Capital gain of an out-of-state corporation subject to New York corporation tax


Goldman Sachs Petershill Fund Offshore Holdings (Delaware) Corp. is liable for New York City general corporation tax on its capital gain from the 2010 sale of its stake in a hedge fund manager, Claren Road Asset Management LLC.

The New York City Tax Appeals Tribunal ruled that the Petershill Fund’s capital gain was attributable to the “capital appreciation” of Claren’s business in the city and, therefore, was related to the city. (Case of Goldman Sachs Petershill Fund Offshore Holdings (Delaware) Corp., TAT (E) 16-9 (GC), New York City Tax Application. Tribe. (March 12, 2021).

The Petershill Fund is owned by two limited partnerships, Petershill Offshore LP and Petershill PMD QP Offshore LP, both offshore entities. The investment strategy of offshore entities is to buy stakes in alternative investment management companies. The offshore entities formed the Petershill Fund and the fund formed the Petershill US IM Master Fund LP, a limited partnership (master fund). The Petershill Fund held 88.91% of the equity of the master fund. Goldman Sachs Group, Inc. held 9.66% of these shares.

In 2008, the master fund purchased a 9.9% limited liability interest in Claren Road Asset Management, LLC. The master fund has never been a managing member of Claren. Claren and the master fund have been treated as partnerships for tax purposes. The fund declared and paid the General Corporation Tax (GCT) on its share of Claren’s income, deductions, gains and losses. The master fund’s share of Claren’s income moved from the master fund to the fund. Other than the master fund’s investment in Claren, neither the fund nor the master fund conducted any business activities in New York.

In 2010, the master fund sold its stake in Claren to The Carlyle Group, an independent buyer. The fund reported a capital gain from the sale of Claren in its federal income tax return of $ 54.7 million. The fund has excluded capital gain in calculating all of its net income. The New York City Department of Finance has asserted a deficiency in GCT. The deficit was due to the fund’s exclusion of the capital gain from all net income.

An administrative judge (ALJ) accepted the notice of deficiency. The ALJ concluded that the fund had a “connection” to the city because of its stake in a city business for which the fund had paid GCT out of its share of the company’s income for each of the years it owned. by Claren. The fund argued that it lacked sufficient connection with the city. The fund compared its investment in Claren to shares of companies.

Doing business in town

The GCT is imposed on companies “doing business in the City”. If a partnership does business in the city, then all of its business partners are subject to the GCT. The only exception to this rule, for limited partnerships that are either “publicly traded limited partnerships” or “investment holding companies”, does not apply to the fund’s ownership of its interest in Claren.

The fund, the court said, “admits by its disclosure on its GCT statements… and by stating its share of Claren’s income on the GCT statements… that it has a connection to the city by virtue of its ownership of a stake. in Claren. “

The fund argued that its stake in the LLC in Claren was “virtually indistinguishable from ownership of shares in a company.” The court rejected the claim that the fund’s interest in Claren should be treated as an interest in a company. Claren properly qualified as a partnership for federal income tax and GCT purposes. Claren was just a channel for the income from its urban activities, all of which went to the partners. As a partner of Claren the fund was treated for tax purposes as having been engaged in the business activities of Claren which took place entirely in the city.

Swart Is Distinguished

In Swart v. Franchise Tax Board, the court ruled that “passively owning” a 0.2% stake in a California limited liability company did not constitute “doing business.” Swart seemed to place a lot of weight, the court observed, on the de minimis nature of 0.2% interest. In comparison, the master fund’s 9.9% stake in Claren could not be considered as de minimis. Further, “doing business under the GCT is defined more broadly than the narrow definition in California law. The definition of GCT was changed in 1990 to expressly include, as part of “doing business”, a limited partner in a partnership doing business in the city. “

Capital gain can be attributed to New York City

The fund argued that although it had a connection to the city when it sold its stake in Claren, the capital gain was not properly allocated among the city. The fund, however, did business in the city by virtue of its limited partnership interest in Claren, and paid GCT out of its share of Claren’s income, deductions, gains and losses, which the fund allocated. 100% to the city, says the court. The question that remained was whether the surplus value should be allocated outside the city, as the fund claimed.

The crux of the fund’s argument in this case arises from the parties’ stipulation that neither the fund and Claren nor the master fund and Claren were engaged in a unitary undertaking. The fund asked the court, in effect, to “divide the income from its partnership interest in Claren” into: (1) the flow-through income from the fund’s share of the operations of Claren, which the fund considered as distributable, and (2) the capital gain on the sale of this participation, which the fund had considered as non-distributable.

In Allied-Signal, Inc. v. Finance Commissioner, the court ruled that the city “could tax dividends and capital gains, when the company in which the investment was held was operating in the city.”

“As we cannot see any meaningful distinction for this purpose between the distributive part of a partner’s income from an interest in a partnership and a distribution of income to the shareholders of a company by way of a dividend, where both were derived from commercial activities within the city, we conclude that any effort to divide the distributive portion of the fund from Claren’s income, on which the [fund] paid GCT, and its capital gain from the sale of its stake in Claren, must, at first glance, fail, ”the court said.

The fund claimed that it was engaged in a separate “investment firm” to manage the investment of its stake in Claren. The fund argued that the capital gain was from the fund’s investment management business, rather than from the business activities of Claren, and therefore the capital gain was not attributable by the city under the principle of the unitary enterprise.

The parties have stipulated that the fund and Claren are not engaged in a unitary business. “We do not interpret the stipulation as requiring us to treat the income that the fund earned from the Claren business any differently from the capital gain that the fund earned from the Claren business. [fund] from the sale of this business, ”the court said.

The distributive share of the Claren income fund and the capital gain were to be treated as part of the unitary enterprise of Claren, and both were attributable to the city under the unitary enterprise principle. The capital gain was entirely attributable to the value of Claren on the date of its sale which, in turn, was entirely attributable to the value of Claren’s business, which resulted entirely from Claren’s business activities in the city, and to which the fund has allocated 100% Towards the city.

“Without the value of Claren’s business on the date of the sale, there would be no gain. The court rejected the fund’s claim that the capital gain was attributable to the fund’s services to London in managing its investment in Claren, rather than to the value of Claren’s business at the time. date of sale. Under Ally-Signal, the capital gain of the fund, attributable to the “capital appreciation” of the municipal enterprise of Claren … has a connection with the city and is subject to the TGC.

The court upheld the ALJ’s determination and upheld the department’s opinion.

This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.

Author Info

Robert Willens is president of the New York-based Robert Willens LLC tax and consulting firm and an assistant professor of finance at Columbia University Graduate School of Business.

Bloomberg Tax Insights articles are written by seasoned practitioners, academics, and policy experts who discuss current tax developments and issues. To contribute, please contact us at [email protected].


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