New Jersey and New York City at Odds over Nexus

Article excerpt

In order for a state or municipality to tax the multistate income of a nondomiciliary corporation, a minimal connection must exist between the corporation's interstate activities and the taxing state. Allied-Signal. Inc. recently challenged both New York City and New Jersey's taxing scheme, contending that both methodologies served to tax income in the absence of a minimal connection. It was victorious only in New Jersey.

FACTS. Allied-Signal, incorporated in Delaware and commercially domiciled in Michigan, owned stock in ASARCO, Inc., a New Jersey corporation head-quartered in New York City. Allied-Signal controlled this investment in ASARCO from its corporate headquarters in Michigan.

NEW YORK CITY CASE. Allied-Signal is the successor-in-interest to the Bendix Corporation. Bendix's activities in New York City were limited to the development of business abroad. On its 1981 corporate tax return, Bendix excluded from its taxable base, dividend and capital gain income stemming from its investment in ASARCO. Bendix argued that, in the absence of a unitary relationship, a nondomiciliary corporation could not be taxed on its investment in another corporation. Alternatively, Bendix argued that the need for a unitary relationship notwithstanding, the City's system of taxation did not fairly reflect Bendix's own presence and activities within New York City. The disagreed. It reasoned that the ability to tax this income was rightfully and rationally based on ASARCO's presence in New York City, and therefore constitutional.

The New York State Court of Appeals upheld the New York City tax, holding that there was sufficient nexus between the ASARCO investment income and the City. The Court found that the presence of a unitary relationship was not the exclusive test for determining nexus to a nondomiciliary corporation's investment income. The Court further held that ASARCO's business activities conducted in New York City provided the requisite nexus.

The Court, in finding a sufficient nexus between the City and Bendix's dividend income from ASARCO focused their inquiry, not on Bendix's business activities, but instead on ASARCO's. …