New York City: recent tax legislation (State & Local Taxation)by Soshnick, Harold F.
New York City recently enacted tax legislation which will increase annual revenue by approximately $174 million. Many of the changes conform the city provisions to similar state laws that were amended in April. (See The CPA Journal, September 1989.) Highlights of the changes include:
* The net operating loss (NOL) carryback for corporations and unincorporated businesses is sharply curtailed;
* The real property transfer tax rate on commercial transfers is raised from 2% to 2.625%; and
* The minimum tax on corporations is increased to $300. The personal income tax rate reductions remain intact with a maximum rate of 3.4% in 1989 and thereafter.
This article focuses on specific provisions of the legislation. In general, the effective date for the provisions is taxable years beginning on or after January 1, 1989, unless otherwise indicated.
Acquisitions on or after July 1, 1989, which are funded by substantially increased debt, where the acquiror has total interest expense for the tax year in excess of $1 million, and which result in ownership of greater than 50%, generally will result in the following adverse tax consequences:
* Loss of the target's NOLs;
* Denial of a deduction for 5% of interest paid; and
* Loss of favorable subsidiary capital treatment upon subsequent sale of target stock.
The 50% dividends received deduction is disallowed for stock where the holding period requirements of Code Sec. 246(c) are not met. A similar disallowance was also part of the state franchise tax revisions enacted earlier this year.
Aviation and other corporations previously taxed under the Transportation Corporation Tax will be taxed under the General Corporation Tax.
Observation: The parallel state change affected only the airline industry. The state will continue to tax other members of the transportation community, most notably the trucking industry, under Article 9 whose provisions are analogous to the City Transportation Corporation Tax. Since the city already taxes the trucking industry under the General Corporation Tax, the City Transportation Corporation Tax has been repealed entirely for tax years ending after December 31, 1988.
NOLs will be treated in conformity with the state's revised approach. As a result of the Act, corporations may only carry back a NOL up to $10,000, with the balance allowed as a carryforward. This change affects losses sustained during taxable years ending after June 30, 1989.
The flat fee minimum tax alternative for the General Corporation Tax is raised from $125 to $300, for taxable years ending after June 30, 1989.
Observation: The city raised its flat fee minimum tax but did not mirror the state's new sliding-scale system.
The allocation options for business income and capital or investment income and capital (the "85/25" rules) are repealed. Taxpayers whose investment income and investment capital exceed 85% of entire net income and total capital can no longer make the annual election to disregard their business allocation percentage in allocating total income and capital. Also, taxpayers whose investment income and investment capital are less than 25% of entire net income and total capital can no longer disregard their investment allocation percentage in allocating total income and capital.
No special surcharge is imposed on banks or insurance companies. This differs from the recent state legislation in which a 2.5% surcharge was enacted.
Unincorporated Business Tax
As with the General Corporation Tax, certain acquisitions occurring on or after July 1, 1989, will result in a disallowance of 5% of interest paid if the acquisition is in violation of certain rules aimed at discouraging leveraged buyouts.
Observation: There is no loss of the target's NOLs for unincorporated business tax purposes following an impermissible leveraged buyout even though this is an adverse tax consequence in the General Corporation Tax context.
NOLs will also be limited in conformity with the revised legislation discussed above in the Corporate Tax section.
Real Property Transfer Tax
The city now taxes any transfer of a co-op apartment occurring on or after August 1, 1989. There is a grandfathering exemption for co-op transfers pursuant to a written contract entered into prior to July 25, 1989.
As of August 1, 1989, increased tax rates apply to transfers of real property. There is no grandfathering exemption for the new rates. In general, transfers of residential dwellings (one, two, and three family houses); individual residential condominium units; co-op apartments; and leaseholds and controlling interests in such properties incur a tax rate of:
* 1.425% of the consideration if the consideration is more than $500,000; or
* 1% if the consideration is $500,000, or less.
Previously, except residential co-op transfers (which were exempt), the tax rate applicable to residential transfers was 1% even if the consideration exceeded $500,000.
Commercial property transfers will be taxed at:
* 1.425% where the consideration does not exceed $500,000 (formerly 1% rate); or
* 2.625% where consideration exceeds $500,000 (previously 2% rate). The basis rule remains the same; there is no tax if the consideration is $25,000 or less.
Example: Alpha Corporation owns tangible personal property worth $5 million, as well as a Manhattan office building with a fair market value of $10 million. On August 2, 1989, B sold 100% of the stock of Alpha to C, for $15 million. B must pay the city a real property transfer tax equal to 2.625% of the fair market value of the building, i.e., $262,500; B is also subject to both the New York State gains tax and the New York State real estate transfer tax.
The city has exercised its authority to subject interior decorating and designing services, and interior cleaning and maintenance services (performed on a regular contractual basis for a term of 30 days or longer) to the city sales tax. The tax is imposed on sales of services on and after December 1, 1989.
The city has conformed to the changes made by the state with respect to payments of interest and interest rates. The city will pay 2% above the prime rate when required to pay interest, but will charge 3% above prime for underpayments.
Appointments have been made which give the new City Tax Tribunal its full complement of three members. Named as President of the Tribunal is Mark Friedlander, who recently served as a member of the former New York State Tax Commission. The other commissioners appointed are Ramon Cintron, who is currently the Director of the Office of Legal Affairs of the Department of Finance, and Dorothy Henderson, presently of counsel at the firm of Elliott Roberts, P.C.
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