December 11, 2008
A determination of the Tax Appeals Tribunal of the City of New York to deny tax deductions claimed by a law firm was affirmed by the New York Appellate Division for the First Judicial Department. The court held:
Petitioner law firm did not sustain its burden of establishing its entitlement to the specific deductions it claims. The payments to retired partners under the Optional Service Plan cannot be for goodwill, because section 13 of the partnership agreement expressly prohibits payments for goodwill. The Tax Appeals Tribunal's interpretation that the subject payments were for services rendered by the retiring partners is supported by substantial evidence and has a rational basis in the law. Petitioner's contention that the payments were made to compensate the retiring partners for their contribution to the intangible value of the firm is unavailing because a contribution to the intangible value of the firm has its basis in the doing of work and the performing of services. Further, the calculation of the payments to the retiring partners takes into account their earnings and years of services. Thus, the payments fit squarely within the plain language of Administrative Code § 11-507(3) ("No deduction shall be allowed . . . for amounts paid or incurred to a proprietor or partner for services or for use of capital").
Petitioner's federal tax deductible contributions to deferred compensation plans on behalf of active partners, while made not to the partners but directly to the plans, clearly are for the direct benefit of the partners and thus are also not deductible under Administrative Code § 11-507(3). (citations omitted)
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