Walt Disney Co. & Consolidated Subsidiaries v. Tax Appeals Tribunal of N.Y.

• Docket Number: 532479
• Decision Date: 20 October 2022
• Citation: 210 A.D.3d 86,176 N.Y.S.3d 356
• Parties: In the Matter of WALT DISNEY COMPANY AND CONSOLIDATED SUBSIDIARIES, Petitioner, v. TAX APPEALS TRIBUNAL of the State of New York et al., Respondents.
• Court: New York Supreme Court — Appellate Division

210 A.D.3d 86

176 N.Y.S.3d 356

In the Matter of WALT DISNEY COMPANY AND CONSOLIDATED SUBSIDIARIES, Petitioner,

v.TAX APPEALS TRIBUNAL of the State of New York et al., Respondents.

532479

Supreme Court, Appellate Division, Third Department, New York.

Calendar Date: September 13, 2022

Decided and Entered: October 20, 2022

Pillsbury Winthrop Shaw Pittman LLP, New York City (Marc A. Simonetti of counsel), for petitioner.

Letitia James, Attorney General, Albany (Frederick A. Brodie of counsel), for Commissioner of Taxation and Finance, respondent.

Before: Garry, P.J., Egan Jr., Clark, Fisher and McShan, JJ.

OPINION AND JUDGMENT

Fisher, J.

Proceeding pursuant to CPLR article 78 (initiated in this Court pursuant to Tax Law § 2016 ) to review a determination of respondent Tax Appeals Tribunal sustaining a notice of deficiency of corporate franchise tax imposed under Tax Law article 9–A.

Petitioner is a corporation organized under the laws of Delaware and is the parent company to an affiliated group of entities, which are part of petitioner's combined group in its tax filings, that are in the business of producing and licensing to others content and other media, entertainment and consumer products. During the tax years ending in 2008 through 2010 (hereinafter the audit period), petitioner, through its subsidiaries, licensed intellectual property to affiliates organized under the law of foreign countries through various licensing agreements in exchange for royalty payments. Petitioner deducted royalty payments received from its foreign affiliates for the audit period under Tax Law § 208 (former [9][o]).

In May 2017, after an audit, the Division of Taxation disallowed the royalty deductions and issued petitioner a notice of deficiency stating that petitioner owed additional corporate franchise tax plus interest for the audit period. Petitioner sought review with the Division of Tax Appeals and, following a hearing, an Administrative Law Judge (hereinafter ALJ) sustained the notice of deficiency, concluding that the Division of Taxation properly determined that petitioner was required to add the royalty payments back into its income. Petitioner filed an exception with respondent Tax Appeals Tribunal, which affirmed the ALJ's determination. Petitioner commenced this proceeding in this Court to challenge the Tribunal's determination.

Petitioner argues that it has the right to deduct royalty payments under the plain meaning of the statute. According to petitioner, Tax Law § 208 (former [9][o]) unambiguously allowed a taxpayer to exclude royalty payments received from a related member unless one of three conditions were met – none of which apply here. Petitioner asserts that, because the definition of "related member" does not require such entity to be a taxpayer, petitioner was entitled to deduct royalty payments as income from its foreign affiliates. Petitioner further contends that respondents created a new exception not provided for in the statute by holding that petitioner would only be entitled to the exclusion if the foreign affiliates were New York taxpayers, thereby discriminating against out-of-state commerce and violating the dormant Commerce Clause of the U.S. Constitution.

"Judicial review of a determination of the Tribunal is limited. If the determination is rationally based upon and supported by substantial evidence, it must be confirmed, even if a different conclusion is reasonable" ( Matter of BTG Pactual N.Y. Corp. v. New York State Tax Appeals Trib., 203 A.D.3d 1347, 1348–1349, 165 N.Y.S.3d 149 [3d Dept. 2022] [internal quotation marks, brackets and citations omitted]; see Matter of Black v. New York State Tax Appeals Trib., 206 A.D.3d 1482, 1484, 172 N.Y.S.3d 151 [3d Dept. 2022] ). "Interpretation given a statute by the agency charged with its enforcement is, as a general matter, given great weight and judicial deference, so long as the interpretation is neither irrational, unreasonable nor inconsistent with the governing statute" ( Matter of Obus v. New York State Tax Appeals Trib., 206 A.D.3d 1511, 1512, 172 N.Y.S.3d 493 [3d Dept. 2022] [internal quotation marks and citations omitted]).

"Ultimately, however, legal interpretation is the court's responsibility; where the question is one of pure statutory reading and analysis, dependent only on accurate apprehension of legislative intent, there is little basis to rely on any special competence or expertise of the administrative agency and its interpretation is therefore to be accorded much less weight" ( Matter of Carmel Academy v. New York State Educ. Dept., 169 A.D.3d 1287, 1288, 94 N.Y.S.3d 715 [3d Dept. 2019] [internal quotation marks, brackets and citations omitted], lv denied 35 N.Y.3d 901, 2020 WL 1581646 [2020] ; accord Matter of Obus v. New York State Tax Appeals Trib., 206 A.D.3d at 1512, 172 N.Y.S.3d 493 ).

The taxpayer bears the burden "to overcome a tax assessment and establish its unambiguous entitlement to an exclusion," exemption or deduction ( Matter of XO Communications Servs., LLC v. Tax Appeals Trib. of the State of N.Y., 182 A.D.3d 717, 718, 122 N.Y.S.3d 412 [3d Dept. 2020], lv denied 36 N.Y.3d 903, 2020 WL 7393389 [2020] ). Such statutory exclusions, exemptions or deductions are to be construed "in favor of the taxing power" ( Matter of Wegmans Food Mkts., Inc. v. Tax Appeals Trib. of the State of N.Y., 33 N.Y.3d 587, 592, 107 N.Y.S.3d 769, 131 N.E.3d 876 [2019] [internal quotation marks and citation omitted]).

The statutory provision at issue contains two operative sections, one of which governs payments made from a "related member" and one of which governs payments to a "related member" (see Tax Law § 208 [former (9)(o)(2), (3)]). A related member is defined as "a person, corporation or entity, ... whether such person, corporation or entity is a taxpayer or not, where one such person, corporation, or entity or set of related persons, corporations or entities, directly or indirectly owns or controls a controlling interest in another entity" ( Tax Law § 208 [former (9)(o)(1)(A)]). A taxpayer is defined as "any corporation subject to tax under [Tax Law article 9–A]" ( Tax Law § 208[2] ). Petitioner, as the entity receiving royalty payments from a "related member," is governed by Tax Law § 208 (former [9][o][3]), which states that,

"[f]or the purpose of computing entire net income or other taxable basis, a taxpayer shall be allowed to deduct royalty payments directly or indirectly received from a related member during the taxable year to the extent included in the taxpayer's federal taxable income unless such royalty payments would not be required to be added back under [ Tax Law § 208 (former [9][o][2])] or other similar provision in [Tax Law chapter 60]."

Therefore, in order to determine whether an entity that receives royalty payments is entitled to deduct them from its income, an examination must be made of whether the entity that made the royalty payments is entitled to add them back under Tax Law § 208 (former [9][o][2]) (see Tax Law § 208 [former (9)(o)(3)]). Such provision provides that, "[f]or the purpose of computing entire net income or other applicable taxable basis, a taxpayer must add back royalty payments to a related member during the taxable year to the extent deductible in calculating federal taxable income" unless one of three conditions are met ( Tax Law § 208 [former (9)(o)(2)(A), (B)]).

In enacting this statute, the Legislature indicated that it was passed to "[c]larif[y] the provisions of law which eliminate tax loopholes concerning royalty payments ... to exclude royalty payments made to certain foreign corporation related members" (Sponsor's Mem, Bill Jacket, L 2003, ch 686). When this statute was amended in 2013 (see L 2013, ch 59, sec 1, pt E, § 2), a memorandum in support of the 2013–2014 executive budget was written, which stated that the then-current statute had been "interpreted by some taxpayers in ways that are inconsistent with the intent of the statute and the Department's interpretation" and, therefore, the amendment "would eliminate those inconsistent readings with clear language on the applicability of the required add-back ... in order to prevent tax avoidance while allowing for fair and equitable administration."

At the hearing, the Division of Taxation's employees testified that petitioner was denied the royalty deduction because the foreign affiliates it had received payments from were not New York taxpayers. The ALJ found that "[t]he addback and exclusion provisions contained in Tax Law [§ 208 former] (9)(o) work in tandem to ensure that royalty transactions between related members are taxed only once" and do "not escape taxation altogether." In determining that petitioner's interpretation of the statute effectively allowed it to avoid taxation on that income, which went against the Legislature's intent in enacting the statute, the ALJ concluded that the Division of Taxation's interpretation of the statute was rational and therefore petitioner was not permitted to deduct royalty payments from its income. When the Tribunal affirmed the findings of the ALJ, it added that "the [L]egislature did not intend for a taxpayer to gain the benefit of the income exclusion ... without the corresponding cost to a related member of the add back."

Although the question presented here "is one of pure statutory reading and analysis" and the Tribunal's interpretation of the statute is therefore given "less weight" ( Matter of Obus v. New York State Tax Appeals Trib., 206 A.D.3d at 1512, 172 N.Y.S.3d 493 [internal quotation marks and citations omitted]), we nonetheless find that the plain meaning...