The Department of Taxation and Finance has proposed amendments to its regulations regarding combined returns under Article 9-A. N.Y.S. Register, Vol. XXXIV, Issue 37, pp. 14-17 (Sept. 12, 2012). The main purpose for the amendments is to reflect changes to combined reporting enacted by 2007 legislation, which imposed mandatory combined reporting between “related corporations” having “substantial intercorporate transactions.” That legislation went into effect beginning in 2007, and the Department thereafter issued a Taxpayer Guidance Division memorandum interpreting the new law. TSB-M-08(2)C (N.Y.S. Dep’t of Taxation & Fin., Mar. 3, 2008), superseding TSB-M-07(6)C (June 25, 2007). However, the Department never amended its regulations to make them consistent with the legislative changes. The proposed amendments signal the Department’s intent to adopt amendments in the near future.
What the Proposed Amendments Do. The proposed amendments principally clarify two important terms contained in the 2007 law: the term “related corporation” — which is substantially similar to the former “substantial ownership” requirement for combination — and the term “substantial intercorporate transactions.” For the most part, the proposed regulations codify the interpretations contained in the Department’s earlier TSB-M. Thus, as under the TSB-M, the proposed amendments set forth two alternative tests for finding the existence of substantial intercorporate transactions in a tax year: (1) where 50% or more of a corporation’s receipts or expenditures are from a related corporation or group of related corporations (“receipts or expenditures test”); or (2) in the event that assets have been transferred to a related corporation, where 20% or more of the transferee corporation’s gross income is derived from those transferred assets (“asset transfer test”). Meeting either test establishes that substantial intercorporate transactions exist for the year, and result in mandatory combination under Article 9-A. Also as under the TSB-M, the proposed amendments include a “10-step analysis” for determining which corporations must be included in a combined return.
Changes from the earlier TSB-M. While the proposed amendments generally follow the earlier TSB-M, the Department has made certain changes. One of the more significant changes relates to the inclusion in the substantial intercorporate transactions calculation of interest paid and received on loans between related corporations, even where the intercompany loan constitutes subsidiary capital. Under the TSB-M, interest on intercompany loans constituting subsidiary capital was not considered in the substantial intercorporate transactions calculation. Also, “intercorporate cost allocations” are excluded from the calculation.
Other Additions in the Proposed Amendments. In 2008, the Department circulated for comment to various professional organizations an earlier draft of the amendments. In that draft, the Department contemplated eliminating from the existing regulations long-standing language that imposes a unitary business requirement for combination. In response to comments, the proposed amendments now expressly provide that in order to be required or permitted to file a New York State combined return, the corporations must be engaged in a unitary business. Also in response to comments, the proposed amendments make clear that under the alternative “asset transfer test” for computing substantial intercorporate transactions, the test applies only to assets transferred on or after January 1, 2007, when the 2007 legislation went into effect.
Another addition in the proposed amendments relates to the “multi-year test” for computing substantial intercorporate transactions. Under that test, in any tax year where intercorporate receipts or expenditures are between 45% and 55%, the test will be considered satisfied if during the tax year and prior two years, the intercorporate transactions are, in the aggregate, 50% or more of total receipts or expenditures for that period. The proposed amendments now make explicit that the multi-year test will be used not only to satisfy the substantial intercorporate transactions test, but also to prove that the test is not satisfied.
Additional Insights. The Department’s amendments in this area are long overdue, coming more than five years after the 2007 legislation. The delay may have been due to the Department’s prior focus on its far more sweeping “corporate tax reform” proposal, the eventual outcome of which remains uncertain. The proposed amendments are not yet final. State law requires a minimum 45-day public comment period from the date of publication in the State Register. Inasmuch as the Department already received substantial comments on its earlier draft, we would expect the final amendments to be adopted later this year in a form substantially identical to these proposed amendments.