased. Petitioner did not take specificexception to any of the ALJ's enumerated findings of fact but didtake exception to certain of her conclusions of law dependent onsuch facts. To the extent that it could be argued that Petitionerintended to object to a finding of fact, Petitioner did not referto, nor can we find, any document or testimony in the record whichsupported such change. Any finding of fact that we expresslyrejected has been so noted.
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sections 168 through 172 of the City Charter as amended by act of
the New York State ("State") Legislature on June 28, 1992, Ch. 808,
Laws 1992, section 140, this case, which was pending before the
Hearings Bureau on October 1, 1992, was transferred to the Tax
Appeals Tribunal for determination. Administrative Law Judge
Marlene F. Schwartz was assigned the case and issued the
Determination based on her review of the record and the briefs
filed by the parties.
Petitioner is a State corporation, which was formed in 1976 to
practice law as a Professional Service Corporation under Article 15
of the State Business Corporation Law ("BCL"). Its shareholders2
were Paul Ribner, Jerome Kluft and Lawrence Berger, each of whom
was an attorney and each of whom held one third of Petitioner's
outstanding shares.
Petitioner's law practice consisted primarily of obtaining
reductions in New York City ("City") real estate tax assessments
(i.e., Certiorari Law) and, to a significantly lesser extent,
obtaining real property tax exemptions for certain clients.
Petitioner represented its clients, who owned real property located
in the City, before the City Tax Commission, in proceedings for
reviews of tentative real estate tax assessments, and before the
State Supreme Court (in counties in the City) in proceedings to
obtain judicial review of decisions of the City Tax Commission
under Article 7 of the Real Property Tax Law ("Article 7
Proceedings"). In ll Article 7 Proceedings, the City was
Based on our review of the record, we have revised the3
amounts stated by the ALJ to be the "cash assets" per the balancesheets.
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represented by attorneys from the City's Law Department.
In the fall of 1983, Messrs. Ribner, Kluft and Berger decided
to cease actively practicing law together. Petitioner's office
lease at 210 East 86th Street in Manhattan terminated on December
31, 1983 and the office was closed. Petitioner did not own or lease
any real property after December 31, 1983.
Petitioner was not formally dissolved. It did not file a
certificate of dissolution with the New York State Department of
State.
Petitioner filed a Federal Form 1120S, U.S. Income Tax Return
for an S Corporation; State Form CT-3S, Corporation Information
Report; and City Form NYC-4S, GCT Return (collectively, the
"Returns") for each of the Tax Years. Petitioner paid the minimum
GCT of $125 for each of the Tax Years. On the Returns, Petitioner
designated its business as "legal services." The balance sheets
thereon showed cash assets ranging from $37,000 to $9,000 and
unspecified "other assets" of $10,904. None of the Returns was3
designated a "final return."
When Petitioner's shareholders ceased practicing law together,
Messrs. Ribner and Kluft began a real estate investment venture at
an office located at 157 East 86th Street in Manhattan. Mr. Berger
formed his own firm, Lawrence J. Berger, P.C. ("Berger, P.C."), in
November of 1983, through which he practiced Certiorari Law at an
office located at 270 Madison Avenue in Manhattan.
Mr. Kluft testified that Mr. Ribner died in April of 1985.4
On Petitioner's Form CT-3S for its fiscal year ended July 31, 1986,Petitioner indicated that Mr. Ribner was a stockholder until April13, 1986 and that the Estate was a stockholder beginning on April14, 1986. On its Form 1120S for that same fiscal year Petitioner'sordinary income (loss) from federal Form 1120S was allocated onethird each to Mr. Kluft and Mr. Berger. The remaining one thirdwas divided between Mr. Ribner and the Estate in proportion to theamount of time each was listed as a stockholder during that fiscalyear. During the following two tax years, one third ofPetitioner's ordinary income (loss) was allocated to the Estate.However, we agree with the ALJ that, as the inconsistency in thedate of Mr. Ribner's death is immaterial to the resolution of thiscase, it need not be decided.
We have added this statement to the findings of fact. The5
ALJ came to this same conclusion in her Determination at page 26and Petitioner has not disputed such conclusion.
-4-
Mr. Berger continued to own one third of Petitioner's shares.
These shares were never owned by Berger, P.C. Mr. Ribner became ill
in February, 1984 and died in April 1985 or 1986. On the Returns
for the Tax Years, Mr. Ribner's estate (the "Estate") was listed as
the owner of 33 and 1/3rd percent of Petitioner's shares beginning
in April, 1986. Petitioner did not comply with the statutory4
requirement of §1510 of the Business Corporation Law (the "BCL")
that it redeem the Estate's shares within six months after the
appointment of the Estate's legal representative.5
The address shown on the Returns for the fiscal year ended July
31, 1986 was 157 East 86th Street, the address of Messrs. Ribner and
Kluft's real estate investment venture. For the subsequent two tax
years, the address on the Returns was in care of Mr. Kluft at 500
East 88th Street in Manhattan.
City real estate tax assessments are made annually for each6
fiscal year beginning July 1st. The fiscal year beginning July 1,1983 is generally referred to as the "83-84 tax year." In theALJ's Determination, the term "Property Tax Year" refers to a Cityfiscal year for real estate tax assessment purposes; while the term"Tax Year" refers to Petitioner's year for purposes of filing itsReturns. In order to avoid confusion, we have adopted such termsand definitions for purposes of this Decision.
-5-
In December of 1983, when Petitioner closed its office, it had
an inventory of pending cases in which Petitions for Article 7
Proceedings ("Article 7 Petitions") had been filed either during
1983 for the Property Tax Year 83-84 or in a previous year for a
prior Property Tax Year. In general, certiorari attorneys are paid6
on a contingency fee basis; i.e., they receive a percentage of any
reduction they obtain in a real estate tax assessment ("Reduction").
Petitioner considered a case on which it was the attorney of record
to be its "property" since it had an interest in any fee that
resulted from an eventual Reduction.
Mr. Kluft testified that, when an attorney refers a client to
a certiorari attorney, it is customary for the certiorari attorney
who receives the referral to remit a portion of any fee ultimately
received (the "Referral Fee") to the attorney making the referral
(the "Referring Attorney"). In some cases, the certiorari attorney
receives the entire legal fee, retains his/her portion, and pays
over the Referral Fee to the Referring Attorney. In other cases,
the certiorari attorney remits the entire fee to the Referring
Attorney who keeps his/her Referral Fee and returns the balance to
the certiorari attorney. Since many property owners contest their
real property tax assessments annually, a referral is a valuable
source of business not only for the work in progress during a
particular Property Tax Year but also for the potential future work
it can engender.
We have omitted Finding of Fact No. 14 of the ALJ's7
Determination, as it is immaterial to our decision. Finding ofFact No. 14 read as follows:
Mr. Kluft testified that it was thepractice in the industry that ReferringAttorneys need not perform any servicesdirectly related to obtaining the Reduction toshare in the fee received by the ReferralAttorney. However, Mr. Kluft did not explainwhy this practice did not violate DR 2-107 ofthe Code of Professional Responsibility as ineffect at that time.
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Mr. Kluft testified that Petitioner's work in progress had no
immediate value, since a fee is paid only upon the completion of a
case in which a Reduction is obtained. After Petitioner
discontinued the active practice of law, its inventory of cases had
to be referred elsewhere. Naturally, Petitioner wished to ensure
that it would eventually be compensated for work already performed
and for referring work in progress to another Certiorari Law firm.7
Petitioner wanted to have the ability to monitor the progress
of cases it referred to other firms to ensure that it received the
Referral Fees to which it was entitled when the cases were
completed. Petitioner also needed to track the precise source of
each Referral Fee, since the fees were not divided among
Petitioner's stockholders on a pro rata basis. Rather, the way
each Referral Fee was divided, depended upon which case generated
that fee.
Finding of Fact No. 16 of the ALJ's Determination has been8
modified to reflect the fact that the statements made about theReferral Agreement are based solely on the testimony ofPetitioner's witnesses.
-7-
The testimony indicates that Petitioner entered into an
agreement (the "Referral Agreement") with Berger, P.C. under which
Petitioner referred its cases to Berger, P.C. and Berger, P.C.
remitted the entire legal fee earned for each completed case to
Petitioner for deposit in a checking account maintained by
Petitioner specifically for this purpose. Petitioner then disbursed
each fee according to the Referral Agreement. According to the
testimony, the Referral Agreement was in writing and had been
executed by the parties involved, however, the Referral Agreement
is not in the record. The Department requested that Petitioner
produce a copy of the Referral Agreement for the record, but
Petitioner failed to do so. Mr. Berger testified that he was unable
to locate a copy of the executed Referral Agreement and that he had
been operating from an unsigned copy, but even this unsigned copy
was not entered into the record by Petitioner. 8
During the Tax Years, Berger, P.C. received total fees of
approximately $1,500,000 generated from the clients referred to it
by Petitioner. While Berger, P.C. issued bills to these clients in
its own name, pursuant to the Referral Agreement, Berger, P.C.
remitted the entire fee earned for each completed case to
Petitioner. Petitioner then disbursed the fee to the Estate, to Mr.
Kluft, and/or to Berger, P.C. (but not to Mr. Berger) by drawing
checks on Petitioner's checking account. Checks were written
virtually every month during the Tax Years, generally on several
different days during each month.
-8-
Petitioner included the full amount of the (approximately
$1,500,000) fees remitted by Berger, P.C. as income in Petitioner's
Returns for the Tax Years. Approximately $700,000 of this amount
was returned by Petitioner to Berger, P.C. for work actually done
by Berger, P.C. In turn, Berger, P.C. paid a salary to Mr. Berger.
Petitioner paid none of these fees directly to Mr. Berger.
Virtually the entire balance of Petitioner's fee income was
disbursed to the Estate and Mr. Kluft. Petitioner deducted all
these disbursements on its Returns as "referral and legal fees."
Since Petitioner's GCT Returns reflected no net income, Petitioner
paid the minimum GCT of $125 for each of the Tax Years.
Although Petitioner admits in its post-hearing brief that it
conducted bookkeeping activities in order to track the Referral Fees
paid by Berger, P.C., the record does not indicate who performed
this activity or where the activity was conducted.
Of the approximately $1,500,000 in fees generated from
Petitioner's clients during the Tax Years, about $400,000
represented fees for work begun by Petitioner with respect to the
Property Tax Year 83-84 and prior Property Tax Years. The remaining
amount of approximately $1,100,000 represented fees for work done
entirely by Berger, P.C., primarily with respect to Property Tax
years 84-85, 85-86, and 86-87.
-9-
In 1986, the City's Law Department sought to determine which
attorney had the authority to settle cases in which Article 7
Petitions had been filed by Petitioner. A letter on the letterhead
of Berger, P.C., dated July 10, 1986 (the "Orders and Offers
Letter") was submitted to Joseph Lauer, Esq. of the Law Department's
Real Estate Tax Division. The letter stated that:
You are hereby authorized to process allOffers to Allow Judgement regarding any caseswhich may be settled hereafter on whichpetitions have been filed by Ribner, Kluft &Berger, P.C.
For all tax years through and including1983-84, the authorized Attorney for Petitionershall be as follows:
Lawrence J. Berger, Esq.For: Ribner, Kluft & Berger, P.C.
For tax years commencing 1984-85 andthereafter, the authorized Attorney forPetitioner shall be:
Lawrence J. Berger, P.C.
Any settlements which may involve taxyears prior to and including 1984-85, shallbear both of the aforementioned legends.
This letter shall ratify and reaffirm theprevious agreement to the same effect, datedSeptember 10, 1984.
Very truly yours,
[Signature of Lawrence J. Berger]Ribner, Kluft & Berger, P.C.by: Lawrence J. Berger
This letter was countersigned by:
[Signature of Lawrence J. Berger]Lawrence J. Berger, P.C.
by: Lawrence J. Berger
[Signature Maxine Ribner] Estate of Paul J. Ribner
Maxine Ribner, executrix
[Signature of Jerome Kluft]Jerome Kluft
Berger, P.C. filed Forms NYC-4S, GCT Returns, for its fiscal9
years ended January 31, 1986 and January 31, 1987 and the shortperiod ended December 31, 1987 (the "Berger Returns"). Berger,P.C. included the $700,000 returned to it by Petitioner in itsincome on the Berger Returns and paid GCT on the alternative taxbase of "income plus compensation paid to officers and more thanfive percent stockholders."
We have added this paragraph to the findings of fact. The10
ALJ included these two sentences in her Determination at page 15and Petitioner has not taken exception to such statement.
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During the fiscal year ended July 31, 1987, Petitioner paid a
$300 Referral Fee to the firm of Katz, Weisberg. Katz, Weisberg was
never an officer or stockholder of Petitioner.9
Petitioner did not refer any of its tax exemption cases to
Berger, P.C. Any of those cases still in progress on December 31,
1983 were apparently completed by Mr. Ribner prior to his illness
or by Mr. Kluft sometime thereafter.
The record indicates that well after the time Petitioner claims
to have gone out of business, it was continuing to file Article 7
Petitions for its clients. The Orders and Offers Letter dated July
10, 1986, that was submitted to the City's Law Department,
specifically addressed, in part, pending cases for the Property Tax
Years 84-85 and thereafter, in which petitions had been filed by
Petitioner.10
There is no indication in the record that any work was done by
or on behalf of Petitioner at a place of business outside the City
during the Tax Years.
Interest was computed to December 15, 1989.11
The Notice of Determination stated that the penalty was for12
late payment.
This Petition is stamped received June 12, 1990 by the13
Department's Adjustment and Review Section. However, the envelopein which the Petition was mailed is postmarked March 12, 1990 bythe United States Postal Service. This envelope is stampedreceived by the Department's Bureau of Tax Collection on March 14,1990. The file also contains additional photocopies of thisPetition which were stamped received by the Department's Office ofLegal Affairs on March 19, 1990. No explanation was provided forthe way in which the Petition was processed once it reached theDepartment. Based on the March 12, 1990 postmark on the envelope,the ALJ found that the Petition was timely filed under §11-680(2)of the New York City Administrative Code and the applicableregulations which are found at 19 RCNY §17-01(a)(2) and we adoptsuch conclusion for purposes of this Decision.
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There is no information in the record regarding the amount of
time, if any, that Mr. Kluft performed work outside the City for
Petitioner during the Tax Years.
The Department issued a Notice of Determination, dated December
15, 1989, to Petitioner asserting the following GCT deficiency for
the fiscal year ended July 31, 1986:
Principal $12,005.67Interest 3,939.1211
Penalty 180.0912
Total $16,124.88
On March 12, 1990, Petitioner timely filed a Petition (which was
given the designation TAT (H) 93-959(GC)) for redetermination of the
deficiency for the fiscal year ended July 31, 1986.13
Interest was computed to April 30, 1990.14
This Petition was not offered into evidence by the Department15
although it was in the file provided to the Administrative LawJudge Division by the Hearings Bureau. Rather, the Departmentoffered into evidence and the Conferee accepted into evidence aPetition dated June 29, 1989 (which was given the designation TAT(H) 92-440 (GC)) which purports to be in response to a Notice ofDetermination issued to Petitioner dated April 3, 1984 (sic) in theamount of $26,048.32 for the fiscal year ended July 31, 1987. TheNotice of Determination dated April 3, 1984 (sic) is not in therecord. By letter dated April 7, 1995, the Department advisedJudge Schwartz that it had not located such a Notice. JudgeSchwartz stated in footnote 7 of her Determination, that, "...unless a written objection to the proposed dismissal is received bythe Tax Appeals Tribunal on or before July 21, 1995, the Petitiondated June 29, 1989 and designated TAT (H) 92-440(GC) will bedismissed as being premature (since it is not in response to aNotice of Determination) and duplicative of the Petition designatedTAT(H) 93-960(GC) which was filed in response to the subsequentlyissued Notice of Determination. Subsequently, a DismissalDetermination/Order dated August 23, 1995 was issued by JudgeSchwartz dismissing the Petition filed with respect to TAT(H) 92-440(GC).
-12-
The Department issued a Notice of Determination, dated February
28, 1990, to Petitioner asserting the following GCT deficiency for
the Tax Year ended July 31, 1987:
Principal $22,653.63Interest 6,211.9414
Total $28,865.57
On March 12, 1990, Petitioner timely filed a Petition (which was
given the designation TAT (H) 93-960(GC)) for redetermination of the
deficiency for the fiscal year ended July 31, 1987.15
Interest Computed to September 6, 1989.16
Pursuant to the Notice of Determination, the Penalty was17
imposed for late payment.
This Petition was dated "9/5/89." This appears to be an18
error since the Petition responds to a Notice of Determinationdated September 6, 1989.
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The Department issued a Notice of Determination, dated
September 6, 1989, to Petitioner asserting the following GCT
deficiency for the short period ended December 31, 1987:
Principal $6,769.00Interest 1,004.9116
Penalty 101.5417
Total $7,875.45
On September 8, 1989, the Department received a timely filed18
Petition (which was given the designation TAT (H) 93-958(GC)) for
redetermination of the deficiency for the short period ended
December 31, 1987.
For all three Tax Years, the Department calculated the
deficiencies by computing the GCT under the alternative tax
computation of entire net income plus compensation paid to officers
and to stockholders owning in excess of five percent of
Petitioner's capital stock (the "Alternative Tax"). The Department
asserted that the Referral and Legal Fees had been paid by
Petitioner to officers and stockholders owning more than five
percent of Petitioner's capital stock and, therefore, included such
We have modified the ALJ's Finding of Fact No. 33 to19
accurately reflect the record.
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amounts in the computation of the Alternative Tax base. In its19
brief, however, the Department conceded that it should not have
treated payments made to Berger, P.C. as payments to an officer or
stockholder for purposes of computing the Alternative Tax base.
At the hearing, Petitioner asserted that it ceased doing
business in the City in December, 1983. Petitioner contended that
its activities in the City during the Tax Years were limited to
maintaining a bank account and certain bookkeeping records and that
these activities were insufficient to constitute "doing business"
within the meaning of §11-603.1 of the New York City Administrative
Code (the "Code"). Petitioner claimed that it merely acted as
nominee, for purposes of accounting for various fees due the
Estate, Jerome Kluft, and Berger, P.C. In the alternative,
Petitioner asserted that if it is deemed to have been doing
business during the Tax Years, such business was conducted from
Rockland County, New York and that it should be permitted to
apportion its income within and without the City based solely on
the amount of time actually spent within and without the City by
Mr. Kluft on its activities. Petitioner also asserted that, under
section 1507 of the BCL, only attorneys admitted to practice in the
State may own shares in Petitioner and vote on corporate matters.
Since the Estate was not an attorney admitted to practice in the
State, Petitioner argued that the Estate could not be an officer or
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stockholder of Petitioner for purposes of the Alternative Tax.
Thus, Petitioner claimed that if it is subject to the GCT, payments
to the Estate should not be added back in computing the Alternative
Tax base.
In response, the Department asserted that Petitioner continued
to carry on business in the City during the Tax Years. The
Department contended that Petitioner may not allocate its business
income within and without the City because Petitioner failed to
prove the existence of any regular place of business outside the
City during the Tax Years. The Department also asserted that,
since the Estate owned the right to share in Petitioner's profits
and to participate in its dissolution or liquidation, the Estate
was a stockholder for purposes of computing the Alternative Tax
base.
In her Determination, the ALJ concluded that:
(1) Petitioner was doing business in a corporate capacity in
the City during the Tax Years, within the meaning of the GCT.
Although Petitioner claimed that it ceased doing business at the
end of 1983, the ALJ determined that the record did not support
such assertion. Petitioner did not liquidate and dissolve at the
end of 1983 but rather retained its corporate existence to fulfill
a related business purpose (the receipt and division of revenues
from referral of its client base and its work in progress) and even
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continued to file tax returns and perform a variety of other
activities throughout the Tax Years. Such activities included,
according to the ALJ, maintaining cash balances in a bank in the
City, writing checks to disburse legal fees received from Berger,
P.C., monitoring the status of the cases, and conducting
bookkeeping activities. Most importantly, Petitioner was doing
business in the City through an agent during the Tax Years, in that
Mr. Berger and/or Berger, P.C. acted as Petitioner's agent.
(2) Petitioner was not entitled to an exemption from GCT (as
provided by §11-603.2 of the Code) for the Tax Years because its
activities exceeded those protected by the exemption. The ALJ
determined that the scope of activities performed on Petitioner's
behalf, and those performed by Mr. Berger and/or Berger, P.C. as
its agent, far exceeded those permitted by the exemption. In
addition, since §11-603.2 of the Code is an exemption provision, it
must be narrowly construed and narrowly interpreted in favor of the
taxing authority. See Matter of Grace v. New York State Tax
Commission, 37 N.Y.2d 193 (1975).
-17-
(3) Petitioner was not entitled to allocate its business
income within and without the City pursuant to §11-604.3(a) of the
Code because it did not establish that it had a regular place of
business outside the City during the Tax Years and what the proper
amount of any such allocation would be, if allowable.
(4) Payments made by Petitioner to Katz, Weisberg should not
have been added back in the computation of the Alternative Tax base
because Katz, Weisberg was neither an officer nor a stockholder of
Petitioner.
(5) Payments made to the Estate were properly added back in
the computation of the Alternative Tax base, because the Estate was
the beneficial owner of more than five percent of Petitioner's
issued capital stock. Former GCT Reg. section 3-20(d) (now 19 RCNY
§11-34(d)) defines a stockholder (with respect to §11-604.1.E), as
a person who is the "beneficial owner" of the stock. Former GCT
Reg section 3-20(d) also refers to former GCT Reg. section 3-51(b)
(now 19 RCNY §11-46(2)) which provides that the "test of ownership
is actual beneficial ownership, rather than mere record title as
shown by the stock books of the issuing corporation." The ALJ
herein has determined that, based on the analysis used in Matter of
Racal Corp., 93-2 NYTC T-458, DAT No. 807361 (N.Y.S. Tax Appeals
Tribunal, May 13, 1993), the Estate was a beneficial owner of the
shares within the meaning of §11-604.1.E of the Code and therefore,
the payments to the Estate were properly included in the
In Matter of Racal Corp., 93-2 NYTC T-458, DAT No. 80736120
(N.Y.S. Tax Appeals Tribunal, May 13, 1993), the State Tax AppealsTribunal construed provisions of 20 NYCRR section 3-6.2 (a part ofthe State's Corporate Franchise Tax regulations). Such regulations(prior to their subsequent amendment) were virtually identical to19 RCNY section 11-46. Racal Corp. dealt with whether a secondtier subsidiary could be a "subsidiary" under 20 NYCRR section 3-6.2 for purposes of excluding interest on subsidiary capital. Inreaching its decision, the State Tax Appeals Tribunal addressed thequestion of what constituted "beneficial ownership" under thatregulation.
Although there are two penalties computed at the rate of one-21
half of one percent for each month which are applicable to the GCT(§11-676.1(b) and §11-676.1(c) of the Code), Respondent did nottake exception to the ALJ's conclusion. Therefore, the penaltyissue is not before us.
-18-
Alternative Tax base.20
(6) No penalties should be imposed in this matter because the
record did not indicate why they were imposed. Since there was no
penalty designated a "late payment" penalty and no penalty that was
computed at a rate that would generate an amount of one and one half
percent of the principal tax deficiency, the ALJ abated the
penalties asserted for the fiscal year ended July 31, 1986 and the
short period ended December 31, 1987.21
Petitioner has taken the following specific exceptions to the
conclusions of the ALJ:
(a) Petitioner denies doing business in the City during the
Tax Years. Petitioner contends that its substantial activity in
the City ceased in December of 1983 when it closed its office and
that as there was no corporate location in the City and no
-19-
corporate activity was performed within the City, there was no nexus
for GCT purposes. Moreover, Petitioner asserts that it is
exempt from GCT as any activity it did engage in, is protected
activity. In addition, Petitioner asserts that, pursuant to the
Referral Agreement, it retained an independent contractor, Berger,
P.C.: (1) to monitor its ongoing cases; (2) to report to
Petitioner on the progress being made on the cases; and (3) to pay
over funds received. Petitioner argues that the existence of a
professional relationship between client and attorney, as in this
case, cannot be extended to mean that nexus is created whenever an
attorney is retained.
(b) Petitioner claims the right to allocate its business
income within and without the City. On exception, Petitioner
contends that if it is deemed to be doing business in the City, it
should be permitted to allocate its business income within and
without the City. Petitioner states that the ALJ determined that
services were performed by Petitioner to generate the fee income.
Petitioner argues that such services as were performed by
Petitioner, were limited to the initial referral and subsequent
follow-up on any case and that such services could only be
performed by Mr. Kluft from his office in Rockland County.
Petitioner contends that, as Mr. Kluft performed these services
outside the City, "equity requires that the location of the
services constitutes a place of business outside the City" for
purposes of allocating Petitioner's income.
-20-
(c) Petitioner maintains that, if it was subject to the GCT
at all, payments made to the Estate were improperly added back in
computing the Alternative Tax base. Petitioner asserts that a
review of the powers possessed by the Estate leads to the
conclusion that these administrative powers do not rise to the
level of beneficial ownership. Petitioner contends that Racal
Corp. is distinguishable from the facts in this case since, in
Racal Corp., the taxpayers controlled every incident of ownership
over the second tier subsidiaries.
In response, the Commissioner contends that the Tribunal
should affirm the ALJ's Determination.
Respondent asserts that the ALJ was more than justified in
concluding that Mr. Berger and/or Berger, P.C. was Petitioner's
agent, rather than an independent contractor, and that Petitioner
was doing business through its agent. In addition, Respondent
contends, Petitioner itself engaged in numerous activities during
the Tax Years, never dissolved and continued its corporate
existence, filed tax returns reporting substantial sums of income
and indicated, in such returns, that it was in the business of
practicing law.
-21-
In addition, regarding Petitioner's contention that it should
be permitted to allocate its business income outside the City,
Respondent contends that the record is devoid of evidence of a
regular place of business outside the City and that Petitioner has
submitted no evidence as to what work was done outside the City.
Lastly, with respect to the inclusion of payments made to the
Estate in the Alternative Tax base, Respondent asserts that the
Estate was a "stockholder," (within the meaning of §11-604.1.E of
the Code), owning in excess of five percent of Petitioner's stock.
Respondent agrees with Petitioner: (1) that pursuant to §1507 of
the BCL, a professional services corporation, such as Petitioner,
may issue shares only to those authorized to practice the
profession, and; (2) that §1511 of the BCL prohibits the transfer
of shares by a shareholder in a professional service corporation to
anyone not authorized to practice the profession. However,
Respondent argues that §1511 of the BCL specifically allows
transfers of interest in a professional service corporation by
operation of law. Therefore, Respondent asserts, the Estate became
the beneficial owner of one third of Petitioner's shares upon the
transfer of such shares, and continued as such by reason of
Petitioner's failure to redeem the shares, within six months after
the appointment of an executor, pursuant to §1510 of the BCL.
Although 19 RCNY §11-03(b) was not promulgated until after22
the Tax Years, identical language was contained in InformationBulletin Number 2-A, section 3(a) that was issued in August, 1973.Since 19 RCNY §11-03(b) merely restates a long-standing Departmentpolicy, we agree with the ALJ that it is proper to give itretroactive effect. Varrington Corp. v. City of New YorkDepartment of Finance, 85 N.Y.2d 28 (1995).
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For the reasons set forth below, we affirm the ALJ's
Determination.
Section 11-603.1 of the Code imposes the GCT on the privilege
of "doing business ... in the city in a corporate or organized
capacity ...." The term "doing business" is expansively defined
under 19 RCNY §11-03(b)(1) to include "all activities that occupy
the time or labor of people for profit." This regulation further22
explains that "[r]egardless of the nature of its activities, every
corporation organized for profit and carrying out any of the
purposes of its organization is deemed to be doing business . . .
." [Emphasis added] According to 19 RCNY §11-03(b)(2), whether a
corporation is "doing business" is a factual determination. The
relevant factors to be considered include: (1) the nature,
continuity, frequency and regularity of the activities in the City;
(2) the purposes for which the corporation was organized; and (3)
the employment in the City of agents, officers and employees.
Although Petitioner contends that it ceased doing business at
the end of 1983, the record does not support such assertion.
Petitioner did not liquidate at the end of 1983, it did not file
final tax returns, and it did not file a certificate of dissolution
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with the New York State Department of State. Instead, it retained
its corporate existence, and continued to file tax returns which
reflected substantial sums of income and indicated that Petitioner
was in the business of performing legal services. The record also
indicates that Petitioner was continuing to file Article 7
Petitions for its clients well after the time it claimed to have
gone out of business. As the ALJ noted, "it cannot be determined
from the record when, if ever, Petitioner ceased to exist in
corporate form." (Determination at 14)
The record supports the ALJ's finding that, although
Petitioner's shareholders had ceased practicing law together,
Petitioner's corporate existence was retained to fulfill a related
business purpose; the receipt and division of revenues from
referral of its client base and its work in progress.
Moreover, even accepting that the mere hiring of an attorney
is insufficient by itself to create nexus for GCT purposes, we
reject Petitioner's assertion that, under the facts herein,
Petitioner simply "retained an attorney" to protect its interest.
Based on the record before us, we conclude that Berger, P.C. was
retained by Petitioner to conduct Petitioner's business with
respect to the Article 7 Petitions which Petitioner had previously
filed and to handle its matters with the Law Department of the City
of New York. All legal fees generated pursuant to such arrangement
were transmitted to Petitioner, which then disbursed a portion to
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Berger, P.C. That Mr. Berger and/or Berger, P.C. was acting as
Petitioner's agent is clearly established in the Offers and Orders
Letter and in the transmittal of the total fees received. A
taxpayer whose business is conducted through an agent is considered
to be doing business if the activities performed by the agent would
constitute doing business. De Amodio v. Commissioner, 299 F.2d 623
(3rd Cir. 1962); Lewenhaupt v. Commissioner, 20 T.C. 151 (1953),
affirmed 221 F.2d 227 (9th Cir. 1955).
Although Petitioner asserts that, pursuant to the Referral
Agreement, it retained an independent contractor and that the use
of independent contractors by a person or business does not under
15 U.S.C. 381(c), create taxability, we note that, as Respondent
argues, (1) the Referral Agreement was not submitted into evidence;
and (2) 15 U.S.C. 381(c) has no application to the facts before us.
The focus of such statute is on interstate commerce and, as
Respondent states, the "statute aims at preventing individual
states from impeding interstate commerce by imposing a net income
tax on a foreign person for no other reasons than that such foreign
person employs an independent contractor, who serves more than one
principal, to sell tangible personal property." (Respondent's
brief at 8)
Nor do we believe that Petitioner should be permitted to
allocate its business income within and without the City. Section
11-604.3(a) of the Code permits a taxpayer to allocate business
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income within and without the City unless the taxpayer does not
"have a regular place of business outside the city other than a
statutory office." As the ALJ concluded, there is nothing in the
record regarding: (1) whether Petitioner had a regular place of
business outside the City during the Tax Years; and (2) what
activities, if any, Petitioner conducted or performed outside the
City. Therefore, Petitioner is not permitted to allocate its
business income within and without the City.
Lastly, we conclude that the Department correctly included
amounts paid to the Estate in the Alterative Tax base as salaries
and other compensation paid to a corporation's stockholders owning
in excess of five percent of its issued capital stock. Although §
1511 of the BCL prevents the sale or transfer of shares by one
shareholder in a professional services corporation to anyone who is
not authorized to practice the profession, such statute also
specifically provides that "[n]othing herein shall be construed to
prohibit the transfer of shares by operation of law or by court
decree." It is noted that §1510 of the BCL requires a professional
service corporation to redeem the shares of a deceased partner
within six months after the appointment of an executor. Although
the record is unclear as to whether Mr. Ribner died in 1985 or 1986,
it is clear that Petitioner did not redeem the shares before or
during the Tax Years. Petitioner now wishes to derive benefit from
that section of the BCL which supports its contention that the
Estate is not an appropriate shareholder, while completely ignoring
We have considered all remaining arguments raised by23
Petitioner, and find them unpersuasive.
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the requirement in the preceding section that it was to redeem the
shares of Mr. Ribner within a specific period of time. Whether or
not Petitioner was properly constituted to conduct its practice
cannot be the focus of this inquiry. For purposes of its tax
liability, the payments to the Estate clearly constituted payments
to a shareholder.
The above conclusion stands because the ALJ correctly found
that Petitioner was the beneficial owner of the shares for purposes
of the GCT. As Respondent argues, "[t]he Estate became the
beneficial owner upon transfer of the shares. It continued as
beneficial owner due to Petitioner's failure to redeem the shares."
(Respondent's brief at 14) Moreover, there is evidence in the
record that the Estate did exercise control over Petitioner, i.e.,
it signed the 1986 Orders and Offers Letter along with Mr. Kluft
and Mr. Berger. Under these facts, we find that the Estate
possessed sufficient control over, and economic benefit from, the
corporation, to be the beneficial owner (as well as the titular
holder) of the shares. Therefore, the payments made by Petitioner
to the Estate were appropriately considered payments to a greater
than five percent shareholder and added back to the Alternative Tax
base.23