ETHYL CORPORATION - DECISION - 06/28/99. In the Matter of ETHYL CORPORATION TAT (E) (GC) - DECISION

Transcription

1 ETHYL CORPORATION - DECISION - 06/28/99 In the Matter of ETHYL CORPORATION TAT (E) (GC) - DECISION NEW YORK CITY TAX APPEALS TRIBUNAL APPEALS DIVISION GENERAL CORPORATION TAX RESPONDENT WAS TIME-BARRED FROM REQUIRING COMBINATION FOR THE YEARS 1977 THROUGH 1979, SINCE THE STATUTES OF LIMITATIONS FOR ASSESSMENT FOR THOSE YEARS WERE OPEN ONLY FOR THE LIMITED PURPOSE OF CONFORMING TO THE SECOND STATE CHANGES. IN ADDITION, RESPONDENT WAS PROHIBITED FROM CHANGING PETITIONER'S ALLOCATION PERCENTAGE DURING THE PERIOD OF LIMITATION RELATED TO STATE CHANGES EVEN THOUGH RESPONDENT'S CHANGES REFLECTED THE STATE AUDIT CHANGES TO PETITIONER'S ALLOCATION PERCENTAGES. ALSO, THE 1980 YEAR WAS NOT OPEN SOLELY FOR THE LIMITED PURPOSE OF CONFORMING TO THE SECOND STATE CHANGES AS THE FIFTH WAIVER DID NOT REVOKE THE FOURTH WAIVER. RATHER, THE WAIVERS INDICATE A CLEAR PATTERN ON BEHALF OF THE PARTIES OF EXTENDING THE TIME PERIOD FOR THE ASSESSMENT OF GCT WITH RESPECT TO THE GCT RETURN SEPARATELY FROM THE TIME PERIOD FOR THE ASSESSMENT OF TAX W ITH RESPECT TO THE SECOND STATE CHANGES. PETITIONER'S REQUEST THAT THE TRIBUNAL WAIVE THE INTEREST ON ANY DEFICIENCY ACCRUED AFTER 1988 ON THE GROUND THAT THE ALJ ERRED IN NOT ISSUING A DETERMINATION IN THIS MATTER FOR OVER NINE YEARS WAS REJECTED. JUNE 28, 1999

2 New York City Tax Appeals Tribunal x : In the Matter of : : DECISION ETHYL CORPORATION : : TAT (E) (GC) : Petitioner. : : x The Commissioner of Finance of the City of New York (the "Commissioner" or "Respondent") filed an Exception to certain conclusions of law contained in the Determination of an Administrative Law Judge ("ALJ") dated August 6, Ethyl Corporation ("Petitioner") also filed an Exception to certain conclusions of law in that Determination as well as to the accrual of interest past 1988 on any deficiencies upheld with regard to Petitioner's liability for general corporation tax ("GCT"). The Commissioner appeared by Robert Firestone, Esq., Assistant Corporation Counsel, New York City Law Department and Petitioner appeared by James W. Shea, Esq. and David A. Agosto, Esq., Hunton & Williams. Both parties filed briefs and oral argument was granted by the Tribunal. Petitioner manufactures and sells chemical and paper products. During the years 1972 through 1982 (the "Tax Years"), Petitioner did business in New York City (the "City"). 1 1 In this decision, the ALJ's factual findings have been set forth to the extent relevant to the issues on appeal before this Tribunal. Neither party took exception to any of the ALJ's factual findings. Any additional findings or corrections to the ALJ's findings have been noted.

3 For each of the Tax Years, Petitioner filed federal corporate income tax returns (the "Federal Returns"), New York State ("State") franchise tax returns, and City GCT returns. Petitioner also filed an amended federal corporate income tax return for 1972 (the "Amended Return") on November 5, The Commissioner of the New York State Department of Taxation and Finance (the "State Commissioner") audited Petitioner's State franchise tax returns for the years 1973 through 1976 (the "First State Audit"). As part of this audit, the State Commissioner also examined Ethyl Export Corporation ("Export"), a wholly-owned subsidiary of Petitioner which was a Domestic International Sales 2 Corporation ("DISC"). The First State Audit was resolved by a settlement which increased Petitioner's State franchise tax liability for each of the audited years (the "First State Changes"). The First State Changes were reflected on four notices issued by the State Commissioner on May 1, 1978, each of which was entitled "Settlement of Audit Adjustments." 2 The ALJ noted that, as a DISC, Export was not subject to federal income tax. Instead, a portion of Export's income was included in Petitioner's federal taxable income as "taxable distributions." See ALJ's Determination, Appendix A at 42. For GCT purposes, income from subsidiaries, such as Export, is eliminated from federal taxable income in calculating City Entire Net Income ("ENI"). -2-

4 In response to Respondent's inquiries concerning the First State Changes, Petitioner filed Forms NYC 3360, dated October 6, 1978, in which it reported to Respondent, as true and correct, changes in net income allocable to the City and additional GCT due 3 as a result of the First State Changes. See ALJ's Determination, Appendix B at 42. Petitioner paid the additional tax reported as due on those Forms NYC The State Commissioner thereafter audited Petitioner's State franchise tax returns for the next four years, 1977 through 1980 (the "Second State Audit"). As part of this audit, the State Commissioner also examined Export and another of Petitioner's wholly-owned subsidiaries, Ethyl Interamerica Corp. ("Interamerica"), a Western Hemisphere Trade Corporation. 4 Petitioner and the State Commissioner reached a settlement requiring certain adjustments to Petitioner's State franchise 3 The ALJ noted that, by law, such additional taxes were assessed on the date on which Petitioner reported the First State Changes without protest. See former R of the New York City Administrative Code (the "Code") [currently ]: If a report... concedes the accuracy of a federal or New York state adjustment or change... any deficiency in tax... resulting therefrom shall be deemed to be assessed on the date of filing such report Interamerica's federal taxable income for the years 1977 through 1982 is set forth in the ALJ's Determination, Appendix C at

5 5 returns for those years (the "Second State Changes") The Second State Changes resulted in additional State franchise tax of $135,558, $21,014, and $25,173 for the years 1978, 1979, and 1980, respectively. The changes for 1977 resulted in an overpayment of State franchise tax of $1,942. The changes to Petitioner's franchise tax liability were reflected in a "Consent to Audit Changes," dated September 9, 1983, which Petitioner executed on October 7, Rather than using Forms NYC 3360, Petitioner reported the Second State Changes to Respondent by letter dated December 1, 1983, which included a copy of the State Consent to Audit Changes. There was no indication in Petitioner's letter that additional GCT was due as a result of the Second State Changes. On December 16, 1983, Respondent's Bureau of Tax Collection, Federal/State Change Unit, prepared workpapers which reflected that, as a result of the Second State Changes, additional City GCT was due in the amounts of 5 The ALJ noted that the Second State Changes included: (a) reducing interest indirectly attributable to subsidiary capital by eliminating current intercompany accounts and notes receivable from the computation of average subsidiary capital; (b) including income earned by Interamerica as a discretionary adjustment pursuant to Tax Law section 211.5; (c) reducing income from subsidiary capital by the DISC dividend income from Export reported by Petitioner and adding the balance of the DISC income to federal taxable income pursuant to Tax Law section 208.9(i)(B); (d) changing Petitioner's State business allocation percentage in conjunction with the treatment described in (c) above; and (e) adjusting Petitioner's investment capital for 1978 in a manner which deprived Petitioner of the election to allocate its investment income by its business allocation percentage under former Tax Law section and resulted in its investment income being allocated by an investment allocation percentage determined by the State auditor to be %. -4-

6 $328.98, $51.33, and $51.02, for 1978, 1979,and 1980, respectively. The Federal/State Change Unit determined the amounts of City GCT due by erroneously treating the additional State franchise tax reported by Petitioner in the December 1, 1983 letter as additional taxable income to which it applied Petitioner's reported business allocation percentage ("BAP") and the then applicable City GCT rate. On February 1, 1984, Respondent issued to Petitioner, Notices For Payment of Tax Due in the principal amounts of $328, $126, and $126, for the years 1978, 1979, and 1980, respectively. The Notices also asserted a penalty for failure to file a report of State changes. On February 28, 1984, Petitioner sent Respondent a check in payment of the asserted tax due for 1978, plus interest. Petitioner was also audited by the IRS for the years 1972 through The IRS made changes to Petitioner's Federal Returns and the Amended Return (the "Federal Changes") which Petitioner reported to Respondent as "true and correct" on a schedule dated November 11, 1985 (rather than on Forms NYC 3360). The reported adjustment to Petitioner's GCT liability as a result of the Federal Changes are listed in the ALJ's Determination, in Appendix D at 43. On May 30, 1984, Respondent first notified Petitioner that he would audit its GCT returns for the years 1980 through 1982 (the "Audit"). On June 4, 1984, A.H. Wells, Petitioner's manager for state and local taxes, spoke to E.C. Schmidt, the City auditor (the "Auditor") regarding postponing the Audit. Respondent sent -5-

7 Mr. Wells a general consent form to extend the statute of limitations for 1980 and 1981 until September 30, 1985 (the "First Waiver"). The form contains the notation, in pencil, in the upper right hand corner: "Schmidt Expires 9/9/84 M. Petrakis." This notation refers to the last date for Respondent to make an assessment (absent extension) with respect to the 1980 GCT return filed on September 9, On June 7, 1984, Mr. Wells returned the First Waiver signed by Petitioner and confirmed Petitioner's understanding that the Audit would be postponed. In July 1985, Petitioner and the City executed another general consent form, which added the year 1982 and extended the time to assess GCT for the years 1980, 1981, and 1982 to September 30, 1986 (the "Second Waiver"). The Second Waiver contains the notation, in pencil, in the upper right hand corner: "C. Schmidt." The Audit of Petitioner's GCT returns for the years 1980 through 1982 commenced on September 15, During October 1985, the Audit was expanded to cover the Second State Changes. On October 30, 1985, Petitioner executed a consent extending the period of limitations for the years 1977, 1978, 1979, and 1980 to June 30, 1986 (the "Third Waiver"). The Third Waiver contains the notation "For filing of report of changed or corrected federal or New York State taxable income pursuant to Section R (c) of the [Code]." It also contains the notation, in pencil, in the upper right hand corner: "Schmidt Exp. 12/1/85." This notation -6-

8 refers to the last date that Respondent could make an assessment (absent extension) with respect to Petitioner's December 1, 1983 report of the Second State Changes. The Audit, thereafter, was further expanded to include Petitioner's report of the Federal Changes on November 11, On December 11, 1985, Mr. Wells wrote a letter to the Auditor regarding the "audit of [Petitioner's] " GCT returns in which he responded to the Auditor's proposed inclusion or combination of Interamerica with Petitioner by asking that the Auditor abate penalties asserted because of Petitioner's failure to file a combined return with Interamerica. In making his request, Mr. Wells noted that: (1) "While combination may be appropriate it is [within the Commissioner's discretion];" (2) Petitioner attempted to file its returns correctly but "combining these companies did not seem to be required in order to prevent distortion;" (3) under the regulations issued in 1983, the City "would have required combined returns;" and (4) it is unfair to require advance knowledge that "these companies should have been combined" and to impose penalties on Petitioner for not filing a combined return with Interamerica. On January 23, 1986, the Auditor sent Mr. Wells his "workpapers for audit number GCB-6597-GCT and GCA-1368-GCT for [Petitioner and Interamerica], respectively," along with the amount of tax due. The Auditor informed Mr. Wells that "[b]ecause of your -7-

9 cooperation, no penalties have been charged in any year." On May 16, 1986, Petitioner executed another general consent form, which added the year 1983 and extended the time to assess GCT for the years 1980, 1981, 1982, and 1983 to December 31, 1986 (the "Fourth Waiver"). The Fourth Waiver contains the notation, in pen, in the upper right hand corner: "C. Schmidt Exp 9/30/86." This notation refers to the date to which the statute of limitations was extended in the Second Waiver. Respondent received the Fourth Waiver on May 19, On May 29, 1986, Petitioner executed a consent extending the period of limitations for the years 1977, 1978, 1979, and 1980 to 6 December 31, 1986 (the "Fifth Waiver"). The Fifth Waiver contains the notation: "For filing of report of changed or corrected federal or New York State taxable income pursuant to Section R (c) of the [Code]." The Fifth Waiver also contains the notation, in pen, in the upper right hand corner: "C. Schmidt Exp 6/30/86." This notation refers to the date to which the statute of limitations was extended in the Third Waiver. Respondent received the Fifth Waiver on June 2, We have modified the ALJ's Finding of Fact 14 to reflect the fact that the Fifth Waiver extended the period of limitations for the years 1977, 1978, 1979, and 1980 to December 31, 1986 and not June 30,

10 letter: On June 3, 1986, the Auditor sent Mr. Wells the following Enclosed are complete and final copies of my workpapers for Audit#: GCB 6597 GCT. There will be no separate billing for [Interamerica]. That corporation's entire net income has been included with its parent's in the same manner as the State included its income (Discretionary Adjustment). Please note that you are still required to report on a NYC 3A (Combined Return) by virtue of your D.I.S.C. On June 4, 1986, Respondent executed both the Fourth Waiver and the Fifth Waiver. On November 3, 1986, Respondent issued a Notice of Determination (the "NOD") to Petitioner, asserting the following GCT deficiencies (with interest computed to December 31, 1986): Tax Year Principal Interest Total 1972 $ $ $ 1, , , , , , , , , , , , , , , , , , , , , , , Total $221, $186, $407,

11 The Statements of Audit Adjustments attached to the NOD 7 indicate the following bases for Respondent's changes: (1) for 1972 through 1976, the Federal Changes; (2) for 1977, the Federal Changes, the Second State Changes, and a discretionary adjustment to include "sub."; (3) for 1978, the Federal Changes, the Second State Changes, and both an increased investment allocation percentage ("IAP") and an increased BAP; (4) for 1979, the Federal Changes and the Second State Changes; (5) for 1980, the Federal Changes, "reduced deductions attributable to sub's," increased investment income, an increased IAP [to %] and an increased BAP, "combine DISC," and a discretionary adjustment to include Interamerica's income in Petitioner's income; and (6) for 1981 and 1982, increased investment capital and income, increased IAPs and BAPs, and "combine DISC." Export's only business activity from 1977 through 1982 was to serve as commission agent for Petitioner and Edwin Cooper, Inc. 8 9 ("Cooper"), another subsidiary of Petitioner., During this period Export did not have a bank account, books and records, or employees. In its dealing with Petitioner and Cooper, Export did not use arm's-length pricing, but instead used the "50-50 combined taxable income" and the "4% gross receipts" methods of establishing intercompany pricing as provided for under IRC section 994. The Auditor required Petitioner and Export to file GCT returns on a combined reporting basis ("Combination") for the years The ALJ noted that none of the asserted deficiencies at issue before him were attributable to the First State Changes. 8 The ALJ noted that, during the period 1977 through 1982, between 28% and 53% of the sales made by Export as commission agent for Petitioner and Cooper were made to (or through) related corporations. 9 We have omitted the ALJ's Findings of Fact 19 through 22 and the accompanying footnotes as they relate to the Federal Changes, and those adjustments are not presently before us. -10-

12 through For the years 1977 through 1979, Combination was required in order to reach the same result that the State Commissioner had reached under Tax Law section 208.9(i)(B), which specifically requires the income of a "tax-exempt DISC" to be 10 included in the income of its parent corporation. The Auditor did not independently examine Export. Export's ENI for the years 1977 through 1982 consisted of "qualified export receipts from the sale of export property" plus 11 "other qualified export receipts." The "qualified export receipts from the sale of export property" equaled Export's commission income. Export's "other qualified export receipts" were almost 12 entirely interest income on producer's loans which it made to Petitioner and, possibly, other parties. As a result of the Combination, the Auditor treated Export's 13 income as business income on the combined report and determined a single combined BAP for Petitioner and Export for the years 1977 through See ALJ's Determination, Appendix H at 44. However, the Auditor determined that, since Export was a "commission DISC," only its commission income was business income includible in calculating the receipts factor of the BAP for the combined 10 For Export's income for 1977 through 1980, see ALJ's Determination, Appendix F at IRC section 993(a) and (b). For Export's ENI and commission income from the sale of export property, see ALJ's Determination, Appendix G at Producer's loans, defined in IRC section 993(d), are qualified export assets. Those assets and the income from those assets are taken into account in determining whether a corporation qualifies as a DISC. 13 Export's income was, for the most part, its commission income and interest on producer's loans. -11-

13 companies. 14 For 1977, the Auditor increased Petitioner's reported BAP from.29435% to %. This increase resulted from a modification to the "Real Estate Rented" component of the "Property Factor" used in calculating the BAP. The Auditor's workpapers indicate that the change is "Per State Audit". 15 For 1978, Petitioner reported investment capital of $415, and investment income of $10,484,616. As these amounts were less than 25% of each of Petitioner's total business and investment capital and its ENI, Petitioner elected to allocate its investment income by its BAP for that year, pursuant to the election provided in former Tax Law section and former R of the New York City Administrative Code (the "Code"). The State auditor increased Petitioner's reported investment capital for 1978 by $133,581,536 to $133,997,304 by including the average fair market value of Petitioner's commercial paper. As that adjustment increased Petitioner's investment capital to more than 25% of its total business and investment capital, the State auditor's adjustment precluded Petitioner from electing to allocate investment income by the BAP under former Tax Law section The actual (gross) receipts from the sales of export property far exceeded Export's taxable income. 15 This factual finding has been added to make the record more complete and is based on a post oral argument submission by the parties and City's Exhibit B-7 at B-1 and G We have omitted the ALJ's Findings of Fact 27 through 33 and the accompanying footnotes as they relate to issues not before this Tribunal on appeal. 17 The State auditor then determined the IAP of Petitioner for 1978 to be %. He also made other minor adjustments. -12-

14 The Auditor adopted the State auditor's changes to investment capital, and determined a City IAP for Petitioner of % for 1978, which he used to allocate Petitioner's investment income, even though Petitioner reported an IAP of 0%. For 1979, the Auditor determined a City IAP for Petitioner of % which he used to allocate Petitioner's investment income, even though Petitioner reported an IAP of 0% and the State auditor had allocated all of Petitioner's income for that year by its BAP. 18 For 1982, Petitioner reported income from subsidiaries of $87,032,383. The Auditor adjusted that amount to $84,262,340. At the Hearing, Petitioner established that the correct amount of income from subsidiaries was $86,919,253. On January 29, 1987, Petitioner timely filed a Petition protesting the claimed deficiencies and also claiming a refund of the overpayment found by the Auditor for Although, in the Petition, Petitioner appeared to be conceding the propriety of those Auditor's changes based on the First State Changes, at the Hearing and in its brief, it argued that Respondent could not adopt the First State Changes to the extent that they related to Export's income. 18 In a post oral argument submission made in conjunction with Petitioner's Counsel, Respondent's Counsel conceded that the change of Petitioner's IAP from 0% to % in 1979 was initiated by the Auditor and was not based on a Second State Change. -13-

15 19 The ALJ found that : The Fifth Waiver was not a revocation of and did not invalidate the Fourth Waiver. Accordingly, the statute of limitations for 1980 was, at the time of issuance of the NOD, open for all purposes. Although Combination of Petitioner and Export was appropriate, assessment on that basis was time-barred for 1977 through 1979, as those years were open only for the limited purpose of conforming to the Second State Changes and the State changes with respect to Export were based on State Tax Law provisions (requiring DISC income to be included in its parent's ENI) which were different than the City Code provisions relied upon by the Commissioner (requiring combined reporting to properly reflect income). The Commissioner's changes to Petitioner's 1977 BAP and 1978 and 1979 IAP and BAP were time-barred under former R (g) of the Code (currently (g)) which prohibited the Commissioner from changing a taxpayer's BAP or IAP during the additional limitations period provided for in former R (c) of the Code (currently (c)). On appeal, Respondent takes exception to the ALJ's finding that the Commissioner was time-barred from requiring Export to file a combined report with Petitioner for 1977 through 1979 because: (1) those years were only open for the limited purpose of conforming to the Second State Changes; and (2) the provision relied on by the Commissioner was not the same as the provision used by the State Commissioner. In addition, Respondent takes 19 In light of the number of issues raised at Hearing, and given that most of those issues are not before us on appeal, we are not listing all the issues addressed by the ALJ below. In addition, we have only listed those conclusions of law of the ALJ to which one or both parties took exception. -14-

16 exception to the ALJ's finding that he cannot change Petitioner's 20 allocation percentages with respect to reported Second State Changes during the additional limitations period provided for in former R (c) of the Code (currently (c)). At the same time, Petitioner takes exception to the ALJ's finding that the statute of limitations for 1980 was open for all purposes as the Fifth Waiver was not a revocation of, and did not invalidate, the Fourth Waiver. Petitioner argues that, by its terms, the Fifth Waiver revoked the Fourth Waiver with respect to the 1980 year and thus, the 1980 year was open only for the limited purpose of conforming to the Second State Changes. Based upon its assertion that the 1980 year is only open for Second State Changes, 20 In his Exception, Respondent states that he takes exception to "Conclusion of Law I, which ruled that the Commissioner cannot assert a deficiency with respect to a reported State change to Petitioner's [IAP]." Respondent's Exception at 2. We note however that Conclusion of Law I refers to deficiencies asserted with respect to reported State changes to Petitioner's BAP as well as its IAP. Furthermore, Respondent's briefs, so far as they address this issue, do not limit their comments to IAPs and in fact state that "... Admin. Code (g) does not preclude the City from assessing reported State changes to the business and investment allocation percentages." (Emphasis added.) See Respondent's Brief in Support of His Exception at 35. Respondent has stated, in response to Petitioner, that "Contrary to [P]etitioner's contention, the Commissioner does not concede that [he] was barred from disallowing [P]etitioner's election to allocate its income by the business allocation percentage.... The Commissioner has not, however, taken exception to the ALJ's ruling on that issue, and that ruling, is, therefore, not at issue in the present case. See Respondent's Reply Brief at 9. In addition, Respondent conceded that the change of Petitioner's IAP from 0% to % with respect to the 1979 year was initiated by the Auditor and was not based on a State change. With this concession, and based on his assertion that former R (g) of the Code only prohibits "City audit changes" to allocation percentages during the additional period for assessment, Respondent has effectively conceded that his change to Petitioner's IAP for the 1979 year was in error. -15-

17 Petitioner also argues that the portions of the deficiency which relate to (1) the combination of Petitioner with Export in 1980; and (2) the changes to Petitioner's IAP and BAP in the 1980 year are also time-barred. In addition, Petitioner takes exception to the accrual of interest after 1988 on any deficiencies because of "the egregious delay on the part of the [ALJ] in rendering the Determination" nine years after the filing of Petitioner's post-hearing brief in March, Petitioner requests that the Tribunal exercise its authority pursuant to 168(a) of the New York City Charter (the "Charter") to waive that portion of the interest which has accrued after For the reasons set forth below, we affirm the ALJ's Determination to the extent appealed and reject Petitioner's request that such portion of interest (on any deficiency upheld) which has accrued after 1988 be waived. A. STATUTORY FRAMEWORK. Former R of the Code (currently ) provides, in part, that: If the amount of taxable income for any year of any taxpayer,... as returned to the United States treasury department or the New York state tax commission is changed or corrected by the commissioner of internal revenue or other officer of the United States or the New York state tax commission or other competent authority,... such taxpayer shall report such changed or corrected taxable income,... and the changes or corrections of his federal or New York state taxable income on which it is based, within ninety days after... the final determination of such change or correction... and shall concede the accuracy of such determination or state wherein it is erroneous

18 Former R of the Code (currently ) provides, in part, that:... If a report or an amended return, filed pursuant to part two or part three of this title, concedes the accuracy of a federal or New York state adjustment or change or correction..., any deficiency in tax under part two or part three of this title resulting therefrom shall be deemed to be assessed on the date of filing such report or amended return, and such assessment shall be timely notwithstanding section R [currently ]. Former R (c) of the Code (currently (c)) provides, in part, that: Report of changed or corrected federal or New York state income.--in the case of the tax imposed under part two or part three of this title, if the taxpayer files a report or amended return required thereunder, in respect of an increase or decrease in federal or New York state taxable income or federal or New York state tax,... the assessment (if not deemed to have been made upon the filing of the report or amended return) may be made at any time within two years after such report or amended return was filed. The amount of such assessment of tax shall not exceed the amount of the increase in city tax attributable to such federal or New York state change.... The provisions of this paragraph shall not affect the time within which or the amount for which an assessment may otherwise be made. -17-

19 Former R (g) of the Code (currently (g)) provides, in part, that: Change of the allocation of taxpayer's income or capital.--no change of the allocation of income or capital upon which the taxpayer's return (or any additional assessment) was based shall be made where an assessment of tax is made during the additional period of limitation under subparagraph (3) or (4) of paragraph (a), or under paragraph (c), (d) or (i);... B. THE REQUIRED COMBINATION ( ) WAS TIME-BARRED. Respondent takes exception to what he calls the ALJ's narrow construction of former R (c) of the Code (currently (c)) which resulted in the ALJ's finding that Respondent was time-barred from requiring Export to be combined with Petitioner for the years 1977 through 1979, since the statutes of limitation for assessment for those years were open only for the limited purpose of conforming to the Second State Changes. Former R (c) of the Code, while providing for a two year statute of limitations for assessment with respect to the filing a report of changed or corrected income, also provided that "[t]he amount of such assessment shall not exceed the amount of the increase in city tax attributable to such... New York state change." (Emphasis added.) The Second State Changes included Export's income in Petitioner's income pursuant to Tax Law section 208.9(i)(B), which automatically required a DISC's income to be included in its parent's income for State franchise tax purposes. Since the Code did not have a corresponding statutory provision, the Auditor relied upon former R of the Code (currently ), which allowed Respondent to exercise his discretion to require a corporation to file a combined report where certain prerequisites (not applicable to Tax Law section 208.9(i)(B)) are met. -18-

20 The ALJ found that "[f]or there to be additional GCT 'attributable' to the State change within the meaning of former [ R (c) of the Code], the City change must thus be the very change made by the State. It is not enough that the City change was prompted by a different State change concerning the same income." See Determination at 27. In reaching this conclusion, the ALJ looked to the definition of the verb "attribute" which is "to reckon as executed, made, originated... achieved as indicated." Webster's Third New International Dictionary (1993), at 142. "Attributable" is defined as "capable of being attributed." Id at 141. Respondent asserts that the Tax Law classification "tax-exempt DISC" is (for all purposes pertinent to the computation of the GCT) identical to the combined reporting classification, so that the audit change pursuant to that State provision would result in an increase in tax under the City provision. Thus, Respondent argues that the State's "tax-exempt DISC" provision is, despite its label, a combined reporting provision. Respondent also argues that, under State Regulation 20 NYCRR 8-1.2, the effect of federal changes on the State tax recomputation is not restricted to the identical corresponding provisions under the State Franchise Tax, and that such State regulation provides a reasonable model to follow for interpretation of the statute and its interplay with the Code. The State Regulations at 20 NYCRR 8-1.2(3) provide in part:... The amount of tax attributable to such Federal change.... means the amount determined by recomputing each of the alternative taxes for measuring the tax imposed under article 9-A, taking into account the item or items resulting in the Federal change...for the taxable year. (Emphasis added.) -19-

21 Moreover, Respondent asserts that, as early as 1972, the City was authorized to combine tax-exempt DISCs pursuant to its regulations and that his 1976 published policy automatically requiring a tax-exempt DISC and its parent corporation to file a combined GCT return was fully consistent with its regulation and a 1975 letter from the City's Finance Administrator stating that DISCs are to be treated the same as any other corporation. See Finance Administration Bulletin, Vol 7, No. 1, March 1976, at 4 (City's Exhibit C) and Taxpayer's Exhibit 1). 21 We reject Respondent's assertion that the ALJ erred in disallowing the combination of Export with Petitioner for the 1977, 1978 and 1979 tax years and affirm the ALJ's Determination in this close question of statutory construction. No matter how reasonable Respondent's assertions may seem, or how close the two adjustments seem to be, the fact remains that, under the plain meaning of the statute, it cannot be said that the Auditor's combined reporting adjustment was "attributable" to the State's adjustment. A State statutory requirement which sweepingly compels a certain tax treatment is not the same as a City policy (which can be withdrawn at the discretion of the Commissioner) to attack income distortion by compelling a similar result. Thus, we agree 21 The Finance Administration Bulletin provided, in pertinent part that: A corporation subject to the general corporation tax which beneficially owns substantially all the capital stock of a [DISC] which is a "tax-exempt" DISC as defined in [Tax Law section 208.9(i)] must file a combined general corporation tax return with the DISC whether or not the latter is doing business in New York City. The Bulletin also informed taxpayers that the new DISC filing rules were contained in the instructions for the 1975 combined GCT return. -20-

22 with the ALJ that, despite the facially similar outcome, the Auditor's changes were based on a different type of authority and motivated by a somewhat different aim than the changes compelled by State law, and thus the City changes were not "attributable" to the Second State Changes and were time-barred. C. CHANGES TO ALLOCATION PERCENTAGES ( ) WERE TIME- BARRED. Respondent's second point relates to his capacity to make allocation percentage changes during the period of limitation related to State changes. Former R (c) of the Code (currently (c)) provides that, when a taxpayer makes a report related to State changes, an assessment of a deficiency may be made within two years after the report is made (if the assessment is not deemed to have been made upon the filing of the 22 report). However, former R (g) of the Code (currently (g)) goes on to state, that: No change of the allocation of income or capital upon which the taxpayer's return (or any additional assessment) was based shall be made... during the additional period of limitation... or under paragraph (c).... The impact of the above Code provision in the instant proceeding is treated extensively in the parties' briefs, often in ways which obfuscate the real point of contention here. A formulation which we believe delineates the issue follows: Although the State audit accomplished changes in Petitioner's allocation percentages, the ALJ did not permit Respondent to "reflect" those changes by altering Petitioner's allocation in a manner which, Respondent argued, followed the State's lead but 22 Respondent has not argued that the assessment should be deemed to have been made upon the filing of the report but argues, instead, that the changes to the allocation percentages were properly made during the two year period provided for in former R (c) of the Code. -21-

23 adopted percentages applicable to the City. The ALJ agreed with Petitioner that the above-quoted language in the Code, while arguably illogical, prohibited Respondent from changing allocation percentages (even if those changes were not City-initiated but merely employed to mirror State changes) during the very period of limitation devised for the purpose of conforming to State changes generally. 23 Thus, what is at issue before us is whether "no change" in the cited Code section means just that or whether, as Respondent asserts, certain changes to allocation percentages resulting from, or tracking, State changes, are permissible even within the additional period of limitation. Respondent argues that both the language and legislative history of former R (g) of the Code (currently (g)) demonstrate that such provision does not bar Respondent's assessment of deficiencies related to Second State Changes to Petitioner's allocation percentages during the additional period of limitation provided for in former R (c) of the Code (currently (c)) The Auditor originally made some changes in allocation percentages that were independently arrived at and not reflective of State changes, but Respondent, through his briefs and specifically at oral argument conceded that the Code prohibited such action. See supra fn Respondent's contention is based on the fact that, when the statute was first enacted in 1966, a taxpayer only had to report federal changes and Respondent was only permitted to assess based on such federal changes during the additional period of limitation. Thus, Respondent argues, at the time the statute was enacted, the word "change" could only have referred to a change initiated by Respondent since the Internal Revenue Service would not have made any changes to allocation percentages. Therefore, when the Code was amended in 1969 to extend the reporting and assessment provisions to State audits, the prohibition against changes to allocation percentages during the additional period of limitation continued to refer only to changes to allocation percentages initiated by Respondent. Thus, Respondent argues that the word "change" as used in former R (g) of the Code (currently (g)) was only "intended to preclude the City from making its own audit adjustments to the taxpayer's allocation percentages during the additional period of limitations for assessing federal and state changes." Respondent's Brief in Support of His Exception at

24 We disagree with Respondent's assertions on this issue. The relevant statutory language is clear and unambiguous and as such must be implemented as written. D. S. Alamo Assocs. v. Commissioner of Finance, 71 N.Y.2d 340 (1988). The language clearly prohibits any change to the allocation percentages during the additional period of limitation. Respondent would have us read the relevant language as "no change [initiated by the Commissioner] of the allocation of income or capital upon which the taxpayer's return (or any additional assessment) was based shall be made... during the additional period of limitation..." This we cannot do. It is not the function of this forum to "add words to a statute which has rationale meaning as written." Richmond v. Tishelman, 61 N.Y.2d 1, 6 (1983); reh'g denied 61 N.Y.2d 905 (1984). Contrary to his assertions, Respondent's interpretation of the statute would give a different meaning to the word "change" from that which is evident in , and (c). Furthermore, Respondent's assertion (that the only changes to a taxpayer's allocation percentage which are prohibited within the additional period of limitation are Respondent's own audit changes) presents other problems of statutory construction by seeking to inject into one Code section, a prohibition which belongs in another. The additional period of limitation, provided for in former R (c) of the Code (currently (c)), relates only to the report of changed or corrected income. Changes to the allocation percentage of a taxpayer which result from the City's own audit adjustments, and thus, are presumably related to the GCT return and not to a report of federal or State changes, are governed by a separate three year statute of limitations contained in former R of the Code. Thus, it is unlikely that the Code would contain a provision specifically prohibiting City audit adjustments to a taxpayer's allocation percentages during the additional period of limitation when a separate statute of limitations is applicable to and governs the timeliness of such -23-

25 changes. 25 While Respondent seeks a result wherein the types of changes that he can make during a specific period of limitations would not be affected by whether the assessment is the result of taxpayer conceded State changes, or the result of the Commissioner's assertion of a deficiency based upon those same changes, the fact remains that the relevant statutory authority provides for such a 26 distinction. 25 Although we affirm the ALJ on this issue, it should be noted that a narrow reading of Respondent's Exception, combined with strict adoption of his concessions in briefs and at oral argument, would severely narrow the remaining open issues. Respondent took formal exception only to those Conclusions of Law by the ALJ which barred changes in Petitioner's IAP (as opposed to its BAP) for 1977, 1978 and Respondent further stated, in a brief, that he was not taking exception to that portion of the ALJ's Determination which permitted Petitioner to allocate its 1978 income by its BAP. The 1977 changes were to BAP only (not appealed), and the changes to IAP in 1979 appear to be entirely the result of City audit changes (rather than State changes). Since Respondent conceded at oral argument that such change was timebarred, it could be argued that there remains no open question regarding this issue except for the changes to IAP for However, we note that other references in Respondent's briefs treat the Exception as more broadly targeted and thus we have chosen to address the broader issue on the merits. For more details as to the conceded points, see supra fn Although we agree with Respondent's assertions that the statute as interpreted by this Tribunal provides taxpayers with options as to how to report its federal and/or State changes, we disagree that the process is as open-ended as Respondent claims. The additional period of limitation is only applicable if the assessment is not deemed to have been made upon the filing of the report of changes, and although Respondent has not raised the issue here, it could be argued that Petitioner conceded the allocation changes, because of the rule that a taxpayer, when reporting its changed or corrected taxable income "shall concede the accuracy of such determination or state wherein it is erroneous." See former R of the Code (currently ). -24-

26 D. THE FOURTH WAIVER, COVERING 1980, REMAINED IN EFFECT. We reject Petitioner's contention that the Fifth Waiver revoked the Fourth Waiver and that, consequently, the 1980 year was open only for the limited purpose of conforming to the Second State Changes. Petitioner's assertion is based on the fact that the Fourth Waiver extends the statue of limitations for 1980 for all purposes through December 31, 1986; whereas the Fifth Waiver (executed later) extends the statute of limitations for 1980 through the same date, but only for the assessment of deficiencies related to the Second State Changes. Former R (b) of the Code (currently (b) provides that the Commissioner and a taxpayer may consent in writing to extend the time to assess GCT, provided that the agreement is entered into "before the expiration of the time prescribed in this section for the assessment of tax." Section R (b) of the Code also provides that the period for assessment "may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon." Former R of the Code (currently ) contains several provisions which, depending on the facts, prescribe different limitation periods for the assessment of GCT. Two of those provisions are relevant to the matter at bar. Pursuant to R of the Code (currently ) GCT "shall be assessed within three years after the return was filed." addition, former R (c) of the Code (currently (c)) provides that, where a taxpayer reports a federal or State change:... the assessment (if not deemed to have been made upon the filing of the report or amended return) may be made at any time within two years after such report... was filed.... The provisions of this paragraph shall not affect the time within which or the amount for which an assessment may otherwise be made. In -25-

27 Therefore, for Petitioner's 1980 tax year, there are two different statutes of limitation for the assessment of tax and thus, two different time periods for which extensions could be obtained pursuant to former R (b) of the Code (currently (b)). As the ALJ stated: With respect to Petitioner's GCT liability for 1980, Petitioner filed a GCT return on September 9, 1981, and a report of the Second State Changes on December 1, Respondent thus had until September 9, 1984, absent extension, to assess additional GCT with respect to the GCT return filed on September 9, 1981, and until December 1, 1985 [absent extension] to assess additional GCT with respect to the report of the Second State Changes filed on December 1, ALJ's Determination at 21. A review of the waivers themselves indicate a clear pattern on behalf of the parties of extending the time period for the assessment of GCT with respect to the GCT Return separately from the time period for the assessment of tax with respect to the Second State Changes. The Fourth Waiver contains those years (including 1980) for which the statute of limitations was open for assessment based on the GCT return; i.e., open for all purposes. The Fifth Waiver, however, contains only the years covered by the Second State Changes which, except for the 1980 year, are not included in the Fourth Waiver. In addition, the Fifth Waiver contains the following language: For filing of report of changed or corrected federal or New York State taxable income pursuant to Section [R (c)] of the Administrative Code. -26-

28 In addition, a review of the First, Second, and Third Waivers together with the Fourth and Fifth Waivers at issue support the ALJ's finding that "[t]hroughout the entire audit process, the goal was to have all necessary waivers in place so that the Audit could proceed in an orderly fashion." See ALJ's Determination at 22. The First Waiver and the Second Waiver extend the period of limitation for the assessment of GCT with respect to the GCT returns filed for the years indicated to "9/30/85" and "9/30/86", respectively. The Third Waiver, however, extends the period of limitations for the assessment of GCT with respect to the report of Second State Changes to "6/30/86." As does the Fifth Waiver, the Third Waiver contains all the years covered by the Second State Changes which, except for the 1980 year, were not included in the First or Second Waiver. In addition, the Third Waiver contains the language: "[f]or filing of report of changed or corrected federal or New York State taxable income pursuant to Section R (c) of the Administrative Code." Petitioner is incorrect when it states that "if the Fifth Waiver executed May 29, 1986 is to have any meaning for the 1980 year, it must mean that the Fourth Waiver executed May 16, 1986 is terminated with respect to 1980, and the scope of the Waiver is restricted to assessment of [GCT] attributable to the [Second State Changes]." See Petitioner's Brief at 10. Petitioner's statement completely ignores the fact that the sequence of waivers addressed two different limitation periods and that extensions were repeatedly obtained for each period separately, as provided in the Code. It is not necessary to terminate the Fourth Waiver with respect to 1980 to give meaning to the Fifth Waiver (with respect to the 1980 year) as the Fifth Waiver has meaning (with respect to the 1980 year) completely separate and independent from the Fourth Waiver. -27-

29 We have already pointed out that the First, Second and Fourth Waivers, which had the role of extending the period of limitation for all purposes, covered different years (1980 and later) than did the Third and Fifth Waivers, which had the role of extending the statute only for the Second State Changes (1980 and earlier). Were it not for the happenstance of the one year overlap, with the result that both groups of waivers include 1980, this issue would never have arisen. Petitioner attempts to use the dual appearance of 1980 in order to promote its argument that a waiver as to each year stands alone (despite being joined to other years in a single document) and that a subsequent waiver referring to 1980 thus necessarily overrides an earlier one. We reject that formalistic approach, believing that documents must be construed in a context which gives rein to their clearly intended, rational meaning, and that these documents, taken together, do not support Petitioner's view. Thus we find, as did the ALJ, that the Fifth Waiver was intended to extend the statute of limitations solely with respect to the report of the Second State Changes and was not intended to supersede the Fourth Waiver with respect to the 1980 year. Furthermore, Petitioner has not claimed, nor presented any evidence, that, in executing the Fifth Waiver, it intended to revoke the Fourth Waiver with respect to the 1980 year. Similarly, we reject any suggestion made by Petitioner at oral argument that the Third Waiver superseded the Second Waiver (in a similar manner to what Petitioner maintains occurred with respect to the Fourth and Fifth Waivers) and that the Fourth Waiver thus never had any meaning with respect to the 1980 year as that waiver could not resurrect a period of limitations which had already been abandoned. We therefore conclude that both the Fourth and Fifth Waivers were valid and the adjustments allowed by the ALJ for the 1980 year (which did not relate to the Second State Changes) were not time-barred. -28-