The New York State Department of Taxation and Finance has released draft amendments to the Article 9-A corporate franchise tax regulations to address significant changes relating to combined reporting under New York State corporate tax reform legislation enacted in 2014 and 2015. Corporate Tax Reform Draft Regulations, Combined Reports, (N.Y.S. Dep’t of Taxation & Fin., Jan. 22, 2016).
Under corporate tax reform legislation, which went into effect for tax years beginning on or after January 1, 2015, a taxpayer is required to file combined returns including unitary corporations in which it has more than 50% of the voting power. The distortion test for mandatory combination under prior law, including the substantial intercorporate transactions test, is eliminated. The law includes several exceptions to unitary combined filing, including an exception for alien corporations that have no federal effectively connected income and that are not classified as “domestic” corporations for federal tax purposes. Notably, the new law also allows commonly owned corporations to make a binding seven-year election to file on a combined basis if the 50% voting power test is met, whether or not a unitary relationship exists. Except with respect to eligibility for tax credits, the combined group will generally be treated as if it were a single entity.
The draft amendments contain several potentially significant proposals:
- The term “unitary business” would be “construed to the broadest extent permitted under the U.S. Constitution,” as interpreted by the U.S. Supreme Court, New York State courts and the New York State Tax Appeals Tribunal.
- The 50% voting power test would be satisfied by a corporation based on direct or indirect ownership, or direct or indirect control, of more than 50% of the voting power of another company. “Voting power” would be defined to mean the power to elect board members of a company, and the calculation of a company’s total combined voting power would exclude formal voting rights held by stockholders in circumstances where there is any express or implied agreement that the stockholder will not vote its stock in the company.
- “Ownership” of voting power would be defined to include actual or beneficial ownership of stock, meaning that the stockholder must have the right to vote and the right to receive any declared dividends. “Control” of voting power would be defined to apply to circumstances where a company “directly or indirectly possesses the power to dictate or influence the management and policies” of another company through the direct or indirect ownership of more than 50% of the voting power in the other company, or where a company has been given the right to vote the stock of another company “by proxy or otherwise.”
- Companies satisfying the 50% voting power test would be presumed to have a unitary relationship when they: (1) are horizontally integrated, meaning that all of the companies’ “activities are in the same general line of business”; (2) are vertically integrated, meaning that all of the companies “are engaged in different steps in a vertically structured enterprise”; or (3) share “strong centralized management” along with “centralized departments or affiliates” for certain functions such as financing, advertising, research and development or purchasing.
- Newly formed corporations would be presumed to have a unitary relationship with their forming company as long as the 50% voting power test is met, and newly acquired corporations would be presumed to have a unitary relationship with their acquiring company as long as the 50% voting power test is met and the corporations are horizontally integrated, vertically integrated or have strong centralized management (as defined by the draft regulations and discussed above).
- Either a business or the Department may nonetheless refute one of the regulatory presumptions that a group is unitary by “clear and convincing evidence.” If no regulatory presumption applies, the presence of a unitary business would be determined based on all of the facts and circumstances of the case without any presumption in favor of or against a unitary business finding.
- If a passive holding company and one or more operating companies satisfied the 50% voting power test, the passive holding company would be “deemed” (rather than merely presumed) to be engaged in a unitary business with such operating company or companies.
- While companies would generally be allowed to make a seven-year election to file on a combined basis if the 50% voting power test is met, the Department would have the right to disregard such election if it appears to the Department, based on the facts at the time of the election, that “the election will not have meaningful continuing application.” As an example of an election lacking meaningful continuing application, the Department describes a situation where an election is “made in anticipation of the sale of substantially all of a business conducted in New York” when a “material part” of any gain from such disposition would be apportioned to New York in the absence of the election and the sale results in the winding up of the seller’s New York business activities. On the other hand, an election would not lack meaningful continuing application merely because the election reduces New York tax liability, as long as the company making the election anticipates “continuing material business operations in New York” that will be subject to and affected by the election. The Department claims to have the power to disregard elections lacking meaningful continuing application because the election is intended to simplify tax filings, rather than allow for a reduction in tax, and, in the example given, the taxpayer making the election would know that it is winding up business in New York and that the election would have no meaningful continuing application.
The regulations also provide a variety of examples applying the 50% voting power test and unitary business requirement.
The regulations are in draft form and have not yet been formally proposed by the Department under the State Administrative Procedure Act. The Department is inviting comments on the draft amendments by April 21, 2016.