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APPELLANTS IMPROPERLY DEDUCTED ROYALTY PAYMENTS RECEIVED FROM FOREIGN AFFILIATE CORPORATIONS WHICH WERE NOT SUBJECT TO NEW YORK FRANCHISE TAXES (CT APP).

The Court of Appeals, in a full-fledged opinion by Judge Cannataro, over a two-judge concurrence, determined the appellant corporations improperly deducted royalty payments received from foreign affiliates not subject to New York’s franchise taxes:

Under a taxation scheme in effect from 2003 through 2013, New York allowed corporations that paid franchise taxes in New York to deduct income received as royalty payments from members of the same corporate group, or family, in calculating their taxable income. The deduction was allowed only if the royalty payment came from a related entity that had already paid a New York tax on the same income through operation of another provision in the Tax Law that required companies to add back royalty payments made to related entities for the purposes of calculating their own taxable income.

In these cases, the state Department of Taxation and Finance determined that appellants improperly deducted royalty payments they received from affiliates in foreign countries that were not subject to New York franchise taxes and, so, were not required to add those payments back on a New York tax return. Appellants challenge the Tribunal’s denial of the deduction as being contrary to the clear language of the statute and as violating the Commerce Clause’s prohibition on discrimination against foreign commerce. Because the Appellate Division correctly interpreted the statutes as permitting a tax deduction only where a related subsidiary was subject to the add back requirement, and because any burden on interstate or foreign commerce created by this tax scheme was incidental and did not violate the dormant Commerce Clause, we affirm. Matter of Matter of Walt Disney Co. & Consol. Subsidiaries v Tax Appeals Trib. of the State of New York, 2024 NY Slip Op 02127, CtApp 4-23-24

Practice Point: Corporations may not deduct royalties received from foreign affiliate corporations which are not subject to New York’s franchise taxes.

 

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