New York City Judge Excludes Non-City Subsidiaries from Unincorporated Business Tax Calculation

An administrative law judge (ALJ) concluded that a city-based unincorporated business tax (UBT) could not include the income, loss, and allocation factors of its subsidiaries that did not conduct business in New York City (NYC) when determining its NYC UBT liability.¹ In so ruling, the ALJ rejected the taxpayer’s attempt to apply an aggregate theory of reporting UBT income and upheld the NYC partnership entity allocation rule.

On its NYC UBT returns, the taxpayer included the income, loss, and apportionment factors of its subsidiaries, including those that did not do business in NYC. In doing so, the taxpayer employed the so-called aggregate theory under which a partnership is considered to be the aggregate of all the entities that flow up into it. The taxpayer aggregated all of its income, gain, loss, and deduction from all sources, including its share of attributes of other unincorporated entities in which it owns an interest, even those that do not do business in NYC. The NYC Department of Finance (Department) rejected this approach and excluded the items from the income calculation and business allocation factors from the tax calculation, resulting in a deficiency assessment. The Department argued that the aggregate method is not supported by the UBT statute. This appeal followed: the taxpayer appealed the assessment to an ALJ of the NYC Tax Appeals Tribunal.

Analyzing UBT computational provisions, the ALJ noted that if an unincorporated entity has an interest in another unincorporated entity, it also includes its share of the tax items of such other entity, based on NYC Administrative Code § 11-502(a). However, in analyzing § 11-506, the ALJ stated that “tax items from an attributed business are taken into account in UBT calculation only after it is determined that UBT applies to such business.” If the UBT does not apply to any business of a subsidiary, the tax items of such business cannot be taken into account in calculating the taxpayer’s UBT. Notably, the ALJ concluded that a business that an unincorporated entity conducts entirely outside of NYC is not treated as an unincorporated business for UBT purposes and cannot be attributed to an upper-tier entity. In this case, it was undisputed that the entities at issue conducted no business in NYC based on their property, payroll, and receipts.

Insofar as the business allocation factors are concerned, the ALJ rejected the taxpayer’s claim that aggregating its own factors with that of its subsidiaries was the “default” method under the UBT law. Neither the UBT law nor administrative rule allows the attribution of factors from an entity that does not conduct business in NYC. The Department applied its partnership allocation rule, which had the effect of removing the non-city subsidiaries allocation factors from inclusion in the calculation of the taxpayer’s own business allocation percentage. The ALJ rejected claims that the rule was invalid because it contradicted that law and was adopted without statutory authority.

The ALJ rejected the taxpayer’s arguments that

• federal taxable income of a partnership is the starting point for UBT income calculation and that there is no mechanism to remove non-NYC tax items from the calculation, ruling that a partnership itself does not have federal taxable income as a starting point;

• the unitary business principle requires inclusion of these non-NYC subsidiaries, stating that the principle applies only in a corporate tax return context; and

• the U.S. Supreme Court’s decision in Loper Bright Enterprises limits the deference to the Department’s regulatory actions. The ALJ noted that the Court’s decision does not apply to local rulemaking, and if it did, the Department had express authority to issue the partnership allocation rule.

Ryan’s Take and Action Steps

This lengthy decision highlights the challenges of applying New York City’s UBT law and regulations to complex partnership structures. Concepts that apply to corporate income tax, such as unitary and greater reliance of federal income tax, do not easily translate when calculating UBT.

This decision should prompt NYC-based unincorporated businesses to ascertain the activities of entities in which it holds an interest. In this case, it was clear that the entities had no contacts with the city, but situations where entities have some in-city presence may yield a different result.

For assistance in navigating this ruling and its impact on your business, contact our Ryan tax professionals today.

¹ In the Matter of the Petition of Cantor Fitzgerald Securities, New York City Tax Appeals Tribunal, Administrative Law Judge Division, No. TAT (H) 19-16 (UB), December 16, 2025.

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