ORION LIMITED PARTNERSHIP - DETERMINATION - 03/31/94 In the Matter of ORION LIMITED PARTNERSHIP TAT(H) 93-31(CR) - DETERMINATION NEW YORK CITY TAX APPEALS TRIBUNAL ADMINISTRATIVE LAW JUDGE DIVISION COMMERCIAL RENT TAX - A GROUND LEASE TENANT'S SUBTENANT DEDUCTION FOR RENTS THAT IT RECEIVED WITH RESPECT TO A BUILDING IT CONSTRUCTED ON LAND IT LEASED AS W ELL AS OW NED, IS LIMITED TO THAT PORTION OF THE BUILDING RENTS WHICH IS REASONABLY ATTRIBUTABLE TO THE VALUE OF THE LEASED LOT VIS-A-VIS THE VALUE OF THE BUILDING AND THE LAND IT OWNED. MARCH 31, 1994
NEW YORK CITY TAX APPEALS TRIBUNAL ADMINISTRATIVE LAW JUDGE DIVISION In the Matter of the Petition : : of : : ORION LIMITED PARTNERSHIP : : for Redetermination of a Deficiency: DETERMINATION of Commercial Rent or Occupancy : Tax under Chapter 7 of Title 11 : TAT(H) 93-31(CR) of the Administrative Code of the : City of New York for the tax period: June 1, 1988 through May 31, 1989. : Murphy, A.L.J.: Petitioner, Orion Limited Partnership, filed a petition for redetermination of a deficiency of Commercial Rent or Occupancy Tax, under Chapter 7 of Title 11 of the New York City Administrative Code (the "Code") for the period June 1, 1988 through May 31, 1989 (the "Period in Issue"). A hearing was held before Al Bernstein, a Hearing Officer in the Department of Finance's former Hearings Bureau, at 345 Adams Street, Brooklyn, New York, 11202, on November 13, 1991. Petitioner appeared by Kenneth Moore, Esq., of Hutton & Solomon. The Department of Finance (the "Department") was represented by Jacqueline Gold, Esq., of the Office of Legal Affairs. A joint stipulation of facts was entered into the record. Petitioner and the Department submitted post-hearing memoranda of law on May 8, 1992 and May 11, 1992, respectively. Petitioner and the Department submitted reply memoranda of law on May 19, 1992 and May 20, 1992, respectively. As a result of the resignation of Mr. Bernstein, who heard this proceeding, the Chief Administrative Law Judge assigned this matter to the undersigned for determination. On November 9, 1993, the parties' representatives appeared before the undersigned and presented their arguments.
ISSUE What portion of rents received by Petitioner for the lease of space in an office building which Petitioner constructed partially on a leased lot, may be deducted as a "Subtenant Deduction" in computing Petitioner's Commercial Rent or Occupancy Tax liability on rent paid for such lot. FINDINGS OF FACT 1. On September 24, 1981, Petitioner entered into a ground lease (the "Ground Lease") with 415 Lexington Avenue Associates (the "Landlord") for the premises known as 415-417 Lexington Avenue in New York City (the "Leased Lot"). Section 4.4 of the Ground Lease provided that if Petitioner subsequently constructed an office building on all or part of the Leased Lot, the Landlord would have no interest in or control over such building. 2. Prior to 1985, Petitioner acquired fee interests in ten lots which adjoined the Leased Lot. The eleven lots (the ten adjoining lots (the "Adjoining Lots") plus the Leased Lot) were merged for real property tax purposes by the Department of Finance in 1985 into Merged Tax Lot Block 1298 Lot 23 (the "Merged Lot"). 3. Petitioner constructed an office building (the "Building") on both the Leased Lot and the Adjoining Lots. 4. During the Period in Issue, Petitioner paid a gross ground rent of $2,486,974 for the Leased Lot (the "Leased Lot Rent"). That rent included real estate taxes, utility and insurance payments apportioned to reflect the portion of those charges attributable to the Ground Lease. 5. During the period in issue, Petitioner received rents of $10,869,758 (the "Building Rents") from three commercial tenants (the "Tenants") for office space in the Building. 6. In computing its Commercial Rent or Occupancy Tax for the period in issue, Petitioner reported as its Subtenant Deduction the full amount of the Building Rents ($10,869,758). As a result of deducting the Building Rents paid by Tenants from the Lease Lot Rent ($2,486,974), Petitioner reported no Commercial Rent or Occupancy Tax due. 7. On June 11, 1991, the Department issued a Notice of Determination asserting a deficiency of Commercial Rent or Occupancy Tax of $74,560.20, with interest of $19,967.22 computed 2
to the date of the Notice. The deficiency pertained solely to taxes due on the Leased Lot Rent. 8. The deficiency resulted from two adjustments. First, the Department allowed only 29.21% of the claimed Subtenant Deduction to take into account the size of the Leased Lot vis-avis the size of the Merged Lot. The Department thus arrived at what it termed a "tentative" Subtenant Deduction amount of $3,175,056. Second, the Department made a further adjustment by allowing only 39.19% of the "tentative" Subtenant Deduction to take into account the value of the Building ($14,500,000) vis-a-vis the value of the Building and the Merged Lot ($14,500,000 plus $22,500,000, respectively, or $37,000,000 total). The Department thus allowed a Subtenant Deduction of $1,244,304, or approximately 11.45% (39.19% of 29.21%) of the claimed Subtenant Deduction. As a result of these adjustments, the Department computed an additional tax due of $74,560. 9. The only evidence presented which relates to the relative values of (a) the Leased Lot to the Merged Lot, and (b) the Building to the Building plus the Merged Lot are, respectively, (a) the ratio of the square footage of the Leased Lot to the square footage of the Merged Lot, and (b) the assessed values of the Merged Lot and of the Building. By virtue of this evidence, the accuracy of which was agreed upon by the parties in the stipulation of facts, the Leased Lot is found to have a value of 29.21% of the value of the Merged Lot, and the Merged Lot is found to have a value of 39.19% of the value of the Merged Lot and the Building. These value ratios are the same value ratios that were used by the Department in making the adjustments at issue. 10. Petitioner argues that because a portion of the Building, which it owned rather than rented, is located on the Leased Lot, it may take the entire amount of the Building Rents as a Subtenant Deduction without adjustment. 11. The Department argues that the Subtenant Deduction must be adjusted so that only that portion of the Building Rents that relates to the value of the Leased Lot vis-a-vis the value of the Merged Lot and Building is deducted. 3
CONCLUSIONS OF LAW A taxpayer who is subject to Commercial Rent or Occupancy Tax on payments made to rent real property for business or commercial purposes, is entitled to deduct amounts it receives from renting any part of such taxable premises. Code 11-701.7. This deduction is commonly referred to as the Subtenant Deduction. The rationale for allowing a prime tenant to deduct from its taxable base rent the rents it receives from its subtenants for the same taxable premises is to ensure that rentals on the same premises are not subject to double taxation. 1 Petitioner argues that since the term "premises" is defined under Code Section 11-701.4 to include real property or any "part thereof, and any structure thereon," and the Building is constructed in part on the premises (the Leased Lot), the Building has become part of the taxable premises. It thus asserts it is entitled to include all Building Rents in computing its Subtenant Deduction, even though part of the Building is built on land other than the taxable premises. The Code's definition of the term "premises" to include "any part thereof" makes clear that taxpayers may obtain a Subtenant Deduction even if they sublet only a portion of the rented 2 premises. This definition was not written, nor was it intended, to allow a deduction for rent paid for premises other than the taxable premises. See Code 11-701.7 which provides that the Subtenant Deduction is available only for the subletting of "such" premises; i.e., the same taxable premises. Petitioner's taxable premises are the premises for which rent was being paid -- the Leased Lot and no more. Those premises did not change by virtue of Petitioner's construction of the Building. The Building (as well as the Adjoining Lots which 1 "Nothing contained in this chapter shall be deemed to require a payment of a double or multiple tax pursuant to this chapter on any part of any taxable premises." Code 1-701(b). 2 This definition may also be read to mean that subtenant rents for a portion of a leased taxable premises is fully deductible. For example, where a tenant pays $1,000 for taxable premises, uses half those premises for its own business purposes, and rents out the remaining half of those premises for $1,000, it may be entitled to Subtenant Deduction of the full $1,000. 4
were united only for real property tax purposes) was not rented by the Petitioner and thus did not become part of "such" taxable premises. To find otherwise would subvert the purpose of the Subtenant Deduction, which is to avoid double taxation. There can be no double taxation where there is no initial taxation; i.e., where the property for which rent is received is owned and not rented by the taxpayer. 3 Even though the rented portions of the Building are technically different taxable premises than the Leased Lot, Building Rent is connected with, and therefore must reasonably be allocated to the Leased Lot for purposes of allowing an appropriate Subtenant Deduction. Otherwise, there would be double taxation since the Building Rents are, in part, attributable to the Leased Lot. Not only is the Building in part located on the Leased Lot, but the Tenants receive rights of entry and exit on all of the Merged Lot including the Leased Lot. The Department has adopted a policy consistent with this reading of the statute. Since 1979, the Department has recognized the need to allow such a deduction, even though the space in the building being rented out by a ground lease tenant technically is a different premises than the rented ground upon which the building is constructed. See Department of Finance Commercial Rent or Occupancy Tax Policy Bulletin, 1-88 (March 14, 1988); Department of Finance Bulletin, Vol 10, no.1 (March 1979), p.2. The Department allocates building rents to a ground lease tenant, for purposes of the Subtenant Deduction, by apportioning rents received for the building (or space therein) by a percentage which is equal to the assessed value of the land over the assessed value of the land and the building. Thus Petitioner is entitled to a Subtenant Deduction equal to a percentage of the Building Rents which is reasonably attributable to the Leased Lot. That percentage is the 3 The logic and need for proportionately allocating rents which a taxpayer receives from a building it constructs on ground leased property to such leased property, rather than treating the building as part of the same taxable premises as any ground lease upon which it is wholly or partially built, is clear. Otherwise, for example, where a building is constructed by a taxpayer on three lots, each of which is a different taxable premises as it is rented from a different landlord, the entire amount of rents received by the taxpayer for the building would constitute Subtenant Deductions with respect to each of the taxable premises. At the very least, some allocation of the building rents must be made as between each of those three lots. 5
percentage that the value of the Leased Lot bears to the combined value of the Building and Merged Lot. As that percentage is the percentage used by the Department in making the adjustment at issue, and whose accuracy Petitioner does not dispute, the Notice of Determination is found to be proper. ACCORDINGLY, IT IS HEREBY CONCLUDED THAT: A. The Building constructed by Petitioner on the taxable premises, the Leased Lot, did not become part of the taxable premises since the Building was not rented by the Petitioner. B. Petitioner is entitled to a Subtenant Deduction for the amount of the Building Rents which are reasonably attributable to the value of the Leased Lot vis-a-vis the value of the Building and the Merged Lot. B. The Department's computation of the value of Petitioner's available Subtenant Deduction was appropriate. The Petition filed by Petitioner, Orion Limited Partnership, in this matter is therefore dismissed, and the Notice of Determination dated June 11, 1991, in the base tax amount of $74,560.20, with interest thereon, is sustained. DATED: March 31, 1994 Brooklyn, New York Anne W. Murphy Administrative Law Judge 6