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Taxes in New York (TiNY) is a blog by the Hodgson Russ LLP State and Local Tax Practice Group. The weekly reports are intended to go out within 24 hours of the Division of Tax Appeals’ (DTA) publication of new ALJ Determinations and Tribunal Decisions. In addition to the weekly reports TiNY may provide analysis of and commentary on other developments in the world of New York tax law.  

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TiNY Report for November 1, 2019 (reporting on DTA cases issued October 24)

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We have one Determination and one ALJ Order to report this week. The Order is a quirky little tune. The Determination is a freakin’ opera! 


Matter of Frias; Judge Friedman; Division’s Rep.: Charles Fishbaum; Petitioner’s Rep.: Jhonatan Mondragon; Article 22.

The Supervising ALJ considered Petitioner’s motion to vacate a default determination based on the following abridged facts:

Petitioner filed the petition challenging a denial of refund. The Division and Petitioner cross-moved for summary determination. Judge Gardiner denied both motions. The parties agreed to have a hearing on January 17, 2019. But then the parties agreed to an adjournment. The rescheduled hearing was on March 19, 2019, but neither Petitioner nor his representative showed up. After waiting a reasonable period, Judge Gardiner granted a default judgement in favor of the Division. 

Here’s a killer Finding of Fact:

“11. On July 1, 2019, petitioner filed this application to vacate the default determination. The application contains Mr. Mondragon’s [ed. Petitioner’s representative] affidavit of the same date, in which he made several assertions to explain the failure to attend. First, Mr. Mondragon stated that he is an individual with a memory and learning impairment that ‘substantially limits major life activities such as working and running a business, dealing with appointments’ or organization. He added that he could not make a ‘rational action’ regarding participation in a hearing. Mr. Mondragon did not identify any time period for the existence of the disability. He also did not offer any documentary substantiation of his disability with the motion papers. Furthermore, Mr. Mondragon stated that the hearing, scheduled for March 19, conflicted with his ability to prepare sales tax returns, and comply with ‘ongoing bookkeeping, payroll, email, and advisory obligations.’ He added that ‘tax season’ is a very stressful time and severely limits his ability to make proper decisions. Finally, Mr. Mondragon stated that he was not in his ‘right senses to agree or disagree’ to the mutually selected hearing date. He acknowledged that he failed to call or request an adjournment of the hearing.”

Although I am rarely at a loss for words, I hardly even know where to start with this. So I’ll offer just one thought: I was taught in law school that the “ineffective assistance of counsel” defense is a valid (albeit last-gasp) argument to be made in criminal appeals. However, no one needed to teach me that you would never, ever, make that argument when the counsel accused of ineffective assistance is yourself. That’s just not a good look.

Not surprisingly, Judge Friedman did not grant Petitioner’s motion to vacate the default judgement. Petitioner was found to have neither showed an acceptable excuse for missing the hearing nor a meritorious case.


Matter Moody’s Corporation & Subsidiaries; Judge Galliher; Division’s Rep.: Jennifer Baldwin; Petitioner’s Reps.: Marc Simonetti, Even Hamme, and Aruna Chittiappa; Article 9-A.


This nearly 80-page-long determination is the latest installment in the Moody’s saga, and the first episode in which substance is addressed. It is a doozy.

Our constant readers will know the background of this case. For those new to TiNY: Moody’s is involved in a couple of lines of business, but its major thing is getting paid by securities issuers (corporate and governmental) to analyze the creditworthiness of the debt issued by those securities issuers. Once the debt is “rated” by Petitioner, it is typically posted so that the investing public is aware of the rating. Which reminds me of an existentialist “tree falls in the forest” line I heard back in 2009 from an unemployed financial analyst: “If a collateralized mortgage obligation’s debt rating is not shared with the public, is the CMO still garbage?” 

Yup, even 11 years after the global economic crisis, it’s still not funny.

Anyway, Moody’s was a New York City-centric business. If it used the “location of performance” service receipts/sourcing method, applicable to the audit years (2011-2014), it would pay a boatload of New York tax. So it asked for alternative apportionment beginning no later than 2008. And it asked a lot of times. Here is a pretty damning phrase “The Division did not formally respond…,” and it is repeated no less than four times in the Judge’s Findings of Fact involving the requests made by Petitioner for alternative apportionment.

In 2014, Petitioner requested (again) alternative apportionment, and it was granted, and the method allowed Petitioner to source receipts based on the location of the issuer of the debt being rated. 

While all of this is going on, Petitioner was hearing rumors that its biggest competitor, S&P, had a deal with the Division so that it could source its receipts on a destination basis.

Anyway, Petitioner sourced its credit rating receipts to New York based on the ratio of New York population to U.S. population, and that resulted in a single-digit apportionment percentage.

On audit, the Division asserted that credit rating receipts are service receipts and should be sourced based on the location of performance. In addition, the Division asserted that Petitioner improperly claimed a subtraction modification for royalties received from foreign affiliates not taxable in New York and that Petitioner was required to include its captive insurance company on its combined return.

Sourcing receipts: This was where the Judge spent most of his energy. Here are his legal conclusions in a nutshell: (1) credit rating receipts are not receipts of a publisher; (2) credit-rating receipts are not “other business receipts,” but even if they were, they would be sourced to the location where they were earned, which is the location where the services were performed (under Matter of Catalyst Repository Systems); (3) credit rating receipts are receipts for services, and thus should be sourced based on location of performance; (4) the Commissioner was permitted to discriminate between the treatment of S&P and Petitioner, S&P’s treatment was based on the State’s desire to avoid a significant loss of 3,000 jobs to New Jersey, and any discrimination was incidental and not purposeful; (5) the Division’s granting a location of issuer methodology in 2014 was a proper exercise of discretion by the Commissioner, and Petitioner was required to use the permitted method and not the population-ratio method under which it filed; and (6) the Division arbitrarily and improperly denied Petitioner’s request for similar alternative apportionment methods for the 2011-2013 years, and, accordingly, Judge Galliher permitted Petitioner to use location-of-issuer, receipts-sourcing for all of the years – the Division’s arguments that Petitioner had not made requests for alternative apportionment for the 2011-2013 was found to be hooey, since the facts found showed that Petitioner had been seeking alternative apportionment methods on a fairly regular basis since 2008.   

As I read through this part of the determination, I had to wonder whether the Judge would have found that the Commissioner exceeded his authority when he made the deal with S&P. I don’t think we’ll ever know the answer to that one.

The subtraction modification for the royalties received from a related party: Petitioner subtracted from its income royalties it received from related corporations not taxable in New York. The Judge concluded that this was not appropriate. Here are the Judge’s legal conclusions: (1) the payments by the foreign affiliates were royalties; (2) the foreign affiliates were related parties; (3) the law permits a subtraction modification for royalties received from a related party “unless such royalty payments would not be required to be added back under [the companion language in the statute denying a deduction for payments made to a related party]” (I’ll call this the “subtraction proviso”); (4) since the foreign affiliates paying the royalties weren’t New York taxpayers, they weren’t required to add back the royalty payment deductions and the subtraction proviso kicked in, thereby denying Petitioner the right to deduct the royalties it received; and (5) the subtraction proviso in this instance did not manifest an as-applied violation of the “discrimination prong” of the Complete Auto Transit Commerce Clause test.

And as I read through this part of the determination, I wondered whether a Wynne-type as-applied fair apportionment argument would have been the better approach. It seems to me that if every jurisdiction had New York’s taxing scheme there would be double taxation of the royalty income any time that the royalty payer was not taxable in the same jurisdiction as the royalty recipient. This seems like a pretty blatant violation of the internal consistency test articulated in Wynne

The inclusion of the captive insurance company in Petitioner’s combined return. The Judge also ruled that Petitioner was required to include its captive insurance company on its combined report. Related insurance companies are generally taxed separately under Article 33. However, related over-capitalized captive insurance companies (“OCCIC”) are required to be included on a taxpayer’s combined report. Among other requirements, more than 50% of an insurer’s income must be from premiums to avoid the disadvantageous OCCIC treatment. In this regard, the captive’s revenue from Petitioner was found by the Judge to not constitute “premiums” under the Tax Law since the insurance provided by the captive insurer to Petitioner did not involve a shift of the risk from Petitioner to third parties. Rather, the captive insurer was a subsidiary of Petitioner, and, to the extent the captive insurer would be obligated to pay for a loss, Petitioner’s net worth would be affected in a way that was no different than if the Petitioner sustained the loss directly. The Judge opined that the New York Tax law concept of “premiums” was influenced by the Internal Revenue Code’s concept of “insurance.” Under interpretations of the IRC, insurance requires a bona fide shifting of risks from the insured to the insurer. The Judge reasoned that absent a shifting of the risk, there could be no insurance, and, without insurance, there could be no premiums.

Penalties. The Judge sustained penalties.  

This is a meaty determination with lots of money involved and really interesting and close call issues. I expect we’ll see the case work its way up to the Tribunal. And I look forward to writing up its analysis in TiNY.

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