The Court Ruling That Brought Notice to NYC Corporations
A recent New York City ruling regarding capital gains tax is catching the attention of corporations doing business in the city. Back in 2010, a fund owned by investment bank Goldman Sachs sold a hedge fund manager—a financial company that employs portfolio managers to establish hedge funds—called Claren Road Asset Management. In March of 2021, the New York City Tax Appeals Tribunal ruled that even though the “master fund” (the company making the sale) was incorporated in Delaware, the capital gain could be linked back to the fund’s business in New York City. As a result, eleven years after the sale of interest in a hedge fund manager in 2010, this gain is considered subject to the city’s corporate tax.
Both Claren and the master fund were taxed as partnerships and paid the general corporation tax (GCT), which New York City levies on all corporations including partnerships. However, when the master fund sold its interest in Claren, it reported a capital gain of $54.7 million but excluded that gain when calculating its net income. This prompted the New York City Department of Finance to send the company a notice that their tax payment, GCT, was deficient.
The key in this situation is that the master fund received income from Claren through their partnership and paid GCT on that income every year that it owned an interest in Claren. The administrative law judge who ruled on this case observed that Claren was essentially a conduit that took money made through business conducted in the city and passed it on to the master fund. Per NYC tax law, if a partnership does business in NYC, all of its corporate partners are subject to that general corporation tax. See 19 RCNY § 11-03(a)(5)
The judge also determined that Claren’s increase in value as a company—the fact that the master fund was even able to make a profit—could be directly linked to Claren’s business in New York. The master fund objected, comparing its investment in Claren to holding corporate stock. They argued that the gain actually came from the fund’s investment management business, not Claren’s business operations.
Analysts Opinions on the Matter
Some tax analysts have expressed concern over this legal decision. Some speculate that this ruling means even foreign corporations who make passive investments in New York City-run businesses could become subject to the same tax. This could disincentivize foreign businesses from making these investments.
Tax rulings like these are often intended to prevent larger corporations from evading taxation. Conversely, recent U.S. tax laws have trended toward supporting small businesses and incentivizing investors to contribute to their growth. One example is the federal exemption from capital gains tax for the sale of qualified small business stock (QSBS). Qualifying stock can be sold 100% tax-free, making this a unique investment opportunity.
Learn more about QSBS opportunities at QSBSExpert.com.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.