NY TSB-A-93(10)C, (5)I Corporation Tax; Income Tax 1993-04-30

Is the income of a court-approved Section 468B qualified settlement fund subject to New York franchise tax or New York State and City personal income tax?

Short answer: No. A designated settlement fund that is a qualified settlement fund under Section 468B of the Internal Revenue Code is not subject to New York franchise tax or to New York State or City personal income tax. For Article 9-A, the fund is not a corporation: a fund administrator who merely holds, invests, and distributes the fund's money is not conducting a business, so the fund is not deemed a corporation under Tax Law section 208.1. For Article 22, because a qualified settlement fund is not treated as a trust for federal income tax purposes (Treasury Reg. 1.468B-1(b)), it is not a trust for New York purposes under section 607(a); and section 601(g) keeps an entity taxed as a corporation federally out of Article 22 altogether. New York City's personal income tax follows the same result. With no tax due, the question of waiving penalties is moot.

Disclaimer: This is an official New York State Department of Taxation and Finance Advisory Opinion (TSB-A), issued by the Office of Counsel at a taxpayer's request. It is limited to the facts set forth in it and binds the Department only with respect to the petitioner to whom it was issued, and only if that petitioner fully and accurately described all relevant facts; another taxpayer cannot rely on it. It reflects the law, regulations, and Department policy in effect when issued and may since have changed. Taxpayer-identifying details are redacted. New York State and local sales taxes are administered centrally by the Department. This summary is informational only and is not legal or tax advice. Consult a licensed New York tax professional about your specific situation.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked at the bottom of this page, or PDF in the sidebar) is the authoritative source for any reliance.

View original ruling (PDF)

Plain-English summary

The Buxbaum-Banco Popular Settlement Fund was a court-created settlement fund administered by Samuel R. Buxbaum. It elected to be treated as a qualified settlement fund under Section 468B of the Internal Revenue Code. The administrator asked whether the fund's investment income is subject to New York State corporation franchise tax (Article 9-A) or New York State and New York City personal income taxes (Articles 22 and 30).

The answer is no on every count.

Not a corporation (Article 9-A). Tax Law section 208.1 sweeps in associations and businesses conducted by a trustee, but only if the trustee is actually conducting a business. Under the regulation and long-standing case law, "the mere investment of funds and the collection of income therefrom, with the incidental replacement of securities and reinvestment of funds," is not conducting a business. The administrator only holds, invests, and distributes the fund's money -- so the fund is not deemed a corporation and owes no franchise tax.

Not a trust (Article 22 / Article 30). Under section 607(a), New York income-tax terms follow their federal meaning. Federally, a Section 468B qualified settlement fund is classified as a qualified settlement fund for all purposes of the Internal Revenue Code (Treasury Reg. 1.468B-1(b)) and is not treated as a trust. So it is not a trust for Article 22 either. Section 601(g) reinforces the result: an entity taxed as a corporation for federal purposes -- and a Section 468B fund is taxed on its modified gross income as if a corporation -- is not subject to Article 22. The New York City personal income tax, administered the same way, follows suit.

Because the fund is not a taxable entity at all, the request to waive penalties is moot.

What this means for you

A qualified settlement fund is not a New York corporation

A court-supervised Section 468B fund whose administrator just invests and distributes the money is not "doing business," so it is not a corporation under Article 9-A and owes no franchise tax.

It is not a trust for income-tax purposes either

Because federal law does not treat a qualified settlement fund as a trust, New York does not either (section 607(a)), and section 601(g) excludes entities taxed federally as corporations from Article 22.

New York City follows the State

The New York City personal income tax is administered like Article 22, so the same non-taxable result applies.

Common questions

Q: Does my Section 468B settlement fund owe New York franchise tax?
A: No. Merely holding, investing, and distributing the fund's money is not conducting a business, so the fund is not a corporation under Article 9-A.

Q: Is the fund a trust subject to New York personal income tax?
A: No. A qualified settlement fund is not treated as a trust federally, so it is not a trust under section 607(a); section 601(g) also keeps it out of Article 22.

Q: What about New York City tax and penalties?
A: The City personal income tax follows the State, so no City tax is due; with no tax owed, any penalty-waiver question is moot.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 209.1 (franchise tax on every corporation)
- Tax Law section 208.1 (definition of corporation; includes associations and business trusts)
- Tax Law section 607(a) (Article 22 terms follow federal income tax meaning)
- Tax Law section 601(g) (entity taxable as a corporation federally is not subject to Article 22)
- 20 NYCRR 1-2.3 (definition of corporation; activities of a trustee)
- IRC section 468B and Treasury Regulation section 1.468B (qualified settlement funds)
- Treasury Regulation section 301.7701-4 (classification of trusts)

Source

Original ruling text

New York State Department of Taxation and Finance

TSB-A-93 (10) C
Corporation Tax
TSB-A-93 (5) I
Income Tax
April 30, 1993

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. Z930111A

On January 11, 1993, a Petition for Advisory Opinion was received from
Samuel R. Buxbaum, Administrator Buxbaum-Banco Popular Settlement Fund, 60 East
42nd Street, New York, New York 10165.
The issue raised by Petitioner, Samuel R. Buxbaum, Administrator BuxbaumBanco Popular Settlement Fund, is whether the income earned by a designated
settlement fund created after 1986 is subject to New York State corporation
franchise tax or New York State and New York City personal income taxes. If so,
will New York State and New York City follow the federal lead and waive all
penalties incurred prior to 1993.
Samuel R. Buxbaum, Esq. is the Administrator/Escrowee of Buxbaum-Banco
Popular Settlement Fund (hereinafter "Settlement Fund"), a designated settlement
fund pursuant to section 468B of the Internal Revenue Code (hereinafter "IRC").
The Settlement Fund was established and funded on May 18, 1990 by court order.
The Settlement Fund has remained intact in an interest bearing account in
Emigrant Savings Bank (formerly Dollar Dry Dock) from inception to date. The
legal matters which caused the formation of the fund have been resolved and
Petitioner wishes to pay all liabilities, taxes and expenses before distributing,
the remaining funds to the designated beneficiaries. No federal, State or city
income tax returns have been filed, but the Settlement Fund will elect to be
treated as a qualified settlement fund, under section 468B of the IRC, for
federal income tax purposes.
Section 209.1 of the Tax Law imposes, annually, a franchise tax on every
corporation for the privilege of exercising its corporate franchise, or of doing
business, or of employing capital, or of owning or leasing property in New York
State in a corporate or organized capacity, or of maintaining an office in New
York State for all or any part of each of its fiscal or calendar years.
Section 208.1 of the Tax Law provides that:
The term "corporation" includes an association, within the meaning
of paragraph three of subsection (a) of section seventy-seven
hundred one of the internal revenue code, a joint-stock company or
association, a publicly traded partnership treated as a corporation
for purposes of the internal revenue code pursuant to section
seventy-seven hundred four thereof and any business conducted by a
trustee or trustees wherein interest or ownership is evidenced by
certificate or other written instrument ...
The term "corporation" is defined in section 1-2.3 of the Business
Corporation Franchise Tax Regulations, which provides, in part, that:
TP-9 (9/88)

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TSB-A-93 (10) C
Corporation Tax
TSB-A-93 (5) I
Income Tax
April 30, 1993

(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 abusiness, the form of the
agreement is of significance but is notcontrolling. 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 ....
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.
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)).
Herein, the activities of Petitioner do not constitute the conduct of a
business as contemplated by section 208.1 of the Tax Law and section 1-2.3 of the
Business Corporation Franchise Tax Regulations. Accordingly, the Settlement Fund
is not deemed to be a corporation for purposes of Article 9-A and is not subject
to the tax imposed by such Article.
With respect to the New York State personal income tax under Article 22 of
the Tax Law, the tax is imposed on resident and nonresident trusts.

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TSB-A-93 (10) C
Corporation Tax
TSB-A-93 (5) I
Income Tax
April 30, 1993

Section 607(a) of the Tax Law provides, in pertinent part, that:
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 ....
For federal income tax purposes, the Settlement Fund is a designated
settlement fund that is treated as a qualified settlement fund. Pursuant to
section 1.468B-l(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 the
Settlement Fund is not treated as a trust for federal income tax purposes, the
Settlement Fund, pursuant to section 607(a) of the Tax Law, is not treated as a
trust for purposes of Article 22 of the Tax Law.
Further, section 601(g) of the Tax Law provides that an association, trust
or other unincorporated organization which is taxable as a corporation for
federal income tax purposes shall not be subject to tax under Article 22 of the
Tax Law.
Herein, the Settlement Fund is a qualified settlement fund under
section 468B of the IRC and pursuant to such section, the Settlement Fund is a
person for federal income tax purposes that is taxed on its modified gross income
and the tax imposed is treated as a tax on corporations.
Accordingly, the Settlement Fund is not subject to the tax imposed under
Article 22 of the Tax Law.
The New York City personal income tax is similar to the New York State
personal income tax and is administered by New York State the same as Article 22
of the Tax Law. Accordingly, the Settlement Fund is not treated as a trust for
New York City personal income tax purposes and the Settlement Fund is not subject
to the New York City personal income tax authorized under Article 30 of the Tax
Law.
Since it has been determined that the Settlement Fund is not a taxable
entity for New York State and New York City tax purposes, the question of whether
penalties will be waived is moot.

DATED: April 30, 1993

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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