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New York State Tax Department Releases Guidance on Tax Reform Legislation

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 The old requirement that separate filing distort the incomes of the companies, which led to much controversy, has been repealed.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 [...]

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New York Releases Corporate Tax Reform FAQs

Earlier this year, New York enacted sweeping corporate tax reform, generally effective for tax years beginning on or after January 1, 2015, including a new economic nexus standard, changes to New York’s combined reporting regime, changes to the tax base and traditional New York income classifications, changes to the receipts factor computation, and changes to the net operating loss calculation and certain tax credits and incentives.  (For a more detailed discussion of these changes, see our Special Report.

While this corporate reform is quite comprehensive, a number of open issues remain so taxpayers and practitioners have been eagerly awaiting additional guidance from the Department of Taxation and Finance.  As a first step in providing that much-needed guidance, the Department has released its first set of responses to frequently asked questions on a new “Corporate Tax Reform FAQs” section of its website.  Most notably, the responses clarify that the non-unitary presumption based on less than 20 percent stock ownership for purposes of determining exempt investment income is a rebuttable presumption.  The responses also clarify that the business capital base includes items of capital that generate exempt income.  Other topics addressed include economic nexus, credits, the Metropolitan Transportation Business Tax (MTA surcharge) and net operating losses.

The Department plans to update the Corporate Tax Reform FAQs on an ongoing basis as it continues to receive questions from taxpayers and practitioners, which can be submitted on the Department’s website.  We will be submitting questions and comments and can do so on behalf of companies that do not want to be identified.  The Department is also in the process of revising its current regulations (which are expected to be released before the end of 2015) and plans to issue two technical memoranda in the interim, one discussing qualified New York manufacturers and one discussing the new expense attribution rules.  Stay tuned for updates regarding this additional guidance.




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