Is a federal qualified settlement fund subject to New York's corporate franchise tax, or treated as a trust for New York State and City personal income tax?

Plain-English summary

A qualified settlement fund (QSF) — a fund holding the proceeds of a class-action settlement (the Allapattah DFC Class Action Settlement Fund), defined under Treasury Regulation § 1.468B — asked whether it is subject to New York's corporate franchise tax (Article 9-A), New York State personal income tax (Article 22), or New York City personal income tax (Article 30).

Not a corporation for Article 9-A. Although a QSF is treated as a corporation for federal procedural purposes, New York taxes an unincorporated entity as a corporation only if it holds itself out as a corporation and conducts a business. Conducting a business is more than owning property and collecting and distributing the income from it (citing Smadbeck, Nauss v. Graves, and Burrell v. Lynch). The fund's activities — collecting and distributing settlement proceeds — are not the conduct of a business, so it is not deemed a corporation and is not subject to Article 9-A (following D'Amato & Lynch, TSB-A-02(8)C/(1)I).

Not a trust for Article 22. New York taxes resident and nonresident trusts under § 601, but whether something is a trust follows the federal classification (§ 607(a)). Because a QSF is classified as a qualified settlement fund — not a trust — for all federal income tax purposes (Treas. Reg. § 1.468B-1(b)), it is not a trust for New York personal income tax and is not subject to Article 22.

Not subject to New York City tax. The New York City personal income tax (Article 30) mirrors the State personal income tax and is administered the same way, so the fund is not treated as a trust for City purposes either.

No filing obligations. Because the fund is not a taxable entity for the State franchise tax, State personal income tax, or City personal income tax, it has no New York filing or reporting obligations.

What this means for you

Administrators and trustees of settlement funds

A QSF that simply receives and pays out settlement money is, in New York, neither a taxable corporation nor a taxable trust — and has no New York filing duties — as long as it does not hold itself out as a corporation or conduct an actual business. The federal QSF classification carries through.

Class-action counsel and escrow agents

The line is between mere collection/distribution of income (not a business) and conducting a business. Reserve/escrow arrangements that only invest and distribute funds generally fall on the non-taxable side (as in D'Amato & Lynch).

Accountants and tax professionals

Anchor on the federal classification: a § 1.468B QSF is a QSF for all federal income tax purposes, not a trust, so § 607(a) keeps it out of Article 22 (and Article 30). For Article 9-A, apply the "more than collection and distribution of income" business test and the holding-out-as-a-corporation requirement.

Common questions

Q: Is a qualified settlement fund subject to New York corporate franchise tax?
A: No. It only collects and distributes income, which is not conducting a business, and it does not hold itself out as a corporation, so it is not deemed a corporation under Article 9-A.

Q: Is it taxed as a trust?
A: No. Because a QSF is not a trust for federal income tax, it is not a trust for New York State (Article 22) or New York City (Article 30) personal income tax.

Q: Does the fund have to file anything in New York?
A: No. With no taxable status for the franchise tax or state/city personal income tax, it has no New York filing or reporting obligations.

Citations and references

Statutes, regulations, and authorities:
- Tax Law § 208.1 (corporation defined); 20 NYCRR § 1-2.5 (deemed corporation)
- Tax Law § 209.1 (Article 9-A franchise tax imposition)
- Tax Law § 601(c), (e) (resident/nonresident trust income tax); § 607(a) (trust meaning follows federal)
- Tax Law Article 30 (New York City personal income tax)
- Treasury Regulation § 1.468B (qualified settlement fund); D'Amato & Lynch, TSB-A-02(8)C and (1)I

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2006.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a06_4c_5i.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-06(4)C
Corporation Tax
TSB-A-06(5)I
Income Tax
July 25, 2006

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. Z060530A

On May 30, 2006, a Petition for Advisory Opinion was received from Allapattah DFC
Class Action Settlement Fund, c/o Morrison, Brown, Argiz & Farra, LLP, 1001 Brickell Bay
Drive, 9th Floor, Miami, FL 33131.
The issues raised by Petitioner, Allapattah DFC Class Action Settlement Fund, are:
1. Whether Petitioner, as described below, is a corporation subject to taxation under
Article 9-A of the Tax Law.
2. Whether Petitioner, as described below, is treated as a trust for purposes of Article 22
of the Tax Law.
3. Whether Petitioner, as described below, is subject to the New York City personal
income tax authorized under Article 30 of the Tax Law.
4. Whether Petitioner, as described below, has any New York State franchise tax or
New York State or City personal income tax filing or reporting obligations.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner was created by an order dated April 7, 2006, of the United States District Court
("Court"), Southern District of Florida in the case of Allapattah Services, Inc. v Exxon
Corporation ("Exxon").
Petitioner was created as a result of a settlement agreement dated December 19, 2005,
under which Exxon agreed to pay $1.075 billion in settlement of claims made against it by a
class of direct- served dealers. The Court, on April 5, 2006, verbally entered an Order of Final
Approval of the Settlement Agreement. A written Final Order containing the Court's findings
and conclusions approving the settlement was entered on April 7, 2006. The settlement
agreement arose out of a breach of contract class action suit brought by Exxon direct-served
dealers who sought recovery for alleged motor fuel overcharges.
On May 10, 2006, Exxon transferred the $1.075 billion to an account in the depository
institution of Petitioner. The depository institution is J.P Morgan Chase. All of the funds
deposited into and the earnings of the J. P. Morgan Chase account are held for the benefit of
Petitioner. Funds deposited into the account are to be invested or reinvested by J. P. Morgan

-2­
TSB-A-06(4)C
Corporation Tax
TSB-A-06(5)I
Income Tax
July 25, 2006

Chase in instruments, or in money market funds investing solely in instruments, secured by the
full faith and credit of the United States, including Treasury Bills, Treasury Notes, and Treasury
Bonds.
At the time that Exxon deposited the funds, it was released from further liability and
participation in the claims process. The claims process, under which individual dealers will
establish their entitlement to payment from the fund, continues before a Special Master
appointed by and reporting to the Court. The claims process will continue until all valid claims
are adjudicated and paid. The assets of Petitioner will be used to make payments to claimants, as
well as other persons involved in the case, including Class Counsel. Petitioner is subject to the
continuing jurisdiction of the Court.
The Garden City Group, Inc. ("GCG") was appointed by the Court as Claims
Administrator. As Claims Administrator, among fulfilling other tasks, GCG processes approved
claims and their payment.
By Court Order dated May 2, 2006, Petitioner was designated as a Qualified Settlement
Fund ("QSF") pursuant to section 1.468B-1 of the Federal Treasury Regulations. The Order cites
the following reasons that Petitioner qualifies as a QSF.
1) It was established pursuant to a court order and is subject to the Court's continuing
jurisdiction.
2) It was established to resolve claims arising out of an alleged breach of contract.
3) The funds are segregated from the assets of Exxon, the transferor.
In addition, in compliance with section 1.468B-2 of the Federal Treasury Regulations, the
Court Order appointed GCG as the Administrator of Petitioner responsible for Petitioner’s tax
reporting requirements. The Administrator will prepare and file federal Form 1120-SF, U.S.
Income Tax Return for Settlement Funds (Under Section 468B), for Petitioner.
Applicable law and regulations
Section 1.468B-1 of the Federal Treasury Regulations provides, in part:
(a) In general. A qualified settlement fund is a fund, account, or trust that satisfies
the requirements of paragraph (c) of this section.
(b) Coordination with other entity classifications. If a fund, account, or trust that
is a qualified settlement fund could be classified as a trust within the meaning of
§301.7701-4 of this chapter, it is classified as a qualified settlement fund for all purposes
of the Internal Revenue Code (Code)....

-3­
TSB-A-06(4)C
Corporation Tax
TSB-A-06(5)I
Income Tax
July 25, 2006

(c) Requirements. A fund, account, or trust satisfies the requirements of this
paragraph (c) if —
(1) It is established pursuant to an order of, or is approved by, the United States,
any state (including the District of Columbia), territory, possession, or political
subdivision thereof, or any agency or instrumentality (including a court of law) of any of
the foregoing and is subject to the continuing jurisdiction of that governmental authority;
(2) It is established to resolve or satisfy one or more contested or uncontested
claims that have resulted or may result from an event (or related series of events) that has
occurred and that has given rise to at least one claim asserting liability—
(i) Under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 (hereinafter referred to as CERCLA), as amended, 42 U.S.C. 9601
et seq.; or
(ii) Arising out of a tort, breach of contract, or violation of law; or
(iii) Designated by the Commissioner in a revenue ruling or revenue procedure;
and
(3) The fund, account, or trust is a trust under applicable state law, or its assets are
otherwise segregated from other assets of the transferor (and related persons).
Section 1.468B-2(k) of the Treasury Regulations provides, in part:
Except as otherwise provided in §1.468B-5(b), for purposes of subtitle F of the
Internal Revenue Code, a qualified settlement fund is treated as a corporation….
Section 208.1 of the Article 9-A of the Tax Law provides, in part:
The term “corporation” includes (a) an association within the meaning of
paragraph three of subsection (a) of section seventy-seven hundred one of the internal
revenue code ... (b) a joint-stock company or association, (c) a publicly traded partnership
treated as a corporation for purposes of the internal revenue code pursuant to section
seventy-seven hundred four thereof and (d) any business conducted by a trustee or
trustees wherein interest or ownership is evidenced by certificate or other written
instrument ....
Section 209.1 of Article 9-A of the Tax Law imposes an annual franchise tax as follows:

-4­
TSB-A-06(4)C
Corporation Tax
TSB-A-06(5)I
Income Tax
July 25, 2006

For the privilege of exercising its corporate franchise, or of doing business, or of
employing capital, or of owning or leasing property in this state in a corporate or
organized capacity, or of maintaining an office in this state, for all or any part of each of
its fiscal or calendar years, every domestic or foreign corporation, except corporations
specified in subdivision four of this section, shall annually pay a franchise tax, upon the
basis of its entire net income base, or upon such other basis [capital base, minimum
taxable income bases or the fixed dollar minimum] as may be applicable as hereinafter
provided, for such fiscal or calendar year or part thereof….
The term “corporation” is defined in section 1-2.5 of the Business Corporation Franchise
Tax Regulations, which provides, in part:
(a) The term corporation means an entity created as such under the laws of the
United States, any state, territory or possession thereof, the District of Columbia, or any
foreign country, or any political subdivision of any of the foregoing, which provides a
medium for the conducting of business and the sharing of its gains.
*

*

*

(b) ... An entity conducted as a corporation is deemed to be a corporation.
*

*

*

(2) A business conducted by a trustee or trustees in which interest or ownership is
evidenced by certificate or other written instrument includes, but is not limited to, an
association commonly referred to as a business trust or Massachusetts trust. In
determining whether a trustee or trustees are conducting a business, the form of the
agreement is of significance but is not controlling. The actual activities of the trustee or
trustees, not their purposes and powers, will be regarded as decisive factors in
determining whether a trust is subject to tax under article 9-A of the Tax Law. The mere
investment of funds and the collection of income therefrom, with incidental replacement
of securities and reinvestment of funds, does not constitute the conduct of a business in
the case of a business conducted by a trustee or trustees.
Section 601 of Article 22 of the Tax Law provides, in part:
*

*

*

(c) … There is hereby imposed for each taxable year on the New York taxable
income of every resident … trust a tax …
*

*

*

-5­
TSB-A-06(4)C
Corporation Tax
TSB-A-06(5)I
Income Tax
July 25, 2006

(e)(1) … There is hereby imposed for each taxable year on the taxable income
which is derived from sources in this state of every nonresident and part-year resident …
trust … a tax….
Section 607(a) of Article 22 of the Tax Law provides, in part:
General. Any term used in this article shall have the same meaning as when used
in a comparable context in the laws of the United States relating to federal income taxes,
unless a different meaning is clearly required....
Opinion
Issue 1
Petitioner in this case is a qualified settlement fund as defined in section 1.468B-1 of the
Federal Treasury Regulations. Pursuant to section 1.468B-2(k) of the Treasury Regulations, a
qualified settlement fund is treated as a corporation for federal tax administrative and procedural
purposes.
For New York State franchise tax purposes, an unincorporated entity is not taxed as a
corporation unless its activities are conducted in a manner whereby the entity presents itself as a
corporation, in which case it is deemed to be a corporation. See D'Amato & Lynch, Reserve
Escrow Agent, Adv Op Comm T&F, June 3, 2002, TSB-A-02(8)C and (1)I.
The conduct of business is more than the ownership of property and the collection and
distribution of income derived from that property. (Smadbeck v St Tax Comm, 33 NY2d 930
(1973); People ex rel Nauss v Graves, 283 NY 383, 386 (1940)). It is “more than the mere
investment of funds and the collection of income therefrom, with the incidental replacement of
securities and the reinvestment of funds that constitute the corpus, as in the case of an ordinary
trust.” (Burrell v Lynch, 274 AD 347, 352 (1948); see also, City Bank Farmers Trust Co. v
Graves, 272 NY 1, 6 (1936)).
The activities of Petitioner in the present case do not constitute the conduct of a business
as contemplated by section 208.1 of the Tax Law and section 1-2.5 of the Business Corporation
Franchise Tax Regulations. See D'Amato & Lynch, supra. Accordingly, Petitioner is not deemed
to be a corporation for purposes of Article 9-A of the Tax Law and is not subject to the tax
imposed by section 209.1 of such Article.
Issue 2
The New York State personal income tax under Article 22 of the Tax Law is imposed on
resident trusts under section 601(c) and on nonresident trusts under section 601(e).

-6­
TSB-A-06(4)C
Corporation Tax
TSB-A-06(5)I
Income Tax
July 25, 2006

For Federal income tax purposes, Petitioner is a qualified settlement fund. Pursuant to
section 1.468B-1(b) of the Treasury Regulations, a fund, account, or trust that is a qualified
settlement fund that could be classified as a trust within the meaning of section 301.7701-4 of the
Treasury Regulations, is classified as a qualified settlement fund for all purposes of the IRC.
Accordingly, since Petitioner is not treated as a trust for federal income tax purposes, Petitioner,
pursuant to section 607(a) of the Tax Law, is not treated as a trust for purposes of Article 22 of
the Tax Law. (See D'Amato & Lynch, supra.) Therefore, Petitioner is not subject to the tax
imposed under Article 22 of the Tax Law.
Issue 3
The New York City personal income tax under Article 30 of the Tax Law is similar to the
New York State personal income tax under Article 22 of the Tax Law and is administered by
New York State in the same manner as Article 22. Accordingly, Petitioner is not treated as a trust
for New York City personal income tax purposes and is not subject to the New York City
personal income tax authorized under Article 30 of the Tax Law.
Issue 4
Pursuant to the determination that Petitioner is not a taxable entity for New York State
franchise tax, New York State personal income tax, or New York City personal income tax
purposes, Petitioner has no New York State franchise tax or New York State or New York City
personal income tax filing or reporting obligations.

DATED: July 25, 2006

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.