The issue of whether a group of related corporations can file separate New York Franchise Tax returns, or whether they need to file on a combined basis (similar to a federal consolidated tax return), has, over the years, been one of the most frequently litigated corporate tax issues. Virtually all of these cases have involved taxpayers who have sought to file on a separate return basis. The Division of Taxation typically takes the position that corporate taxpayers should file combined franchise tax returns. The cases generally involve situations where out-of-state corporations (corporations that either have no nexus to New York or very low apportionment factors) are highly profitable, either due to the profitability of their own operations or because these corporations receive interest, royalties, or other types of payments from related corporations doing business in New York. The division has argued in these cases that separate return filing distorts the amount of income taxable by New York.
In two recent cases, IT USA,1 and SunGard,2 however, it was the division that argued that corporate taxpayers should not be permitted to file combined returns and the taxpayers who argued that separate filing would be distortive. As a result, the cases are reminiscent of the classic episode of the situation comedy Seinfeld, titled “The Bizarro Jerry.” In the episode, Elaine meets and begins to hang out with a group of men who resemble Jerry, George, and Kramer but behave in the opposite manner (that is, they don’t act like jerks).3 The episode generates a funny sense of unease as everything you had come to expect is different. A reader of IT USA or SunGard will experience the same unease as soon as she reaches the division’s arguments in each case.
