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Allied-Signal, Inc. v. Commissioner of Finance

Allied-Signal, Inc. v. Commissioner of Finance

Court of Appeal of New York,

September 4, 1991, Argued ; December 23, 1991, Decided

No. 165

Opinion

 [*75]  [**732]  [***697]     In this appeal we are called upon to determine whether New York City may constitutionally tax any portion of the dividend and capital gain income that a nondomiciliary corporation receives by reason of its investment in another corporation conducting business within the City in the absence of a unitary business relationship between the two  [*76]  corporations. 1 For the reasons that follow, we conclude that the City may do so without offending either the Due Process Clause (US Const 14th Amend) or the Commerce Clause (US Const, art I, § 8) of the Federal Constitution.

 [****5]  I. THE CITY'S TAXATION SCHEME

] New York City imposes a general corporation tax, based upon net income, on domestic and nondomiciliary corporations "[f]or the privilege of doing business, or of employing capital, or of owning or leasing property in the city in a corporate or organized capacity, or of maintaining an office in the city" (Administrative Code of City of New York § 11-603 ). Consistent with this purpose, the City has adopted rules for allocating corporate income, depending upon the connection between the income and the City. Although income derived from a taxpayer's business operations (business income) and income derived from a taxpayer's investments (investment income) are taxed at the same rate, each is allocated to the City by a different method.]

The portion of a corporate taxpayer's business income allocable to the City is determined by multiplying the taxpayer's total business income by its "business allocation percentage" (BAP). The BAP represents the arithmetic average of the ratios of the taxpayer's receipts, payroll and property values within the City to those of the corporation as a whole (see, Administrative Code § 11-604 [a]).  [****6]  2 For example, if 20% of a taxpayer's total receipts, payroll and property are connected with the City, its BAP will be 20%, and it will be taxed by the City on 20% of its total business income.

A corporate taxpayer's investment income, in contrast, is allocated to the City by multiplying the taxpayer's total investment income by its "investment allocation percentage" (IAP). Unlike the taxpayer's BAP--which reflects the taxpayer's own activities in the City, the taxpayer's IAP reflects the degree of New York City presence  [**733]   [***698]  of the issuers of the  [*77]  securities in which the taxpayer has invested (i.e., the corporations which have generated the taxpayer's investment income). 3 

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79 N.Y.2d 73 *; 588 N.E.2d 731 **; 580 N.Y.S.2d 696 ***; 1991 N.Y. LEXIS 5153 ****

In the Matter of Allied-Signal Inc., as Successor in Interest to Bendix Corporation, Appellant, v. Commissioner of Finance, Respondent.

Prior History:  [****1]   Appeal, on constitutional grounds, from an order of the Appellate Division of the Supreme Court in the First Judicial Department, entered November 29, 1990, which affirmed a judgment of the Supreme Court (Jeffrey M. Atlas, J.; opn 146 Misc 2d 632), entered in New York County in a proceeding pursuant to CPLR article 78, denying the petition to annul a determination of respondent that assessed a general corporation tax deficiency against petitioner's predecessor-in-interest.

 Matter of Allied-Signal, Inc. v Commissioner of Fin., 167 AD2d 327, affirmed.

Disposition: Order affirmed, with costs.

CORE TERMS

dividend, nexus, investment income, unitary business, benefits, taxation, taxing jurisdiction, capital gains, nondomiciliary, taxpayer, taxed, shareholders, cases, stockholders, earnings, commerce clause, due process, privilege tax, taxing state, do business, apportioned, intangible, decisions, municipal, fiscal, sufficient nexus, apportionability, contends, purposes, unitary

Tax Law, State & Local Taxes, Franchise Taxes, Imposition of Tax, General Overview, Income Taxes, Corporations & Unincorporated Associations, Administration & Procedure, Constitutional Law, Fundamental Rights, Procedural Due Process, Energy & Utilities Law, Taxation Issues, Congressional Duties & Powers, Commerce Clause, Substantive Due Process, Scope, Evidence, Inferences & Presumptions, Civil Procedure, Appeals, Appellate Jurisdiction, State Court Review, Business & Corporate Law, Corporate Governance, Shareholders, Federal Taxpayer Groups, S Corporations, Distributions by S Corporations, Income Tax