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December 17, 2001
NY Court: ERISA Pre-empts State Tax Law
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ew York state tax appeals court has found that New York's unrelated business income tax is pre-empted by federal law and inapplicable to pension and profit-sharing funds.

The decision could cost New York state millions of dollars in revenue, the New York Law Journal reports.

The judge held that the New York State Unrelated Business Income Tax (UBIT) is pre-empted by the provisions of the federal Employment and Retirement Security Act (ERISA.) It is virtually certain to result in an appeal, according to the Journal.

The case involves a Manhattan-based international consulting company, McKinsey & Co., and ERISA-governed retirement plans generating debt-financed income, which is subject to UBIT. But the central issue was whether Article 13 of the Tax Law, which carries a 9 percent UBIT, is trumped by ERISA.

Administrative Law Judge Dennis M. Galliher said yes.

The case arose when the trust challenged the unrelated business income tax it was assessed for the years 1994, 1995 and 1996. For each year, the trust was required to calculate a New York State apportionment factor linked to its investment in different funds. Some of those funds earn debt-financed income that is subject to federal UBIT.

Under the interpretation of the New York Division of Taxation, that income is also subject to the state UBIT, which resulted in McKinsey Master Retirement Plan Trust paying state unrelated business income tax of $147,412, $4,102 and $225,860 for the years in question.

Galliher identified as the critical issue whether the state's action violates the broadly worded pre-emption provisions of ERISA. The state had argued that New York's UBIT is not inconsistent with the aim of ERISA; Galliher found the unrelated business income tax "clearly at odds with Congress' ERISA intent of providing a uniform body of benefits law which fosters maximum stability and security with minimum conflict of law and regulatory burdens between various jurisdictions."

Additionally, the Division of Taxation maintained that the New York UBIT is only one of a number of considerations that the fund's investment managers take into account in determining investment choices, and therefore did not unreasonably burden the McKinsey Master Retirement Plan Trust.

Again, Galliher disagreed. The state UBIT, she said, imposed a liability on every ERISA plan earning unrelated business income, "with the result being a reduction of funds available for plan beneficiaries, coupled with increased administrative burdens on the plans."

"Subjecting ERISA plans to state UBIT, if nothing else, immediately gives rise to reporting and compliance requirements on a state-by-state basis, as well as filing and payment duties which involve estimation and timing issues," Galliher said. "All of these requirements run counter to the Congressional aim of achieving a uniform body of pension law with minimal financial and administrative burdens and conflicts among and between the different states and between the states and the federal government."

To read the New York Law Journal article via Law.com, click here.


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