New York Rules that Real Estate Group and Single Purpose Investment Entity Are Not Unitary

By: Marc Jackson, State Income Tax Director

At a glance:

• The main takeaway: ANew York Tax Appeals Tribunal decision illustrates the state’s application of the unitary business principle, ruling that a unitary business relationship did not exist between a single-purpose real estate investment entity and its operating affiliates.
• Assess the impact: The evaluation of a unitary business relationship between groups of corporations is a complex, fact-specific analysis, and each entity’s facts and circumstances must be regularly and independently reviewed.
• Take the next step: Unsure if your company is engaged in a unitary business with its affiliates? Aprio’s State and Local Tax (SALT) team can review whether your business has a unitary business relationship and the potential impact on state income tax filings.   

Schedule a free consultation today to learn more!

The full story

For state corporate income tax purposes, taxpayers and state revenue agencies rely on the unitary business principle to determine whether or not a group of corporations is required to or has the option of, filing a combined state income tax return.

Generally, states fall into two distinct groups when it comes to the filing of combined returns:

• States where it is mandatory to do so if a unitary business relationship exists.
• States where it is allowable and something the taxpayer may elect to do. 

The determination of whether a group of companies is engaged in a unitary business is a facts and circumstances analysis based on several factors. A recent New York Tax Appeals Tribunal decision provides guidance on how New York applies the unitary business principle to single purpose investment entities that are wholly owned by members of a combined group.[1]

Understanding the business relationship

During the years in question, YLL KOP was a single-purpose investment entity holding a passive investment in a shopping mall located outside of New York. YLL KOP is a wholly owned subsidiary of YLLA, a member of the Lendlease Americas Holdings, Inc. and subsidiaries unitary group (the taxpayer in this case). The activities of the other members in the group included project management and construction of high-rise condominiums, office buildings, hotels, and hospitals, as well as development and asset and construction management for military family housing. On their originally filled New York combined returns, the taxpayer did not include the activities of YLL KOP based on the position that a unitary relationship did not exist. The Department of Taxation determined that the taxpayer should have included YLL KOP in the combined returns and assessed additional tax and penalties. 

New York’s application of the unitary business principle

The tribunal explained that the “hallmarks of a unitary relationship” include functional integration, centralized management, and economies of scale.[2] 

• Functional Integration examines whether there is an interconnection or interdependence between the business operations of the entities. This includes whether they share services, support one another, or the products of one support the products of another.
  
  The tribunal noted that the business operations of the taxpayer group and YLL KOPwere of a substantially different nature and therefore there was no operational overlap between the two. This argument was aided by the fact that in prior years the petitioner had divested all of its shopping mall businesses with the lone exception of YLL KOP.  Therefore, the tribunal concluded that functional integration did not exist.

• Centralized Management addresses whether the officers and/or decision-makers of one corporation are effectively controlling and managing the other corporation.
  
  Thetribunal explained that while a management agreement did exist between a member of the taxpayer’s combined group and YLL KOP, the agreement was identical to one that had previously existed with a third-party. Additionally, the underlying asset, the mall, in which YLL KOP was an indirect passive investor, was operated and managed by another entity, not affiliated with or part of the taxpayer’s combined group. Therefore, the tribunal concluded that centralized management did not exist.

• Economies of Scale evaluates whether the relationship creates efficiencies, market value, or cost benefits to either entity.
  
  The tribunal determined that since the sole shopping mall business was owned by the petitioner during the years in question, there were no operational efficiencies, cost savings, or value created from the interactions between YLL KOP and the petitioner. In addition, what minimal transaction existed between YLL KOP and members of taxpayer’s combined group were conducted at arm’s length. Therefore, the tribunal concluded that economies of scale did not exist.

Based on the analysis above, the Tribunal ruled that a unitary business relationship did not exist, and it cancelled the assessment.

The bottom line

The evaluation of a unitary business relationship between groups of corporations is a complex, fact-specific analysis of the relationship between the entities. As this case illustrates, each entity’s facts and circumstances should be evaluated regularly and independently to determine if those interactions with other members of the group constitute a unitary relationship. While common principles do apply to this determination (e.g., the “hallmarks” noted above), it is important to apply those principles in connection with each state’s guidance, as states may apply those principles differently.

Aprio’s SALT team has experience analyzing and evaluating the complex issues around whether businesses have unitary relationships. We can assist your business with a review of the multistate treatment of affiliated groups of corporations to help ensure compliance with state laws and to find tax savings when a voluntary unitary return would be beneficial. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

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[1] In the Matter of the Petition of LENDLEASE AMERICAS HOLDINGS, INC. & SUBSIDIARIES, N.Y. Tax App. Trib. No. 829540, 01/23/2025.

[2] See MeadWestvaco Corp. v. Ill. Dep’t of Revenue, 553 US 16 (2008).