NY TSB-A-99(26)C Corporation Tax 1999-11-03

Is a gain under a residual sharing agreement -- compensation for market information provided from New York to help an affiliate price a vessel sale -- excluded from gross earnings for section 184 purposes?

Short answer: No, it is not excluded. A Great Lakes shipping corporation's receipt under a residual sharing agreement -- its 20% share of the proceeds when an affiliate sold a vessel, in return for market and operating information the corporation furnished by telephone from New York -- is compensation for services performed in New York. It is gross earnings arising from the employment of capital from sources within New York and is subject to the franchise tax under section 184 of Article 9.

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

American Steamship Company, a New York Great Lakes shipping corporation taxed under section 184, entered a residual sharing agreement with an affiliated finance company (GATX Capital). GATX Capital sold a Great Lakes vessel (the sale occurred outside New York). Under the agreement, American Steamship -- from New York, by telephone -- gave GATX Capital information about Great Lakes vessel operating characteristics and market conditions to help set the selling price, in exchange for 20% of the proceeds above a required residual value. American Steamship asked whether that "gain on residual sharing agreement" is excluded from gross earnings under section 184.

The Department held it is not excluded -- it is taxable:

Section 184.1 taxes gross earnings from all sources within New York, meaning all receipts arising from or growing out of the employment of capital (NY Central & Hudson River R.R.).
The receipt is the corporation's compensation for services it performed under the agreement.
Because those services (furnishing the market information) were performed in New York, the receipt -- like the overseas money/flower-order fees held taxable in ITT World Communications -- is gross earnings from New York sources subject to section 184.

That the underlying vessel sale closed outside New York did not change the result; what mattered was where American Steamship performed its services.

What this means for you

Section 184 reaches receipts from services performed in New York

"Gross earnings" is broad -- all receipts growing out of the employment of capital. A share of someone else's sale proceeds, earned as pay for your services rendered in New York, counts.

Where the services are performed controls

The vessel and its sale were outside New York, but the corporation supplied its information from New York, so the receipt is sourced to New York.

Labeling a receipt a "gain" does not exclude it

Calling the payment a "gain on residual sharing agreement" on financial statements does not remove it from gross earnings; its substance is service compensation.

Common questions

Q: Is the residual-share payment excluded from section 184 gross earnings?
A: No. It is compensation for services performed in New York and is included in gross earnings.

Q: Does it matter that the vessel sale happened outside New York?
A: No. The taxable connection is where the corporation performed its information services, which was New York.

Q: What kind of receipts does section 184 reach?
A: All receipts arising from or growing out of the employment of capital from sources within New York.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 184.1 (franchise tax on gross earnings of transportation and transmission corporations)
- People ex rel. NY Central & Hudson River R.R. Co. v Roberts, 32 App Div 113, affd 157 NY 677
- Matter of ITT World Communications, Inc., TSB-H-81(62)C (Dec. 2, 1981)
- American Steamship Company, TSB-A-99(26)C (Nov. 3, 1999)

Source

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-99(26)C
Corporation Tax
November 3, 1999

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C990423A

On April 23, 1999, a Petition for Advisory Opinion was received from American Steamship
Company, 500 Essjay Road, Williamsville, New York 14221.
The issue raised by Petitioner, American Steamship Company, is whether a gain on a residual
sharing agreement related to the sale of an asset by a sister corporation is excluded from gross
receipts for purposes of section 184 of Article 9 of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is located in Buffalo, New York and is a New York corporation engaged in a Great
Lakes shipping business. GATX Capital corporation, a finance company, is located in San
Francisco, California. Both Petitioner and GATX Capital are subsidiaries of GATX Corporation.
GATX Capital owned a Great Lakes vessel that was leased to and operated by Transtar
Corporation, a Pennsylvania Corporation. GATX Capital sold its beneficial ownership interest in
the vessel to Transtar Corporation. The sale of the vessel took place outside New York State, and
was finalized in the second quarter of 1999. The vessel was located in the Great Lakes outside of
New York.
In connection with the sale of the Great Lakes vessel owned by GATX Capital, Petitioner
entered into a residual sharing agreement with GATX Capital. Under the agreement, Petitioner
provided GATX Capital with information, via telephone from New York, relative to operating
characteristics of Great Lakes vessels and the general market conditions in the Great Lakes industry
to aid GATX Capital in determining the selling price of its vessel. In return for this activity,
Petitioner will receive a 20 percent share of the sale proceeds in excess of GATX Capital's required
residual value for the vessel. The income received as a result of the residual sharing agreement will
be reflected as a component of Petitioner's gross earnings in 1999, and will be recorded as "gain on
residual sharing agreement"on its financial statements.
Discussion
Section 184.1 of the Tax Law imposes a franchise tax on a taxpayer's gross earnings from
all sources within New York State, excluding earnings derived from business of an interstate
character.

-2
TSB-A-99(26)C
Corporation Tax
November 3, 1999

Gross earnings means all receipts arising from or growing out of the employment of capital,
whether that capital is employed in the transportation and transmission business or otherwise.
(People ex rel. NY Central & Hudson River R.R. Co. v Roberts, 32 App Div 113, affd, 157 NY 677)
In the Matter of ITT World Communications, Inc., Dec St Tax Commn, December 2, 1981,
TSB-H-81(62)C, the petitioner was authorized to conduct business internationally in the area of
record communications. It could send communications from a point within the United States to some
other part of the world outside of the United States. Its three major lines of business were messages,
the international counter part to the domestic telegram; telex; and leasing of communication circuits
to customers. It was held, in part, that the fees received by the petitioner that represented charges
for sending money and flower orders overseas in connection with an international transaction, were
fees received for services that were rendered by the petitioner in New York, and constituted gross
earnings subject to tax under section 184 of the Tax Law.
In this case, under the residual sharing agreement, Petitioner provided GATX Capital with
information, via telephone from New York, relative to operating characteristics of Great Lakes
vessels and the general market conditions in the Great Lakes industry to aid GATX Capital in
determining the selling price of the vessel it was selling. In return, Petitioner will receive 20 percent
of the sale proceeds in excess of GATX Capital's required residual value for the vessel. This receipt
recorded on Petitioner's financial statements as "gain on residual sharing agreement" is Petitioner's
compensation for the performance of services pursuant to the sharing agreement.
Since, with respect to the residual sharing agreement, Petitioner performed its services in
New York State, Petitioner's receipt from the residual sharing agreement, like the fees from sending
money and flower orders overseas in ITT World Comm, supra, constitutes gross earnings from
sources within New York and is subject to tax under section 184 of the Tax Law.

DATED: November 3, 1999

NOTE:

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

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