Is a court-ordered liquidation fund taxed like a qualified settlement fund subject to New York franchise tax, State income tax, or New York City income tax?

Plain-English summary

Following a RICO prosecution of BCCI, a federal court appointed a trustee (Harry W. Albright, Jr.) over the stock of First American Corp and ordered the operating banks sold under a liquidation plan. The trustee holds the sale proceeds in a Fund, pays creditors, makes distributions to the United States and other beneficiaries, and makes only short-term Treasury investments. By a closing agreement with the IRS, the Fund is taxed under the qualified settlement fund rules of IRC section 468B. The question: is the fund subject to New York franchise tax (Article 9-A) or personal income tax (Article 22)?

Neither. For New York franchise tax, an unincorporated entity run by a trustee is a taxable corporation only if the trustee is actually conducting a business -- and the mere investment of funds and collection and distribution of income is not conducting a business (Tax Law section 208.1; 20 NYCRR 1-2.5). The fund's activities (holding, paying debts, distributing, and short-term investing) are not a business, so it is not a corporation and not subject to Article 9-A.

For personal income tax, New York terms follow their federal meaning (Tax Law section 607(a)). Because the fund is treated as a qualified settlement fund under IRC section 468B -- a "person" taxed on its income as if a corporation, and not classified as a trust federally -- it is not a trust for Article 22, and section 601(g) also keeps an entity taxed as a corporation federally out of Article 22. So the fund owes no Article 22 tax. The same applies to the New York City personal income tax (Article 30), which is administered like the State tax, so the fund is not taxed there either. The fund therefore has no New York filing or reporting obligations.

What this means for you

A court-supervised settlement/liquidation fund is usually not "doing business"

Holding money, paying creditors, making distributions, and parking cash in short-term investments is the mere investment and collection of funds -- not the conduct of a business -- so a trustee-run fund is not a corporation subject to the Article 9-A franchise tax.

A section 468B qualified settlement fund is not a "trust" for New York income tax

Because New York income-tax terms follow federal meaning and a qualified settlement fund is not a trust federally (it is taxed as if a corporation), the fund is not a resident or nonresident trust under Article 22, and section 601(g) independently excludes an entity taxed as a corporation federally.

The result: no New York tax and no returns for the fund itself

The fund is neither an Article 9-A corporation nor an Article 22 trust, so it has no New York franchise or personal income tax to pay and no returns to file. (This says nothing about tax on the operating companies being liquidated.)

Common questions

Q: Is a court-ordered settlement or liquidation fund a corporation in New York?
A: Not if the trustee is only holding, investing, and distributing money. That is not conducting a business, so the fund is not a corporation subject to the Article 9-A franchise tax.

Q: Is a section 468B qualified settlement fund a taxable trust in New York?
A: No. It is not a trust federally (it is taxed as if a corporation), so under section 607(a) and section 601(g) it is not subject to the Article 22 personal income tax.

Q: Does the fund have to file New York returns?
A: No. Because it is neither an Article 9-A corporation nor an Article 22 trust, the fund has no New York filing or reporting obligations.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 208.1 (corporation includes a business conducted by a trustee evidenced by certificate)
- Tax Law section 209.1 (Article 9-A franchise tax)
- Tax Law section 601(g) (entity taxed as a corporation federally is not subject to Article 22)
- Tax Law section 607(a) (New York income-tax terms follow federal meaning)
- 20 NYCRR 1-2.5 (mere investment/collection of funds is not conducting a business)
- IRC section 468B and Treas. Reg. 1.468B-1 (qualified settlement fund; not a trust)
- The Steinhardt-Caxton Consolidated Settlement Fund, TSB-A-95(14)C / TSB-A-95(5)I

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1997.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a97_12c_4i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(12)C
Corporation Tax
TSB-A-97(4)
Income Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. Z970210A

On February 10, 1997, a Petition for Advisory Opinion was received from
Harry W. Albright, Jr., Trustee of First American Corp, One Rockefeller Plaza,
Suite 1002, New York, New York 10020.
The issues raised by Petitioner, Harry W. Albright, Jr., Trustee of First
American Corp, are (1) whether the Fund is a corporation for purposes of Article
9-A of the Tax Law and subject to the tax imposed by Article 9-A, (2) whether the
Fund is treated as a trust for purposes of Article 22 of the Tax Law and subject
to the tax imposed by Article 22, (3) whether the Fund is treated as a trust for
New York City personal income tax authorized under Article 30 of the Tax Law, and
(4) what are the Fund's filing or reporting obligations.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Prior to 1992, First American Corporation ("FAC"), a U.S. corporation, was
a bank holding company whose principal asset was the stock of First American
Bankshares, Inc. ("FAB").
FAB was engaged directly and through subsidiary
corporations in the commercial banking business. All of FAC's stock was owned
by Credit and Commerce American Investment, B.V. ("CCAI"), a Netherlands
corporation.
All of CCAI's stock was owned by Credit and Commerce American
Holdings, N.V. ("CCAH"), a Netherlands Antilles corporation.
A substantial
portion of the stock of CCAH was, in turn, controlled by BCCI through nominee
shareholders. BCCI was a group of corporations organized in Luxembourg and the
Cayman Islands.
The United States brought a criminal proceeding against BCCI under the
Racketeer Influenced and Corrupt Organizations Act. As a result of this action,
the United States District Court for the District of Columbia (the "Court")
entered an order that all of FAC's and FAB's operating assets be sold under a
Court-ordered plan of liquidation. FAC and FAB are currently in the process of
liquidating.
Virtually all of the assets of value within the CCAH chain of corporations
were owned by FAC and its subsidiaries. Thus, in order to protect the United
States's interests in CCAH, the United States asked the Court (as part of a plea
agreement with BCCI) to appoint a trustee to take control of all of the FAC
stock. On June 23, 1992, the Court appointed Harry W. Albright Jr. as trustee
(the "Trustee").

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The Trust Order states as follows:
The purpose of this Order is to enable the corporate defendants
("BCCI") to comply with their obligation under the Plea Agreement to
divest themselves of any interest they hold in Credit and Commerce
American Holdings N.V. ("CCAH"), and its subsidiaries FAC and FAB,
[and] to enable the government to realize its interest, arising
under the Plea Agreement and the Order of Forfeiture, in the
proceeds of the sale or other disposition of BCCI's interest in CCAH
and its subsidiaries....
....
The Trustee shall collect and hold, subject to any existing lien,
all the issued and outstanding shares of FAC, and shall sell or
otherwise dispose of such shares or cause the boards of directors of
FAC and FAB to sell or otherwise dispose of all assets owned or
controlled directly or indirectly by FAC at any given time,
including, without limitation, all of the issued and outstanding
capital stock of FAB or of the FAB subsidiaries, consistent with the
purposes of this Order, to a purchaser or purchasers approved by the
Federal Reserve....
....
The Trustee shall exercise all rights, titles, powers and privileges
of a shareholder of FAC....
....
It is further ORDERED that following the sale or disposition of all
of the FAC shares or assets, the Trustee shall give notice of such
sale or disposition to the Court, counsel for the United States ...
counsel for the Board of Governors of the Federal Reserve, all
shareholders of record of CCAH, pursuant to a list to be provided by
the Federal Reserve Board, and all creditors of CCAH and all
creditors of Credit and Commerce Investment, B.V. ("CCAI") ....
Consistent with the Court's Order of Forfeiture of January 24, 1992,
any proceeds remaining after the payment or reimbursement of the
expenses of the Trustee ... shall be used to pay, in the following
order of priority, such bona fide debts of FAB, FAC, CCAI, and CCAH
as are required by binding contract or law to be paid.
Any
remaining proceeds should be held by the Trustee in an interest­
bearing account or instrument pending further order of the Court.
Pursuant to the Trust Order, as part of the process of liquidating FAC, the
Trustee has caused FAC and it subsidiaries to sell all of their operating assets
for more than $460 million in net proceeds. Part of these sale proceeds have
been distributed to the Trustee.
The remainder of the sale proceeds are

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currently held by FAB, under the direct control of its board of directors, and
are being invested principally in short term U.S. government securities, pending
liquidating distributions to the Trustee.
The Trustee's Functions With Respect to the Sale Proceeds
Under the Court's orders, the Trustee is to (a) receive the sale proceeds
(the "Proceeds") and hold the Proceeds in a fund or funds (the "Fund"), (b) pay
out of the Fund the bona fide debts of CCAI and CCAH, (c) make a Series of
distributions out of the Fund to the United States, the Federal Reserve Bank of
New York, and any other person entitled thereto (collectively, "beneficiaries"),
(d) make short-term investments of the Fund and collect and reinvest the income
therefrom , and (e) distribute all remaining amounts in the Fund, following the
payment of all expenses, the beneficiaries of the Fund. The vast majority (more
than 95%) of the proceeds distributed to date by FAC to the Trustee have been
immediately used by the Trustee to pay CCAI's and CCAH's debts or have been
immediately distributed by the Trustee to the beneficiaries of the Fund (and have
not been invested by the Trustee).
The Trustee's activities are limited to those set forth above, and each of
these activities are subject to Court supervision and approval. The Trustee's
investment of the Fund will be limited to deposits in United States banks and
purchases of short-term United States Treasury bills (i.e., those having a term
to maturity of 183 days or less).
The Trustee and the Internal Revenue Service ("IRS") have entered into a
Closing Agreement with respect to certain federal tax matters concerning the Fund
and the Trustee. With respect to the taxable status of the Fund, the Closing
Agreement provides as follows:
Although it is expressly understood that "the fund" described in
paragraph 2 below is not a qualified settlement fund, it is agreed
that for federal tax purposes the fund shall be subject to all of
the rules set forth in Treasury Regulation ("Tres. Reg") §1.468B-2
[the qualified settlement fund rules], as modified by this Closing
Agreement.
...
The Trustee will be treated as the administrator of a QSF [qualified
settlement fund] within the meaning of §1.468B-2(k)(3).
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.

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Section 208.1 of the Tax Law provides that:
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 ... 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 ... 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....
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.
Herein, the activities of the Trustee 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. 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 Article 9-A.

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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 ....
For federal income tax purposes, the Fund is being treated like a qualified
settlement fund, and the Trustee is treated as the administrator of 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 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, Fibreboard Asbestos
Compensation Trust, Adv Op Comm T & F, January 21, 1997, TSB-A-97(1)I; and The
Steinhardt-Caxton Consolidated Settlement Fund, Adv Op Comm T & F, August 3,
1995, TSB-A-95(5)I.)
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 treated like a qualified settlement fund under
section 468B of the IRC. Pursuant to section 468B, 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 the income of a corporation.
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.

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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.
Note that this advisory opinion does not address whether a franchise tax
is imposed on FAC and FAB during liquidation.

DATED:

May 19, 1997

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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