The New York State Department of Taxation and Finance has issued a Technical Memorandum that provides a procedure to allow taxpayers to withdraw from the commonly owned group election made on their 2015 and 2016 Article 9-A combined returns. Technical Memorandum, “June 1, 2018 Deadline for Withdrawal (in certain circumstances) of the Commonly Owned Group Election made on a 2015 or 2016 Combined Return,” TSB-M-18(1)C (N.Y.S. Dep’t of Taxation & Fin., Mar. 22, 2018).
Under the election, all corporations that meet the morethan-50% ownership requirements for combination with any taxpayer in the group are included in the Article 9-A combined return, regardless of whether they are engaged in a unitary business. The election is made by the group’s “designated agent” on an original timely filed return and, under the Tax Law, is irrevocable and binding for seven years. Otherwise, under New York State corporate tax reform, only corporations that meet both the more-than-50% stock ownership and unitary business requirements are included in an Article 9-A combined return.
As background for the new one-time withdrawal procedure, the Technical Memorandum notes that there have been several instances where the commonly owned group election was made but not all corporations that met the ownership requirements were included in the taxpayer’s Article 9-A combined return. Rather, the combined return that was filed included only those corporations that were included in the designated agent’s federal consolidated return. Earlier this year, the Department issued an FAQ reminding taxpayers that the commonly owned group Article 9-A return is not limited to entities included in the federal consolidated return under IRC § 1504—which is generally based on 80% or more common ownership—and can require the inclusion of corporations that file as part of a different federal affiliated group return.
The Department has concluded that some taxpayers misunderstood the commonly owned group election filing requirement and made the election based on that misunderstanding, possibly resulting in a substantial tax change. The Department views this as a transitional issue regarding a new provision of law and has decided to “administratively permit” the designated agent to withdraw the election for the years 2015 and 2016, but only where the corporations included in the Article 9-A combined returns identically matched those that were included in the designated agent’s federal consolidated return, and did not include any other corporations that met the Article 9-A combined filing ownership requirements.
The Technical Memorandum sets out a limited time withdrawal procedure under which, no later than June 1, 2018, the designated agent must, among other things, file amended Article 9-A combined returns for the first year the election was made, including only those corporations that meet the ownership and unitary business requirements for combination. Taxpayers are instructed not to mark the box for making an “irrevocable election” and must include a statement that the election is being withdrawn based on the Technical Memorandum. If by the time of filing of the amended 2015 Article 9-A combined return the 2016 combined return has ready been filed, the 2016 return must also be amended by June 1, 2018.
The New York City Department of Finance has issued similar guidance under the business corporation tax. Finance Memorandum 18-3, “June 1, 2018 Deadline for Limited Withdrawal of the Commonly Owned Group Election Made on a Tax Year 2015 or 2016 Combined Return” (N.Y.C. Dep’t of Fin., Mar. 29, 2018).
The New York State and City Tax Departments have taken the highly commendable approach of permitting the commonly owned election to be withdrawn under the narrowly defined criteria set out in the Technical Memorandum. Although the State and City statutes make the election “irrevocable,” there is some authority (federally and in other states) for a taxpayer to withdraw from a consolidated or combined return election for “good cause.” Since the commonly owned election was generally perceived as a means of simplifying the filing of returns, it is perhaps understandable that some taxpayers may have mistakenly viewed such simplification as meaning conformity to the federal consolidated group. The State and City approach is welcome recognition that a strict interpretation of the new election can have harsh consequences and that there should be an opportunity for taxpayers to avoid those consequences by correcting the election under this limited time procedure.