The New York State Department of Taxation and Finance has issued helpful guidance extending the additional investment capital identification periods for non-dealers under certain circumstances. Technical Memorandum, “Additional Investment Capital Identification Periods for Certain Non-Dealers for Specified Circumstances that Occur on or After October 1, 2015,” TSB-M-15(4.1)C, (5.1)I (N.Y.S. Dep’t of Taxation & Fin., Jan. 7, 2016). 

Recent New York State and City corporate tax reform legislation narrowed the definition of investment capital but made investment income entirely exempt from corporate income tax. In order to qualify as investment capital, however, stock must satisfy five separate criteria, one of which is that the stock must be “clearly identified” in the taxpayer’s records as being held for investment. Although the corporate tax reform legislation implementing this change is effective for tax years beginning on or after January 1, 2015, transition rules allowed all corporations subject to New York State and City corporate tax (other than securities dealers) until October 1, 2015, to clearly identify stock being held for investment for purposes of receiving investment capital treatment. 

This new Technical Memorandum supplements the investment capital identification requirements contained in a previous Department memorandum, “Investment Capital Identification Requirements for Article 9-A Taxpayers, TSB-M-15(4)C, (5)I (N.Y.S. Dep’t of Taxation & Fin., July 7, 2015). Specifically, the new Memorandum provides an additional investment capital identification period beyond October 1, 2015, for certain non dealers for stock that otherwise satisfies the criteria for investment capital. The additional identification period begins on the later of the “measurement date” or January 7, 2016 (the date the Technical Memorandum was released), and ends at the close of business of the 90th day thereafter: 

  • In the case of a corporation that first becomes subject to tax under Article 9-A on or after October 1, 2015, the “measurement date” is the date that the corporation begins doing business, employing capital, owning or leasing property or maintaining an office in the state (collectively, “doing business”).
  • In the case of a corporation or unitary group that becomes subject to tax on or after October 1, 2015, solely because it has New York receipts of $1 million or more (“economic nexus”), the measurement date from which the 90 days run is the date on which the corporation or unitary group first had $1 million or more of New York receipts.
  • In the case of a corporation that is not a New York taxpayer, has not been included in a New York combined return, and that first meets the capital stock requirement to be included in a combined return on or after October 1, 2015, the measurement date is the day the corporation first meets the capital stock requirement.
  • In the case of a partnership that on or after October 1, 2015, first begins doing business in the state, the measurement date is the date the partnership first begins doing business in the State. In the case of a partnership that becomes subject to tax solely because it has New York receipts of $1 million or more, the measurement date is the date on which the partnership first has $1 million or more of New York receipts.
  • In the case of a partnership that is not itself doing business in the State, but on or after October 1, 2015, first has as a partner a corporation subject to tax under Article 9-A, the measurement date is the first date that the partnership has a corporate partner that is subject to tax in the State.
  • In the case of a partnership that is not itself doing business in the state, and prior to October 1, 2015, none of its corporate partners were subject to tax in the state, but on or after October 1, 2015, one or more of its partners becomes subject to tax in the state, the measurement date is the first date that one of its existing partners becomes subject to tax in the State.

The Technical Memorandum also clarifies that for non-dealers any stock purchased after the additional identification period described above has expired, and that was purchased pursuant to an option acquired by those corporations before the expiration date, may not be identified as investment capital unless the corporation or partnership clearly identified the option as held for investment prior to the expiration of the additional identification period.

Additional Insights

In its earlier Technical Memorandum addressing investment capital identification requirements, the Department allowed corporations and partnerships that were not securities dealers a nine-month grace period – from January 1, 2015, to September 30, 2015 – to identify stock held for investment, regardless of when the stock was purchased. This new Memorandum creates an additional, and ongoing, 90-day grace period for certain corporations and partnerships that become subject to Article 9-A on or after October 1, 2015. Pursuant to the Memorandum, a qualifying corporation which first finds itself subject to tax in New York State will receive a 90 day grace period to identify stock as held for investment, whether it becomes subject to tax in January 2016 or January 2019. The Department’s new policy is commendable and ensures that non-dealer corporations have a workable grace period in which to identify stock held for investment, even for those that first become subject to New York tax in the future.