The Department of Taxation and Finance has now offically adopted amendments to its combined return regulations under Article 9-A. Notice of Adoption, N.Y.S. Register, Vol. XXXV, Issue 1, pp. 3336 (Jan. 2, 2013). The amendments reflect changes to combined reporting enacted by 2007 legislation, which imposed mandatory combined reporting between “related corporations” having “substantial intercorporate transactions.” As more fully discussed in the October 2012 issue of New York Tax Insights, when these amendments were published for official comment, the amendments principally clarify the statutory term “substantial intercorporate transactions.” They set forth two alternative tests for finding the existence of substantial intercorporate transactions in a tax year, a 50% or more “receipts or expenditures test” and a 20% or more “asset transfer test.” Meeting either test establishes that substantial intercorporate transactions exist for the year, resulting in mandatory combination under Article 9-A.
In response to comments received following publication of the proposed amendments in September 2012, the Department has made a few additional changes. The changes stem from comments and questions regarding the relationship of two provisions in the proposed amendments involving the calculation of substantial intercorporate transactions: that “expenses that benefit, directly or indirectly, one or more related corporations” are included in the calculation, but that “[i]ntercorporate cost allocations” are not. The adopted amendments now provide that where a corporation incurs expenditures that benefit one or more related corporations “and allocates those costs to the related corporation[s],” those cost allocations are not considered in determining whether there are substantial intercorporate transactions. The Department has also added language that expenditures for service functions, such as payroll processing and personnel services, are not considered expenditures that benefit related corporation(s), and therefore are not included in substantial intercorporate transactions.
In response to a public comment requesting that the amendments expressly permit taxpayers to rely on the Department’s prior guidance set forth in TSB-M-08(2)C (N.Y.S. Dep’t of Taxation & Fin., Mar. 3, 2008) — which was substantially codified in these amendments — the Department now states that since some of the amendments represent a departure from the TSB-M, the amendments expressly apply to taxable years beginning on or after January 1, 2013. That statement is somewhat confusing since most of the amendments do reflect policies that have been in place since the TSB-M was issued, and presumably will continue to apply for tax years prior to 2013.