The New York State Department of Taxation and Finance (the Department) has been issuing guidance explaining the 2014 corporate tax reform legislation (generally effective on January 1, 2015) through a series of questions and answers (known as FAQs), recognizing that providing guidance through regulations is cumbersome and takes a long time. On April 1, the Department issued a new set of FAQs explaining some aspects of the legislation. Some of the highlights are discussed below.
Under the new law, related corporations may, and may be compelled to, file combined returns if they are engaged in a unitary business. The old requirement that separate filing distort the incomes of the companies, which led to much controversy, has been repealed. An issue that has been highlighted by the legislation is whether a newly acquired subsidiary can be considered to be instantly unitary with the parent so that the corporations can file combined returns beginning on the date of the acquisition. The FAQs explain that this will depend on the “facts and circumstances” of each case, which is not very informative. We understand from informal conversations with senior Department personnel that their approach, which they have not published, is that corporations will generally be considered to be instantly unitary if they had a significant business relationship before the acquisition (e.g., the subsidiary was a supplier of goods to the parent). If no such pre-existing relationship exists, the corporations will generally not be found to be unitary until the beginning of the next taxable year after the acquisition. The FAQs also clarify that corporations with different taxable years can be included in a combined return. When a related corporation does not have the same taxable year as the company designated as the group’s agent for filing purposes, the related corporation’s income and activities for its taxable year ending within the agent’s taxable year are included in the combined report for the agent’s taxable year.
The FAQs explain that the corporate tax reform legislation has not changed the method for determining the partnership income of a corporate partner in a partnership. The current approach, under which partnership items of income and expense flow through to the corporate partner, has been retained. This approach is reflected in Department regulations. The New York City Department of Finance has not adopted regulations on this subject and we understand that the City does not feel itself bound by the State approach. Taxpayers should be aware that corporations that are limited partners with limited liability and no voting rights may be able to argue successfully that they do not have nexus with New York if they have no other contacts with New York besides their limited partnership interest. Courts in other states have so held, although the case law in New York is not favorable.
Several FAQs focus on the new economic nexus rule in New York State. The FAQs indicate that franchisors that sell goods and services or licenses to franchisees located in New York State are taxable under the economic nexus rules. Economic nexus is found if a company has $1 million or more in receipts from New York State. If a corporation is a partner in a partnership, the corporation is deemed for nexus calculation purposes only to have received all of the partnership’s New York receipts (not just its share), and these are added to the corporate partner’s other receipts in applying the $1 million test. Interestingly, the recent legislation that conforms the New York City general corporation tax to the State tax reform provisions does not include the economic nexus provisions. Senior Department of Finance officials have explained to me that the reason for this is “politics.”
In lieu of allocating interest expenses to investment income and other exempt income, the law allows a taxpayer to elect to have 40 percent of its interest allocated to such income. The FAQs explain that the Department does not have the power to override this election and require actual attribution. The Department must follow the taxpayer’s election.
The law provides that a unitary relationship will be presumed for determining exempt investment income (although not for combination) if a corporation owns 20 percent or more of another corporation. The FAQs clarify that this presumption is rebuttable, although they indicate that if the Department chooses to rebut the presumption, it will have the burden of proving that the less-than-20 percent- owned subsidiary is unitary with the taxpayer.
The Department expects to issue more FAQs in the coming months and we will provide further explanations as they are released.