It is common for groups of affiliate companies to record transactions within the group by “book entry” rather than actual transfers of cash. It is also common for one member of an affiliate group to undertake an activity that benefits all of the members of the group without necessarily passing on the cost of such activity. Because these inter-affiliate transactions may have no economic effect on the ultimate owner (as moving money from one’s “left pocket” to one’s “right pocket” would not), oftentimes taxpayers approach these transactions with a degree of casualness. However, a Tax Appeals Tribunal decision from earlier this year, CLM Associates, LLC, DTA No. 826735 (N.Y. Tax App. Trib., Feb. 12, 2018), is a reminder that form matters in such transactions, and that taxpayers should consider the risk that consideration may be deemed to have been paid between affiliates.

The case concerned “an automotive sales and service group” known as “Premier.” Premier had 12 wholly owned subsidiaries: “CLM” (the petitioner in the case) and 11 car dealerships. CLM was not a dealership, but, rather the “administrative” entity for the Premier group, providing “accounting, [HR], record retention, [IT,] and marketing” functions for all other members of the group. All 12 subsidiaries were disregarded as entities separate from Premier, and, therefore all of the entities were considered a single taxpayer for Federal income tax purposes. As a result, transactions between any of the group members are ignored for Federal income tax purposes.