Is a federal section 468B 'qualified settlement fund' that holds cash and Treasury Bills subject to New York State franchise tax (Article 9-A) or New York State/City personal income tax (Article 22/30)?

Plain-English summary

The Steinhardt-Caxton Consolidated Settlement Fund is a federal "qualified settlement fund" (QSF) under IRC section 468B, established by court order to pay investor claims arising from an SEC action against Steinhardt and Caxton. It holds only cash and U.S. Treasury Bills through the federal court registry; a Fund Administrator in Garden City runs it. It asked whether it owes New York State franchise tax or New York State/City personal income tax, and what it must file.

Neither tax applies.

• Article 9-A franchise tax: A trust or fund is taxed as a corporation only if its trustee/administrator is conducting a business. The conduct of business is "more than the mere investment of funds and the collection of income therefrom, with incidental replacement of securities and reinvestment of funds." Here the Fund Administrator merely invests cash in Treasury Bills and collects income, so the Fund is not a section 208.1 corporation (following Buxbaum) and owes no Article 9-A tax.
• Article 22 / New York City personal income tax: Federally, a QSF is not classified as a trust (Treasury Reg 1.468B-1(b)); under section 607(a) New York follows that, so the Fund is not a trust for Article 22. And section 601(g) excludes from Article 22 any entity taxable as a corporation federally -- a QSF is taxed at the entity level as a corporation for procedural purposes. So no personal income tax (and the same result for the parallel New York City tax).

Having no taxable status, the Fund has no New York filing or reporting obligations.

What this means for you

Merely investing and collecting income is not "conducting a business"

A settlement fund that just holds cash and Treasury Bills and collects the income is not a corporation for Article 9-A -- so it owes no franchise tax.

A federal QSF is not a trust for New York income tax

Because a section 468B qualified settlement fund is not classified as a trust federally, it is not a trust for Article 22, and section 601(g) keeps it out of the personal income tax as an entity taxed as a corporation federally.

No taxable status means no filing

A fund that is neither an Article 9-A corporation nor an Article 22 trust has no New York State or City filing or reporting obligations.

Common questions

Q: Does a court-ordered settlement fund owe New York franchise tax?
A: Not if its administrator only invests the funds and collects income; that is not conducting a business, so it is not a corporation for Article 9-A.

Q: Is the fund taxed as a trust under the personal income tax?
A: No. A federal section 468B qualified settlement fund is not a trust federally, so it is not a trust for Article 22, and section 601(g) excludes it.

Q: Does the fund have to file anything in New York?
A: No -- with no taxable status, it has no New York State or City filing or reporting obligations.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 209.1 (franchise tax on corporations)
- Tax Law section 208.1 (corporation includes a business conducted by trustees evidenced by certificate/written instrument; activities, not purposes, control)
- Tax Law section 601(g) (an association/trust taxable as a corporation federally is not subject to Article 22)
- Tax Law section 607(a) (Article 22 terms follow their federal meaning)
- IRC section 468B and Treasury Reg 1.468B-1 through -5 (qualified settlement funds; not classified as trusts)
- Samuel R. Buxbaum, Buxbaum-Banco Popular Settlement Fund, TSB-A-93(10)C (settlement fund not a corporation/trust); see also QSF pairs 97(3)C/1I and 97(12)C/4I

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1995.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a95_14c_5i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-95 (14) C
Corporation Tax
TSB-A-95 (5) I
Income Tax
August 3, 1995

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. Z950427A

On April 27, 1995, a Petition for Advisory Opinion was received from The
Steinhardt-Caxton Consolidated Settlement Fund, c/o Joel L. Carr, Fund
Administrator, 1101 Stewart Avenue, Suite 207, Garden City, New York 11530.
The issues raised by Petitioner, The Steinhardt-Caxton Consolidated
Settlement Fund (the "Fund"), are il) whether the Fund is subject to the New York
State franchise tax or the New York State and New York City personal income taxes
and (2) what are the Fund's filing or reporting obligations.
The Fund is a consolidated settlement fund approved and established
pursuant to the settlement incorporated in two final judgments of permanent
injunction and other relief as to Steinhardt Management Company, Inc.
("Steinhardt") and Caxton Corporation ("Caxton"), respectively, each dated
December 16, 1994, in the United States District Court for the Southern District
of New York ("the Court"). The action is entitled Securities and Exchange
Commission v Steinhardt Management Company, Inc. and Caxton Corporation, 94 Civ
9040 (SDNY)(RPP).
The Fund consists solely of cash and short-term United States Treasury
Bills held through the Court Registry Investment System ("CRIS") maintained by
the United States District Court for the Southern District of Texas. The Fund
Administrator's office is located in Garden City, New York.
On December 16, 1994, in Securities and Exchange Commission v Steinhardt
Management Company, Inc. and Caxton Corporation, supra., the Court entered final
judgments of permanent injunction and other relief (together, the "Final
Judgment") as to Steinhardt, a New York corporation, and Caxton, A Delaware
corporation. Pursuant to the Final Judgment, on December 29, 1994, Caxton
deposited $14 million and on December 29, 1994 Steinhardt deposited $21 million
(together, this $35 million constitutes the Fund assets) in the registry of the
Court for deposit with CRIS. Pursuant to the Final Judgment, CRIS serves as
custodian of the Fund. CRIS invests the Fund solely in United States Treasury
Bills. The Court appointed the Fund Administrator to administer the Fund.
Pursuant to the Final Judgment, the Fund's assets will be used to pay
claims by certain investors against Steinhardt and Caxton arising out of their
alleged activities in the government securities markets in violation of the
Federal securities laws and antitrust laws. Claims may be made against the Fund,
among other things, for compensatory and consequential damages arising from such
activities as are alleged by the Securities and Exchange Commission in its
complaint against Steinhardt and Caxton in 94 Civ 9040. Eligible claimants
entitled to receive distributions from the Fund have yet to be determined. Three
TP-9(9/88)

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years after the entry of the Final Judgment, or at such other time as the parties
may agree or the Court orders, the Fund will pay to the Treasury of the United
States, as residual distributee, any monies remaining in the Fund that have not
been distributed to claimants, reserved against or placed in escrow pursuant to
the terms of the Final Judgment.
The Final Judgment requires the parties and the Fund Administrator to take
all necessary steps to enable the Fund to be a "qualified settlement fund" within
the context of section 1.468B-1(c) of the Treasury Regulations. The Final
Judgment provides that the Fund Administrator is to cause the Fund to pay Federal
taxes as a "qualified settlement fund" as provided in section 1.468B-2 of the
Treasury Regulations. The Fund has elected to be treated as a "qualified
settlement fund" for Federal income tax purposes, pursuant to section 1.468B­
5(b)(2) of the Treasury Regulations, with respect to the period beginning as of
the date of its inception in 1994.
The Federal income taxation of the Fund is governed by section 468B of the
Internal Revenue Code ("IRC") and the Treasury Regulations promulgated
thereunder. Section 468B of the IRC provides generally that escrow accounts and
settlement funds are subject to current Federal income taxation. Under section
1.468B-1(c) of the Treasury Regulations, the Fund will be treated as a "qualified
settlement fund". As a qualified settlement fund, the Fund is treated as a
separate taxable entity taxable on its earnings at trust rates. For Federal tax
administrative and procedural purposes (rules for information returns and tax
returns, the time and place for the payment of tax, etc.), a qualified settlement
fund is treated as a corporation.
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:
[t]he 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 ....
The term "corporation" is defined in section 1-2.5 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

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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 ....
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
1-2.5 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 of the Tax Law 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:
[a]ny 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 ....

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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, supra.)
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 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.
After determining that the Fund is not a taxable entity for New York State
and New York City tax purposes, the Fund has no New York State franchise tax or
New York State or New York City personal income tax filing or reporting
obligations.

DATED: August 3, 1995

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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