ALBANY, N.Y. (CN) - Robert Redford has sued New York state, contesting its tax assessment of $1.6 million from the sale of his company's part-ownership of the Sundance Channel.
Redford sued the New York State Department of Taxation and Finance on July 30 in Albany County Supreme Court.
He seeks "a declaratory ruling on a pure question of law concerning the constitutionality of imposing on plaintiff, a nonresident of the State of New York, a personal income tax on the gain derived from the sale of an ownership interest in a limited liability company."
New York claims Redford owes $1,568,470 for tax year 2005 from his sale of ownership interests in a Utah LLC.
In that tax year Redford, of Utah, was 100 percent owner of Sundance T.V., which owned 85.5 percent of Sundance Television Limited, an S corporation.
S corporations are closely held corporations that do not pay federal taxes, because their income or losses are passed along to shareholders, who must report the income or losses on their own tax returns.
"This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level," according to the Internal Revenue Service Web page.
Sundance Television Limited ("Limited") owned 20 percent of Sundance Channel LLC ("Channel"). The Sundance Channel, headquartered in New York, operates a cable TV station.
Sundance T.V.'s (INC) business activity in 2005 was "limited to the holding of an interest in Limited. INC managed its passive investment in Limited, paid its business expenses and maintained its books and records, all from its out-of-state location," Redford says in the complaint.
Limited, in turn, owned part of the Channel and received trademark revenue from it.
"Neither NC nor Limited had an office, or property, or employed anyone within New York," the complaint states. "Neither entity had any property, payroll or receipts, located in or deemed attributable to the conduct of a trade or business in New York.
"Plaintiff did not use his ownership interest in INC, nor did he use his indirect ownership interest in Limited or Channel, in any trade or business carried on by him in New York. Further, plaintiff did not have any property, payroll or receipts located in or deemed attributable to the conduct of a trade or business in New York.
"In 2005, Limited sold a portion of its interest in Channel to an unrelated third party. The gain related to this sale was passed through to the direct and indirect partners of
Limited, including plaintiff by way of INC."
Redford says that he declared, and paid taxes on, his income from the sale of his interest in the Channel, in Utah.
But New York claims he owes $845,066 in taxes, plus $727,404 in interest on the sale. It notified him in May this year.
"In 2008, the balance of the ownership interest held by INC in Channel, after the liquidation of Limited, was also sold to an unrelated third party," the complaint states.
"Again, INC and plaintiff determined that the gain was non-New York source income and reported it as such their 2008 New York State tax returns.
"As part of its audit of INC and plaintiff, the Department reviewed plaintiff's liability for the gain received from INC during the tax year 2008 and accepted their filing position and agreed not to pursue a tax from the gain received by plaintiff."
Redford claims his tax assessment is "inconsistent with Article 16, section 3 of the New York Constitution."
He seeks declaratory judgment that he doesn't owe the money, plus costs.
He is represented by Stephen Solomon, with Hutton & Solomon, of New York City.