Is a Section 468B escrow settlement fund subject to New York franchise or personal income tax, and will New York waive penalties as the IRS did?

Plain-English summary

The SEC v. Vaskevitch Escrow Fund, administered by receiver Paul A. Fischer, held assets recovered in a securities-fraud action. After Treasury issued the Section 468B regulations in December 1992, the receiver filed late federal returns for 1987-1992 electing qualified-settlement-fund treatment and qualified for the IRS's one-time penalty waiver. He also filed New York State and City returns and paid tax and interest for 1987-1991. He then asked: is the fund's income actually subject to New York franchise tax or New York State and City personal income tax, and if so, will New York waive penalties as the IRS did?

The fund is not a taxable entity in New York at all -- so the penalty question never arises.

Not a corporation (Article 9-A). Under Tax Law section 208.1 and the regulation, the receiver's holding and investing of the fund is not conducting a business; "the mere investment of funds and the collection of income therefrom" does not make the fund a corporation. So it owes no franchise tax. The opinion follows Buxbaum, TSB-A-93(10)C.

Not a trust (Articles 22 and 30). A Section 468B fund is not treated as a trust federally (Treasury Reg. 1.468B-1(b)), so it is not a trust under section 607(a); section 601(g) also excludes an entity taxed as a corporation federally, as a Section 468B fund is. The New York City tax follows.

Penalty waiver moot. Since the fund is not a taxable entity for New York State and City purposes, the question of whether New York would waive penalties is moot.

What this means for you

A receiver's escrow fund is not a New York corporation

Holding and investing recovered assets is not conducting a business, so a Section 468B escrow fund is outside Article 9-A.

It is not a trust for income-tax purposes

Because the fund is not a trust federally, it is not one under section 607(a); section 601(g) also excludes corporation-taxed entities from Article 22, and the City follows the State.

No tax means no penalty question

If the fund is not taxable in the first place, there is nothing to penalize -- so whether New York mirrors the federal penalty waiver is moot.

Common questions

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

Q: Is the fund subject to New York or City personal income tax?
A: No. It is not a trust federally (so not under section 607(a)), and section 601(g) excludes entities taxed as corporations; the City follows the State.

Q: Will New York waive penalties like the IRS did?
A: The question is moot -- the fund is not a taxable entity in New York, so there is no tax and no penalty to waive.

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; penalty waiver)
- Treasury Regulation section 301.7701-4 (classification of trusts)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1993.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a93_14c_8i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-93 (14) C
Corporation Tax
TSB-A-93 (8) I
Income Tax
June 18, 1993

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. Z930503A

On May 3, 1993, a Petition for Advisory Opinion was received from SEC v.
Vaskevitch Escrow Fund, Paul A. Fischer, Receiver, 1025 Thomas Jefferson Street,
N.W., Suite 400 East, Washington, DC 20007-0805.
The issue raised by Petitioner, SEC v. Vaskevitch Escrow Fund, Paul A.
Fischer, Receiver, is whether the income earned by a qualified settlement fund
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.
SEC v. Vaskevitch Escrow Fund (the "Fund"), was established pursuant to
judgments entered against multiple defendants in the securities fraud action
Securities and Exchange Commission v. Vaskevitch, et al., 87 Civ. 1620
(S.D.N.Y.). Judgment was entered against David Sofer, Plenmeer, Ltd., and Meda
Establishment on November 14, 1988, and a default judgment was entered against
Nahum Vaskevitch on November 16, 1988. Assets recovered from these entities and
persons were deposited in the Fund in the years 1987 through 1989.
From the date of the first recovery (July 15, 1987) until transferred to
the receiver (April 30, 1992), all assets of the Fund were held in the court
registry of the United States District Court for the Southern District of New
York. No Federal, New York State or New York City income tax returns were filed
and no Federal, New York State or New York City income taxes were paid while the
Fund was held in the registry of the Court.
On January 28, 1992, Paul A. Fischer was appointed receiver of the Fund by
the Court. On May 1, 1992, the assets of the Fund were invested in Goldman
Sachs-Institutional Liquid Assets ILA Units, Treasury Instruments Portfolio.
On March 12, 1993, the receiver of the Fund filed Federal income tax
returns treating the Fund as a qualified settlement fund pursuant to section
1.468B of the Treasury Regulations as promulgated on December 18, 1992. Pursuant
to section 1.468B of the Treasury Regulations, the Federal income tax return of
the Fund for each of the taxable years 1987 through 1992 included an election to
treat the Fund as a qualified settlement fund for each such taxable year. Section
1.468B-5 of the Treasury Regulations provides that any otherwise applicable
penalties are waived for any fund which files an election under such section and
files the required Federal income tax returns and pays the required Federal
income tax and interest on or before March 15, 1993. By its elections and filing
of Federal income tax returns and payment of Federal income tax and interest, the
Fund qualified for this waiver of penalties. New York State and New York City tax
returns for the taxable years 1987 through 1992 were filed on March 12,1993.
Taxes and interest in the following amounts were paid by the receiver:
TP-9 (9/88)

-2­

Year
1987
1988
1989
1990
1991

Tax
$ 1,550
4,156
24,607
23,774
16,761

Interest
$ 771
1,625
6,711
3,743
1,028

TSB-A-93 (14) C
Corporation Tax
TSB-A-93 (8) I
Income Tax
June 18, 1993
Total
$ 2,321
5,781
31,318
27,517
17,789

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
sectionseventy-seven hundred four thereof and any business conducted
bya trustee or trustees wherein interest or ownership is evidenced
bycertificate 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:
(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
actualactivities 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

-3­

TSB-A-93 (14) C
Corporation Tax
TSB-A-93 (8) I
Income Tax
June 18, 1993

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 the Fund Administrator 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. (See Samuel R.
Buxbaum, Administrator Buxbaum-Banco Popular Settlement Fund, Adv Op Comm T & F,
April 30, 1993, TSB-A-93(10)C.) Accordingly, the 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.
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 Fund is 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 Fund is not treated as a trust for Federal income tax
purposes, the 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.
(See Samuel R. Buxbaum,
Administrator Buxbaum-Banco Popular Settlement Fund, Adv Op Comm T & F, April 30,
1993, TSB-A-93(10)C.)
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

-4­

TSB-A-93 (14) C
Corporation Tax
TSB-A-93 (8) I
Income Tax
June 18, 1993

Tax Law. Herein, the Fund is a qualified settlement fund under section 468B of
the IRC and pursuant to such section, the 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 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 Fund is not treated as a trust for New York
City personal income tax purposes and the 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 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: June 18, 1993

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

NOTE: The opinions expressed in Advisory 0pinions
are limited to the facts set forth therein.