EMIGRANT SAVINGS BANK - DETERMINATION/ORDER - 06/13/97

In the Matter of EMIGRANT SAVINGS BANK TAT(H) 94-130(BT) - DETERMINATION/ORDER

NEW YORK CITY TAX APPEALS TRIBUNALADMINISTRATIVE LAW JUDGE DIVISION

BANKING CORPORATION TAX - AS THERE W ERE NO MATERIAL TRIABLE ISSUES OF FACT, THEISSUE OF W HETHER A JOINT VENTURE W HICH DEVELOPED REAL PROPERTY IN NEW JERSEYW AS PART OF PETITIONER'S UNITARY BANKING BUSINESS COULD BE DECIDED BY MOTIONFOR SUMMARY DETERMINATION/THE JOINT VENTURE W AS NOT PART OF PETITIONER'SUNITARY BANKING BUSINESS AS THERE W AS NO: (1) UNITY OF OW NERSHIP; (2) UNITY OF USEAND OPERATION; (3) FUNCTIONAL INTEGRATION; (4) CENTRALIZATION OF MANAGEMENT; OR(5) FLOW OF VALUE W HICH COULD NOT BE MEASURED BY SEPARATE ACCOUNTING/THEINCOME FROM THE JOINT VENTURE W AS THEREFORE NOT TAXABLE BY THE CITY.JUNE 13, 1997

NEW YORK CITY TAX APPEALS TRIBUNALADMINISTRATIVE LAW JUDGE DIVISION__________________________________ : In the Matter of the Petition : : DETERMINATION/ORDER of : : TAT(H) 94-130(BT) EMIGRANT SAVINGS BANK : :

Murphy, A.L.J.:

Upon the motion of Emigrant Savings Bank ("Petitioner"),

dated June 15, 1995, for summary determination that for 1987 (the

"Tax Year"), there was no deficiency of New York City ("City")

Banking Corporation Tax ("BT") but an overpayment for which it is

entitled a refund (the "Motion"); and the affidavits, affirmation,

exhibits, memoranda of law and oral arguments submitted by Donald

B. Susswein, Esq., Petitioner's representative, and Martin

Nussbaum, Esq., Assistant Corporation Counsel, the representative

of the Commissioner of Finance ("Commissioner" or "Respondent");

for the facts and reasons set forth below, Petitioner's motion is

granted.

FACTS

Giving all reasonable inference to Respondent, the material

facts are as follows:

1. In the Tax Year, Petitioner, Emigrant Savings Bank, was

engaged in the banking business in the City. Petitioner was not

engaged in the banking business in New Jersey during this period.

2. During the Tax Year, Petitioner, through Embridge Company

("Embridge"), held a 55% beneficial interest in New Jersey real

property (the "Property"). Embridge, a trust created under the

The Joint Venture Agreement and a contemporaneous sales1

agreement were signed by William A. Donahoe, Petitioner's thenSenior Vice President, as trustee for Petitioner and as Embridge'ssole trustee. It is not disputed that Embridge was acting only onPetitioner's behalf and was disregarded for federal income taxpurposes. Therefore, it is not relevant, for purposes of thisdetermination/order, whether Petitioner acted directly through Mr.Donahoe as its employee or indirectly through him as Embridge'sTrustee. The term "Petitioner" is also used in this determin-ation/order to encompass actions taken by Embridge and by itstrustee with respect to Petitioner's 55% beneficial interest in the Property.

Some time after 1977, Robert J. O'Rourke, Petitioner'sExecutive Vice President, became Embridge's sole trustee. Duringthe Tax Year, Daniel C. Hickey, Petitioner's Senior Vice Presidentand General Counsel was Embridge's sole trustee.

2

laws of New Jersey in 1971, was a pass-through entity for Federal

income tax purposes. As the beneficial owner of the 55% interest

in the Property to which Embridge held legal title, Petitioner

(rather than Embridge) took the tax consequences arising from such

ownership into account on its tax returns for the Tax Year.

3. In the early 1970's, Lethbridge Associates ("Leth-

bridge"), an unrelated partnership, owned the remaining 45%

interest in the Property. Loans from Manufacturers Hanover Trust

Company (a bank unrelated to Petitioner) to Lethbridge, Lethbridge

Corporation, and George Lethbridge, were secured by a mortgages on

the Property (the "MHT Mortgages"). At that time, Lethbridge and

Petitioner, through Embridge, intended to develop the Property

through a joint venture.

4. In 1977, Lethbridge sold its 45% interest in the Property

to members of the McBride family (the "McBrides"). On March 31,

1977, the McBrides and Petitioner entered into an agreement (the

"Venture Agreement") to form a New Jersey joint venture known as

Ramapo Ridge-McBride (the "Joint Venture"). The purpose of the1

Joint Venture was to construct residential condominium units and to

Article 2 of the Venture Agreement provided that the initial2

capital contributions to the Joint Venture were $4,500 from theMcBrides and $5,500 from Petitioner's trustee.

The "prime rate of interest" was defined therein to be "the3

same rate of interest per annum publicly announced and publishedby Morgan Guaranty Trust Company as its `Prime Lending Rate.'"

The Note further provided that if Petitioner were required4

to purchase the MHT Mortgages pursuant to a prior agreement, thatthe McBrides would provide Petitioner with "an amount equal to 45%

3

develop other commercial property on the Property. Under the

Venture Agreement, profits and losses were to be shared, and

capital contributions and distributions were to be made, according

to the venturers' proportionate Joint Venture shares: 45% for the

McBrides and 55% for Petitioner's trustee. 2

5. No member of the McBride family was a stockholder, officer

or director of Petitioner. Article 1, §1.3 of the Venture

Agreement provided that the "relationship between the parties shall

be limited to the ownership, development and operation, sale or

leasing of the premises."

6. Prior to the creation of the Joint Venture, and in

furtherance of their acquisition of the Lethbridges' interest in

the Property, in September of 1976, the McBrides executed a

promissory note to Petitioner (the "Note") with respect to a

$2,000,000 line of credit. The Note was issued at the prime rate

of interest ("Prime") plus 1/4 of 1%, but was in no event to be3

less than 6.5% per year. The Note was secured by the Property. In

a schedule appended to and incorporated by reference in the Note,

the Property was identified as Block S69, Lots 1, 3, 8 and 9A;

Block S68, lot 24 and the Bed of Myrtle Avenue; and several named

commercial properties. $467,917 of the Note pertained to prior

advances and was to be repaid by July 1, 1979, while the repayment

of the balance was to be made by January 2, 1985. Under the terms

of the Note, the McBrides were to purchase the MHT Mortgages.4

of the funds required to perform said agreement."

4

7. The Note was subsequently amended: (a) on July 25, 1980,

to increase the loan amount to $5,465,000; (b) in March of 1984,

following the death of Frank McBride, to substitute his estate in

his place; and (c) on February 25, 1985, to increase the rate of

interest to Prime plus 1/2 of 1%, but in no event less than ll% per

year, and to extend the repayment date to January 2, 1988.

8. Articles 4.2 and 4.3 of the Venture Agreement provided

that all activities which involve the physical development and

operation of the Property, including site preparation and con-

struction, and all sales and leasing activities, were required to

be performed by entities owned or controlled by the McBrides, or by

McBride Enterprises, Inc. ("McBride Enterprises"), a company owned

and operated by the McBrides. Article 10 of the Venture Agreement

provided that the McBrides were also responsible for maintaining

the Joint Venture's books and records, including bank accounts.

9. On March 31, 1977 (the same date that the Venture Agreement

was entered into), the Joint Venture entered into a sales agreement

(the "Sales Agreement") granting McBride Enterprises the exclusive

right, on a commission basis, to sell or lease its residential

property and be the listing broker for the sale or lease of its

commercial or industrial property.

10. No services were required to be performed or were ever

performed by Petitioner with respect to the Joint Venture and its

Property. None of Embridge's trustees was an expert in the devel-

opment, management or sale of condominium units. Nor did any other

of Petitioner's employees have such expertise before or during the

Tax Year. However, during the term of the Joint Venture, one of

Petitioner's employees occasionally visited the Property to check

on the status of the development and on the sales of condominium

Neither party submitted a copy of the Tax Year BT return.5

However, Petitioner submitted copies of its Form NYC 3360B, BankingCorporation Tax Report of Change in Tax Base Made by the U.S.Internal Revenue Service and/or NY State Department of Taxation andFinance (the "Report of State Changes") for the that year with itsOctober 24, 1995 reply papers. See, infra, Facts ¶19.

5

units. That individual was deceased at the time the Motion was

made.

11. In computing City taxable income in its BT reports prior

to the Tax Year, Petitioner included its proportionate share of the

Joint Venture's income (the "Venture Income") or loss (the "Venture

Loss"), as well as the interest income received on the Note. In

1986, the year immediately preceding the Tax Year, the Venture Loss

effectively lowered Petitioner's bank tax liability by $36,348, or

less than 2%. For the five periods subsequent to the Tax Year

(1988 through 1993), Petitioner incurred Venture Losses which it

included in computing its City taxable income.

12. For the Tax Year, however, Petitioner did not include the

Venture Income, consisting of operating income of $5,860,138 and

capital gains of $13,514,341, in computing its City taxable

income. 5

13. Petitioner reported Venture Income for the Tax Year as

New Jersey income on a New Jersey corporation income tax return,

and paid New Jersey taxes thereon.

14. Petitioner disposed of its interest in the Joint Venture

in 1994. Petitioner realized income as a result of its interest in

the Joint Venture, but had not filed its 1994 BT as of the time the

Motion was filed.

15. The New York State (the "State") Department of Taxation

and Finance (the "State Tax Department") audited Petitioner's New

Petitioner excluded the Venture Income from its State6

franchise tax return, showing and identifying such income as "NewJersey partnership income."

6

York State banking corporation franchise tax return for the Tax

Year (the "State Audit").

16. As a result of the State Audit, the State Tax Department

required Petitioner to include Venture Income (which was identified

in the State Tax Department's audit workpapers as "New Jersey trust

income") in State entire net income ("ENI"). Although Petitioner6

requested permission at audit to separately account for the Venture

Income and Venture Loss, and the gain from the Venture, the State

Tax Department denied that request based on its interpretation that

relevant State regulations did not allow for any discretionary

allocation adjustment where Petitioner did not maintain branch

operations outside New York State. Respondent has not asserted

that a similar limitation exists for City BT purposes.

The State Tax Department also required Petitioner to file a

combined franchise tax report with two of its subsidiaries: Prustan

Corporation ("Prustan") and Prujas Corporation ("Prujas").

According to the State Audit workpapers, Prustan owned an interest

in an Ulster County real property venture which did not do business

in the Metropolitan Commuter Transportation District (which

includes the City). On June 28, 1991, the State Tax Department

issued a final determination reflecting these, among other,

changes.

17. On May 9, 1990, Respondent began an independent audit of

Petitioner's City BT return for the Tax Year (the "Audit"). During

the course of the Audit, Respondent's auditor, Stuart Auslander

(the "Auditor"), issued to Petitioner Information Document Request

Number 6 (the "IDR") which inquired:

With this payment, Petitioner's total combined BT payments7

for 1987, reported on NYC Form NYC-1A, were $4,137,819. Petitionerasserts that if its request for discretionary relief is granted,only $796 of the additional payment made of $975,935 would havebeen due for the Tax Year; i.e., a total BT liability of$3,162,680.

As a part of its request to separately account for VentureIncome and Venture Loss, Petitioner concedes that $470,759 ofdeductions taken with respect to the Joint Venture for 1986 shouldnot have been taken and that its 1986 BT liability should thereforeincrease by $36,348. Petitioner has maintained a similar positionwith respect to all open years. Those years, however, are not atissue and Respondent has not asserted the right of equitable offsetor recoupment.

7

Were there intercompany transactions between Emigrantgroup members (subsidiaries or other) and the RamapoRidge-McBride partnership venture [the Joint Venture] and/or the McBride organization.

The IDR also requested that Petitioner list specific transactions

between Emigrant and the Joint Venture including "lending, payment

of interest, provision of management or other services" and submit

supporting workpapers.

18. On March 14, 1991, Petitioner responded to the IDR.

Petitioner stated that there were no "intercompany transactions

between Emigrant group members and Ramapo Ridge-McBride and/or

[the] McBride organization except for Embridge Company."

Petitioner did not submit any other information at that time and

indicated, on the face of the IDR, that workpapers were "N/A."

19. On July 25, 1991, following the State Audit, Petitioner

filed with Respondent the required City Form 3360B, Banking

Corporation Tax Report of Change in Tax Base Made by U.S. Internal

Revenue Service And/Or NY State Department of Taxation and Finance

(the "Report of State Changes") and remitted additional City BT for

the Tax Year of $975,935. At the same time, Petitioner submitted7

conforming amended City Forms NYC-1, Tax Return For Banking

For the Tax Year, Petitioner concedes the application of a8

State Audit adjustment of $10,284 which corrected a subtractionerror made in computing interest on New York State obligations.

8

Corporations, and NYC-1A, Combined Tax Return for Banking

Corporations for the Tax Year (the "Amended Returns"). The Amended

Returns included Prujuas in a City combined return, but did not

include Prustan which did no business in the City. Petitioner's

combined City ENI reported on the Amended Returns was $53,489,666;

of which, $948,130 was attributable to Prujas.

Appended to the Report of State Changes and to the Amended

Returns were identical requests that Respondent not follow the

State by including Venture Income in City banking corporation ENI

for the Tax Year. Petitioner specifically requested that Respon-8

dent exercise the discretion granted him under New York City

Administrative Code (the "Code") section 11-642(a)(6) to adjust

Petitioner's allocated City income by allowing it to separately

account for the Venture Income for the Tax Year by excluding such

income from City ENI on the basis that the income had been earned

from a business wholly carried on outside the City. The Amended

Returns were reviewed during the course of the Audit.

20. The Auditor issued a Notice of Proposed Audit Adjustment

on or about May 5, 1992. On May 14, 1992, Francis R. May, Senior

Vice President and Controller for Petitioner, responded to the

Notice of Proposed Audit Adjustment by a letter in which he stated

Petitioner's disagreement with the proposed assertion of a BT

deficiency and renewed Petitioner's request for discretionary

relief.

21. The Auditor responded to Mr. May in a letter dated

October 1, 1992 (the "Auditor's Letter"). The bases stated in the

Auditor's Letter for denying Petitioner's request for a

9

discretionary adjustment were that owning real estate was a

"permissible activity," Petitioner had invested in the Joint

Venture, and that the Joint Venture's income was from Petitioner's

unitary business. Included in the Auditor's Letter were the

following factual findings: (a) Petitioner's "only holding of the

trust" was its 55% interest in the Joint Venture; (b) the "business

activity" of the Joint Venture was conducted in New Jersey; (c) the

business activities of the Joint Venture included "joint ownership

of the property and oversight over the property development

project;" (d) the partners in the Joint Venture had "jointly chosen

the McBride organization to develop and run the project;" (e) the

Joint Venture maintained separate books and records; and (f) there

were no inter-entity transactions between Petitioner and the Joint

Venture. The Auditor's Letter specifically stated:

[T]he bank did not lend money to the partnership or to the McBrides nor lend money in such a way as to aidthe purchase by the partners of their partnership sharenor finance the activity of the development project.

22. On March 11, 1993, Petitioner supplied certain infor-

mation which the Auditor had requested, including copies of its

1987 New Jersey tax return and the Note.

23. On September 29, 1993, Respondent issued to Petitioner a

Notice of Determination asserting a deficiency of BT in the

principal amount of $541,158.41, with interest computed to that

date of $370,337.53, for a total deficiency of $911,495.94 (the

"Notice").

24. Petitioner requested a conference before Respondent's

Conciliation Bureau. Following conciliation proceedings, the

Director of that Bureau issued a Proposed Resolution which

No formal letter denying Petitioner's refund request was9

submitted in the Motion papers. The Proposed Resolution issued byRespondent during the Conciliation proceeding, however, indicatesthat Respondent "denied [the] refund claim of Bank Tax . . .filed on 7/25/91 [sic] for tax year 1987."

In section (1) of the Petition (in the subsection,10

"Redetermination of a Deficiency"), on the line encaptioned "totaldue per notice," Petitioner transposed the Notice figures andasserted a Notice amount of $911,945.94, rather than the Noticeamount of $911,495.94.

10

indicated that Respondent "denied the refund claim" and sustained9

the Notice. On March 14, 1994, Petitioner responded that it did

not consent to the Proposed Resolution. On May 3, 1994, Respondent

issued a Conciliation Decision and Order discontinuing the concili-

ation proceeding based on Petitioner's "express disagreement" with

the proposed resolution.

25. On July 29, 1994, Petitioner filed a Petition with the

Tax Appeals Tribunal in which it protested the deficiency asserted

by Respondent and also requested a refund of BT paid in the amount10

of $975,935 "plus interest."

26. On June 15, 1995, Petitioner filed the Motion, accom-

panied by affidavits from Donald B. Susswein, Esq. and Francis R.

May, several documentary exhibits, and a supporting Memorandum of

Law, requesting summary determination that its participation in the

Joint Venture was not a part of its unitary business and, there-

fore, that it must be permitted to separately allocate and account

for the Venture Income and related deductions for the Tax Year.

27. On August 24, 1995, Respondent submitted a Memorandum in

Opposition and an affirmation from Martin Nussbaum, Esq. Appended

to that affirmation were several pages from the Index of Mortgages

of Bergen County for 1970 through 1981 (the "Index Pages") which

recorded mortgage agreements between several of the McBrides and

several financial institutions including Petitioner. According to

The record does not disclose who authored the handwritten11

notes on those photocopies, although those notes may have been madeby the City Auditor as indicated in his affidavit discussed, infra,Fact ¶29 (in which the Auditor states that prior to completing theAudit, he photocopied the Index Pages and cross-referenced theinformation contained on some of these pages with other unspecifiedBergen County, New Jersey deed books).

11

the photocopied Index Pages and the handwritten notes thereon: (a)11

a mortgage given to Petitioner by several of the McBrides in the

total amount of $91,157.85 was recorded in 1973 and borrowings in

the amount of $258,000 were consolidated into a single mortgage;

and (b) a mortgage of $3,500,000 given to Petitioner by several of

the McBrides was recorded in December of 1977 with respect to

"Rockleigh N J [sic]."

28. On October 24, 1995, Petitioner submitted a Reply

Memorandum to Respondent's Memorandum in Opposition, accompanied by

photocopies of: (a) correspondence between Petitioner and the

Auditor; (b) several pages from the Report of State Changes; (c)

pages from the State Audit workpapers; and (d) several pages from

the Amended Returns. Many of these documents had been submitted to

the Auditor during the course of his review. See, Fact ¶19, supra.

29. On February 9, 1996, Respondent submitted an affidavit of

the Auditor dated February 8, 1996 (the "Auditor's Affidavit")

accompanied by photocopies of: (a) the IDR; (b) the March 11, 1993

correspondence from Petitioner to the Auditor; (c) the Note; (d)

amendments to the Note; (e) Note Exhibits A-1 and C; (f) Note

Schedule C; (g) Note Extension Agreement; and (h) Internal

Revenue Service Forms 851, Affiliations Schedules, filed by

Petitioner for the Tax Year (the "Affiliations Schedules").

30. As indicated in the Auditor's Affidavit, the finding

expressed in the Auditor's letter that Petitioner did not lend

monies to the Joint Venture was based solely upon Petitioner's

March 14, 1991 response to the IDR because the Auditor had not, at

The other nine listed corporations are: Hamilton Center12

Corporation; Emex Corporation; Marschall Associates, Inc.; EmseyCorporation; P.S.B. Inc; E.T.H Inc.; ETH of Maryland Inc.;Londonderry Estates, Inc.; and Emisure Agency Inc.

12

that time, "independently investigated in any detail the financing

or other intercompany transactions between the Joint Venture and

Emigrant Savings." Before the Notice was issued, however, Peti-

tioner informed the Auditor of the existence and terms of the Note.

The Auditor then concluded, based on his examination of the Note,

that the loans were issued at "extremely favorable" rates.

31. The Auditor further stated in his Affidavit that his

examination of the Bergen County records indicated:

. . . a transfer of property in 1977 from Emigrant andLethbridge, in the ratio of 55%/45%, to Emigrant andMcBride in the ratio of 55%/45%. The stated considera-tion for the transfer was one hundred dollars. One ofthe blocks described in the deed was Block s-70 [sic].

32. In the Affiliations Schedules, Petitioner reported that

it held eleven wholly-owned subsidiaries, including Prustan and

Prujas. With respect to these subsidiaries' principal business12

activities, Petitioner reported that seven were engaged in "real

estate management;" two were engaged in "real estate investment;"

one was engaged in "insurance;" and one (which was owned indirectly

through another wholly-owned subsidiary) was engaged in "mortgage

banking." Footnotes to the State Auditor's workpapers also

indicate that Petitioner had two other subsidiary corporations:

Emigrant Capital Markets Corporation and Emigrant Mortgage Bankers,

Inc. which were "located entirely within New York . . . [but which

were] inactive and have no income." It is not clear from the

record whether these two corporations were included in the

Affiliations Schedules.

13

33. In furtherance of the Motion and in response to materials

submitted by Respondent, Petitioner, over a period of time,

submitted the affidavits of several of its employees: (a) Frank A.

Balzarini, its Senior Vice President of property management; (b)

Daniel C. Hickey, its Senior Vice President and General Counsel and

an Embridge trustee; (c) Charles Howe, its former Tax Manager; and

(d) Diane Hofmockel, its Tax Director (who gave two affidavits).

Petitioner also submitted a Supplemental Memorandum in Support of

Petitioner's Motion for Summary Determination on February 26, 1996.

34. Oral Argument was held on the Motion on March 6, 1996, at

which time the parties presented their direct arguments. The

proceeding was continued in order to afford Respondent an

opportunity, through discovery, to obtain additional information

from Petitioner which might contribute evidentiary support for its

assertion that material triable issues of fact exist.

35. On May 8, 1996, in a letter to Petitioner's represen-

tative, Respondent's representative submitted: (a) twenty-one

"Questions of Fact," (b) three "Requests for Production of

Documents;" and (c) ten "Requests for Production of Witnesses."

According to the letter, the requests for production were made

solely "in the event there is a hearing."

36. By letter to the undersigned, dated June 3, 1996,

Petitioner requested that Respondent explain the relevancy of

several of his "Questions of Fact" in the context of the legal

issue presented by the Motion.

37. By letter to the undersigned, dated June 12, 1996,

Respondent replied to Petitioner's June 3, 1996 letter, stating

that:

Respondent respectfully declines Petitioner's invitationto further elaborate and provide it with the exact legal

14

arguments Respondent intends to use in conjunction with eachitem of evidence. It is not our desire to assistPetitioner in its wish to "focus (its) [sic] responses appropriately," or to selectively reveal evidence whichcasts its position in the most favorable light.

38. On June 21, 1996, the undersigned wrote to the parties

and indicated that based upon the language in the June 12, 1996

letter quoted above, it appeared that Respondent did not desire

discovery from Petitioner prior to a ruling on the Motion (vis-a-

vis prior to a hearing on the merits). Respondent's represen-

tative confirmed this to be the case in a subsequent Telephone

Conference. As a result, the continued Oral Argument was scheduled

for, and held on, September 12, 1996.

39. At the September 12, 1996 session, the undersigned

questioned Respondent's representative on the record as to whether

he wished to pursue the previously proffered opportunity for

discovery. The representative responded:

It is my position that a formal discovery is relevantin the context of a hearing. [T. 45].

. . . .

It is our position that there is not discovery in theAdministrative Law Judge proceeding with reference to amotion for summary determination.. . . the obligationof the Respondent in that motion . . . is to show thatthere are material issues of fact. I believe I have donethat in my May 8, 1996 letter. [T. 49]

Respondent's representative further stated that he had

"withdrawn discovery proceeding" [T. 52] and that it was his

position that a formal discovery request was only relevant

"[w]ithin the context of a hearing on the record." [T. 59] When

questioned about the June 21, 1996 letter from the undersigned and

the subsequent Telephone Conference, he replied:

15

The litigation judgment that I made was that it was muchmore efficient and much better for the City in the contextof a hearing where I have an ongoing cross-examination ofwitnesses to further probe those witnesses to get documenta-tion or in the context of certain witnesses who can flushthis out to seek that kind of documentation, rather thanthe scope of this summary determination motion where I

view that as somewhat limited. [T. 70].

40. Following oral argument, the parties were offered an

opportunity to submit additional arguments in writing. Petitioner

and Respondent informed the undersigned, in writing, that there was

no need for additional briefing.

STATEMENT OF POSITIONS

Petitioner asserts that the Joint Venture was not a part of

its unitary banking business and therefore the Venture Income for

the Tax Year should be accounted for separately. Petitioner

contends that the undisputed facts establish that as between itself

and the Joint Venture there was no: (1) unity of ownership, (2)

unity of use and operation, (3) functional integration, (4)

centralization of management, nor (5) flow of value which could not

be measured by separate accounting. In the alternative, Petitioner

argues that separate accounting of the Venture Income is required

to properly reflect its City taxable income and BT liability.

Respondent argues that summary determination should not be

granted, and asserts that there are material triable issues of fact

which may only be determined after a full hearing. Respondent

maintains that Petitioner is engaged in "real estate management"

and, therefore, the Joint Venture was a part of its unitary

business. Relying primarily on the Note between Petitioner and the

McBrides (which he asserts was not made at arm's length) and the

information contained in the Index Pages and the Affiliations

Schedules, Respondent argues that the relationship between

Petitioner and the Venture is characterized by a "flow of value"

16

which supports a determination that the Joint Venture was part of

Petitioner's banking business. Respondent further asserts that

the Auditor had no authority to "bind" Respondent and, conse-

quently, that the facts as articulated in the Auditor's Letter must

be disregarded.

CONCLUSIONS OF LAW

Section 1-05(d)(1) of the Tax Appeals Tribunal Rules of

Practice and Procedure provides that any party to an action before

the Tribunal may make a motion for summary determination, supported

by an affidavit, copies of relevant pleadings, and "any other

available proof" which:

. . . shall be granted if, upon all the papers and proofsubmitted, the administrative law judge finds that it hasbeen established sufficiently that no material andtriable issue of fact is presented and that the adminis-trative law judge can, therefore, as a matter of law,issue a determination in favor of any party.

However, Rule section 1-05(d)(1) further states:

The motion shall be denied if any party shows sufficientbasis to require a hearing of any issue of fact.

To prevail on its motion, Petitioner must prima facie

establish that it is entitled to summary determination on the facts

presented, as a matter of law, and must tender "sufficient evidence

to eliminate any material issues of fact from the case." Winegrad

v. New York Univ. Med. Center, 64 N.Y.2d 851 (1985), citing

Zuckerman v. City of New York, 49 N.Y.2d 557 (1980). See also,

Alvarez v. Prospect Hospital, 68 N.Y.2d 320 (1986). Thus,

Petitioner must prove on undisputed facts that the Joint Venture's

business was not unitary with its business and that, as a matter of

law, it was entitled to separately apportion and account for the

Venture Income during the Tax Year. See, Allied-Signal, Inc. v.

17

Director, Division of Taxation, 504 U.S. 768 (1992); British Land

(Maryland), Inc. v. Tax Appeals Tribunal, 85 N.Y.2d 139 (1995).

See also, People ex rel. Sheraton Buildings, Inc. v. Tax Commis-

sion, 15 A.D.2d 142 (3d Dept. 1961).

Once Petitioner makes a prima facie case, in order to defeat

the Motion, Respondent must either rebut the prima facie showing

(Shapiro v. Health Ins. Plan, 7 N.Y.2d 56 (1959)) or establish the

existence of a material triable issue of fact. Zuckerman, supra at

562; Matter of McNamara, 97-1 NYTC T-138 (NYS Tax Appeals Tribunal,

January 30, 1997).

There can be no dispute that if the Joint Venture's business

was not unitary with Petitioner's business, discretion must be

exercised under Code section 11-642(a)(6) to allow Petitioner to

separately account for the Venture Income which has no connection

to the City, rather than require Petitioner to apply an allocation

formula which takes into account the income of both businesses.

See, British Land, supra, where the New York Court of Appeals held

that "the first prerequisite of a constitutionally valid

application of an apportionment of income formula" is a

determination that the examined activities were part of a unitary

business. 85 N.Y.2d 139, 147 (1995). The issue therefore is

whether Petitioner has established that the Joint Venture is not

unitary with its City banking business.

A "unitary business" has been found where the multi-entity or

multi-division operation was properly characterized by either the

"three unities" of ownership, operation and use (Butler Brothers v.

McColgan, 315 U.S. 501 (1942)), or there exist the three criteria

of "functional integration," "centralization of management" and

"economies of scale" (Mobil Oil Corporation v. Commissioner of

Taxes of Vermont, 445 U.S. 425 at 436-38 (1980); Asarco Inc., etc.

v. Idaho State Tax Commission, 458 U.S. 307 (1982); F.W. Woolworth

Co. v. Taxation and Revenue Department, 458 U.S. 354 (1982)).

18

There was no "unity of ownership" between Petitioner and the

Joint Venture as 45% of the Joint Venture was owned by unrelated

third parties (the McBrides). Nor was there a "unity of operation"

between the entities. Pursuant to the Venture Agreement, McBride

Enterprises was solely responsible for the day-to-day operations of

the Joint Venture, and Petitioner's employees and officers were not

involved in the Joint Venture's daily management. Finally, there

was no "unity of use" between the two entities. For example, there

was no common executive force between Petitioner bank and the Joint

Venture. Nor were there any other incidents that might character-

ize a unitary relationship, such as joint purchasing or shared

advertising. Therefore, the "three unities" test was not met.

See, Butler Bros. v. McColgan, supra.

The alternative analysis commonly used to identify a unitary

business involves determining whether the entities are function-

ally integrated, are centrally managed, and their relationship

benefits from shared economies of scale.

There was no "centralization of management" between Petitioner

and the Joint Venture. McBride Enterprises was solely responsible

for the Joint Venture's day-to-day operation and the Embridge

trustees brought no special expertise to the Venture. The most

Petitioner did was occasionally send one of its employees to the

development site to check on unit sales. This minimal oversight

was wholly consistent with monitoring its investment in the Joint

Venture.

There is no evidence, or even suggestion, that the Venture

benefitted from any "economies of scale" which would typify a

unitary relationship with Petitioner. Nor was the Joint Venture's

business of building New Jersey condominiums "functionally inte-

grated" with Petitioner's City banking business. There were no

substantial transactions undertaken between the two entities. Nor

With respect to the Note, the facts set forth in the13

Auditor's Affidavit are being accepted in the light most favorableto Respondent (see, Nojaim Bros. v. CNA Ins., 113 A.D.2d 109 (4thDept. 1985)); i.e., that: (a) Petitioner loaned monies toindividual members of the McBride family prior to the partiesestablishing the Joint Venture; (b) the Note was secured by theProperty; and (c) some of the proceeds were used by the McBrides toacquire their interest in the Joint Venture.

The factual inquiry whether two entities are part of a14

single unitary business may include an analysis as to whether therewere non-arm's length transactions between the entities. Allied-Signal, Inc. v. Director, Div. of Taxation, supra. See also,British Land (Maryland), supra.

19

were there any other incidents of functional integration, such as

common purchasing or the use of common services.

Thus, on the uncontroverted facts, Petitioner has made a prima

facie showing that the Joint Venture's business of developing

condominiums was not unitary with its core banking business. The

issue, therefore, becomes whether Respondent has contradicted that

prima facie case or has established a material triable issue of

fact which requires a hearing on the merits.

Respondent avers that there are material issues of fact

presented by the Note, the Index Pages, and the Affiliations13

Schedules, which defeat summary determination and require denial of

the Motion. Based on these facts, Respondent asserts that the

businesses are unitary (i.e., that Petitioner's prima facie case

is defeated) and/or that there are sufficient triable issues of

fact which compel a formal hearing.

First, Respondent argues that the stated interest rate of the

Note was inadequate and therefore not at arm's-length. Based on

this position, Respondent concludes that a unitary relationship

existed between Petitioner and the Joint Venture. 14

20

The Note, however, was not between the Joint Venture and

Petitioner, but between Petitioner and unrelated parties who, as

members of the McBride family, held a direct or indirect 45% Joint

Venture interest. Moreover, although Respondent disputes the

Note's stated interest rate, that rate was always above the Prime

rate and Respondent did not offer any facts whatsoever to rebut

this showing. This is sufficient for Petitioner to prove prima

facie that the Note was made at an arm's-length rate.

Nor does the fact of the Note demonstrate that the two

businesses were functionally integrated. Neither does it confirm,

as Respondent argues, the kind of "sharing or exchange of value not

capable of precise identification or measurement - beyond the mere

flow of funds arising out of a passive investment or a distinct

business operation - which renders formula apportionment a

reasonable method of taxation." Container Corporation of America

v. Franchise Tax Board, 463 U.S. 159, 161 (1983). Even if

Petitioner funded the entire Joint Venture through the Note and its

own contribution, that alone would not be enough to make the Joint

Venture's business unitary with Petitioner's banking business.

See, e.g., the July 27, 1989 Ruling of the Department of Finance,

Finance Quarterly Bulletin 89-46. vol.1 no.3, pp. 17-21 (an opinion

issued by Respondent's Office of Legal Affairs permitting

Respondent to require separate accounting where the activities of

the principal business of the corporation and of an oil well

venture in which the corporation invested were found unconnected,

and the corporation's initial capitalization of the venture was

determined to be insufficient to make the venture's business

unitary with the business of the corporation).

Neither are the Index Pages, which record mortgages between

Petitioner and individual McBrides on parcels ostensibly contingent

to the Property, evidence of transfers of "value" to the Joint

Venture, as Respondent also argues. At best, the Index Pages

demonstrate that various individual members of the McBride family

Respondent also argues that it is possible that Petitioner15

may have acquired its interest in the Property through foreclosure,and therefore the Joint Venture is part of the Petitioner's unitarybanking business. Any argument that Petitioner may have acquiredthe Property as a result of mortgage foreclosure is whollyspeculative and is not supported by the facts before me. See,Shapiro, supra. See also, DiSabato v. Soffes, 9 A.D.2d 297 (1stDept. 1959).

The Joint Venture Agreement specifically states that theMcBrides purchased their interest from Lethbridge Associates, anentity unrelated to Petitioner. It is silent as to Petitioner'sacquisition of its interest in the Property. Without more, thesource of Petitioner's contributed interest cannot be taken intoaccount for purposes of this motion.

21

obtained mortgage loans from several financial institutions,

including Petitioner.15

Finally, Respondent's reliance on the Affiliations Schedules

is similarly insufficient. These schedules simply indicate that

several of Petitioner's subsidiaries were involved in unspecified

real estate activities. Since only two of those entities, Prustan

and Prujas, were required to be included by the State Tax

Department in State combined franchise tax returns, and only Prujas

(with a reported business purpose of "real estate") was included in

the protested Amended Returns, insufficient factual information was

provided to indicate that the affiliated corporations were engaged

in Petitioner's banking business. This hardly suffices as a

rational basis for assuming that the separate operations of the

Joint Venture condominium development business were unitary with

Petitioner's banking business.

The undisputed facts do not indicate that there was a flow of

value between the Venture and Petitioner incapable of precise

measurement which would constitutionally justify treating the

business of the Joint Venture as being unitary with Petitioner's

banking business. Respondent, therefore, has failed to contradict

Petitioner's prima facie case.

Facts which appear in Petitioner's papers and are not16

controverted by Respondent, similarly are deemed admitted forpurposes of this motion. See, Kuehne & Nagel v. Baiden, 36 N.Y.2d539 (1975).

22

Respondent further argues that material triable factual issues

exist which may only be resolved at hearing. In determining

whether such issues exist, all proof offered by Respondent,

including that proffered through affidavit, must be accepted as

true and considered in the light most favorable to him. Museums at

Stony Brook v.Patchogue Fire Dep't., 146 A.D.2d 572 (2d Dept.

1989); Dowsey v. Megerian, 121 A.D.2d 497 (2d Dept. 1986). See

also, Glick & Dolleck v. Tri-Pac Export Corp., 22 N.Y.2d 439 (1968)

(the credibility of affiants generally may not be weighed in a

summary determination proceeding). 16

If contrary inferences reasonably may be drawn from undisputed

facts, a full hearing is required (Gerard v. Inglese, 11 A.D.2d 381

(2d Dept. 1960)), as summary determination is a drastic remedy and

"should be denied where there is any doubt . . . whether there is

a material triable issue of fact." Phillips v. Kantor & Co., 31

N.Y.2d 307, 311 (1972). See also, Glick & Dolleck Inc. v. Tri-Pac

Export Corp.; 22 N.Y.2d 439 (1968); Indig v. Finkelstein, 23 N.Y.2d

728 (1968); Museums at Stony Brook v. Village of Patchogue Fire

Department, 146 A.D.2d 572 (2d Dept. 1989).

However, it is equally true that unsubstantiated allegations

are insufficient to demonstrate the existence of a material triable

issue of fact. While an opponent of a motion for summary

determination is not required to lay bare his entire defense

(Cucalon v. State of New York, 103 Misc. 2d 808 (Ct. of Claims

1980)), the opponent must raise issues which are genuine (DiSabato

v. Soffes, supra). The opponent may not defeat the motion by

making only general allegations. Zuckerman, supra at 562. As the

The opposing attorney's affidavit may, however, serve as17

a "vehicle" for the submission of accompanying admissible evidence.Zuckerman, supra at 563.

The only indication as to those subsidiaries' precise18

activities is the comment in the State Audit Report that Prustanowned an "interest in Highland, New York. (Ulster Co.)" and was notdoing business in the City.

23

Court of Appeals held in Rotuba Extruders v. Ceppos, et al., 46

N.Y.2d 223, 231 (1978):

. . . only the existence of a bona fide issue raised byevidentiary facts and not one based on conclusory orirrelevant allegations will suffice to defeat summaryjudgment.

Neither the repetition or incorporation by reference of allegations

contained in the pleadings (Indig v. Finkelstein, supra at 729) nor

the mere submission of a hearsay affirmation by the opponent's

representative (Zuckerman, supra at 559) is sufficient to create17

a material triable issue of fact.

Respondent essentially posits that since unidentified

integrated activities between Petitioner and the Joint Venture

might exist, there are material triable issues of fact which would

defeat the Motion. For example, Respondent points to the fact that

several of Petitioner's wholly-owned subsidiaries were involved in

the "real estate" business. The record, though, does not indicate

that Petitioner's involvement with these entities was anything more

than as a passive investor. See, Mobil Oil, supra. Nor does18

Respondent allege with any specificity the nature of the alleged

intercorporate activities. Such mere speculation does not create

a triable issue of fact. Indig v. Finkelstein, supra; Zuckerman,

supra.

See, Bryan v. City of New York, 206 A.D.2d 448 (2d Dept.19

1994): "Allegations of mere hope that the discovery will revealsomething helpful to the City's case provide no basis forpostponing the determination of the plaintiff's motion.

24

While a motion for summary determination may be defeated if it

can be established that its opposition depends upon knowledge

within the exclusive control of the movant (White v. First Nat'l

Bank, 22 A.D. 2d 973 (3d Dept. 1964)), that rule only applies where

reasonable efforts were made by the opponent to discover facts

which give rise to a triable issue, and that those efforts were

unsuccessful. Marino v. Methodist Hosp. of Brooklyn, 185 A.D.2d

806 (2d Dept. 1992).

Pursuant to established authority, the undersigned continued

the summary determination proceeding to permit discovery by

Respondent of facts which might support his assertion that

Petitioner and the Joint Venture were engaged in a unitary

business. See, Rules Section 1-05(d)(2) which provides that, upon

review of affidavits submitted in opposition to a motion for

summary determination, if the administrative law judge determines

"that facts essential to justify opposition may exist, but cannot

then be stated," the judge may continue the proceedings for

submission of additional affidavits or admissions and "may make

such other order as may be just." See also, Blue Bird Coach Lines,

Inc. v. 107 Delaware Ave., N.V., Inc., 125 A.D.2d 971 (4th Dept.

1986). Such delay in ruling on the motion to allow for discovery

was a significant exercise of discretion in Respondent's favor.19

Despite being given the opportunity for discovery, Respondent

failed to make a good faith effort to obtain information arguably

within Petitioner's control. Marino v. Methodist Hosp. of

Brooklyn, supra. See also, Twining Nemia & Hill v. Read Memorial

Hospital, Inc., 89 A.D.2d 432 (3d Dept. 1982); Tausig & Son v.

Initially, in support of its opposition to the Motion,20

Respondent asserted that the Auditor had no authority to "bind"Respondent and therefore that the facts articulated in theAuditor's Letter must be disregarded. The majority of the factual

25

Providence Washington Ins., 28 A.D.2d 279 (lst Dept. 1967).

Respondent's representative specifically and repeatedly declined

the proferred discovery based on his misapprehension that discovery

was not appropriate prior to resolution of a motion for summary

determination. More important, in his June 12, 1996 correspon-

dence, he expressly stated that he would not engage in discovery

because he did not wish to "provide [Petitioner] with the exact

legal arguments Respondent intends to use in conjunction with each

item of evidence." This position is contrary to the purpose of

discovery and other pre-trial procedures articulated in the Rules,

which is to avoid surprise.

Mere speculation that some facts may possibly exist that would

support Respondent's position does not give Respondent an absolute

entitlement to require Petitioner to go through the formal hearing

process to obtain relief. See, e.g., Marriott v. Shaw, 151 Misc.

2d 938 (Civil Ct City of NY Kings Cty. 1991). Respondent engaged

in a detailed audit over the course of three years, as well as a

several-year litigation process where he has been afforded the

opportunity for pre-hearing discovery pursuant to our Rules.

Nevertheless, Respondent is unable to assert a single, material

triable issue of fact and is unwilling to communicate the bases for

his position. Under such circumstances, it is unfair and inequi-

table to force the Petitioner to go to formal hearing to gain

relief, rather than to have its case decided in a summary fashion.

Since Respondent has failed to raise a genuine, material

triable issue of fact and has failed to rebut the Petitioner's

prima facie case that the Joint Venture business was not unitary

with Petitioner's City banking business, Petitioner's motion is

granted. DiSabato, supra at 300. 20

conclusions contained in the Auditor's Letter are undisputed; e.g.,that Petitioner held a 55% interest in a Joint Venture whichtransacted business in New Jersey, and that the operations of theJoint Venture were carried out by the Petitioner's co-venturer, theMcBride organization. (See, Facts ¶21, supra). The subsequentAffidavit of the Auditor, submitted by Respondent, clarified thebasis for the Auditor's prior position with respect to the singledisputed fact, the existence and terms of the Note. (See, Facts¶¶30 and 31, supra). As noted, since the characterization of theNote is no longer disputed, there is no need to determine whetheror not the Auditor had authority to "bind" Respondent by theAuditor's Letter.

26

The deficiency with respect to the Tax Year, asserted in the

Notice of Determination dated September 29, 1993, is therefore

abated except to the extent of the undisputed adjustment discussed

in Footnote 8, supra, and Petitioner's request for a refund of BT

paid for the Tax Year is granted.

IT IS SO ORDERED.

June 13, 1997 New York, New York

______________________________ ANNE W. MURPHY Administrative Law Judge