Tax News

CCH (cch.taxgroup.com) reports:

The New York Department of Taxation and Finance has issued a corporate franchise tax memorandum explaining the combined reporting rules applicable to Article 9-A general business corporations, effective for tax years beginning on or after January 1, 2007. The new rules apply as a result of the 2007 budget legislation, which changed the circumstances under which a taxpayer must file a combined report with related corporations. While regulations are being prepared to further explain the changes, the memorandum outlines the Department's interpretation of the amended law.
As amended, the law requires a taxpayer to file on a combined basis with related corporations if there are substantial intercorporate transactions among the related corporations. The steps described below should be used to determine whether a combined report is required and, if so, which corporations are in the combined group.
Step 1: Every taxpayer must identify all of the corporations to which it is related. If one or more of the related corporations are taxpayers, identify all of the corporations related to these taxpayers. Do this until all related corporations have been identified. If a taxpayer has no related corporations, it must file on a separate basis. This constitutes the Step 1 group of related corporations.
Step 2: Identify all of the related corporations that have substantial intercorporate transactions with any taxpayer identified in Step 1. These related corporations and the taxpayers constitute the Step 2 tentative combined group.
Step 3: Add to the Step 2 tentative combined group every related corporation that has substantial intercorporate transactions with any corporation identified in Step 2. This constitutes the Step 3 tentative combined group.
Step 4: Add to the Step 3 tentative combined group every related corporation that has substantial intercorporate transactions with any corporation identified in Step 3. Repeat this process until it adds no more corporations to the group. This constitutes the Step 4 tentative combined group.
Step 5: Identify each related corporation not in the Step 4 tentative combined group that has substantial intercorporate transactions with another related corporation not in the Step 4 tentative combined group. Compare all such groups and combine into one group those with common members (i.e., the unattached related group). There may be more than one unattached related group.
Step 6: If there are substantial intercorporate transactions between any one corporation in an unattached related group and the Step 4 tentative combined group, then all corporations in that unattached related group are included in the combined group. Do this for each unattached related group. As unattached related groups are included in the combined group, do this analysis between the expanded group and each unattached related group. The resulting group is the Step 6 tentative combined group.
Step 7: If there are substantial intercorporate transactions between any one corporation in the Step 6 tentative combined group and an unattached related group, then all corporations in the unattached related group are included in the combined group. Do this for each unattached related group. As unattached related groups are included in the combined group, do this analysis between the expanded group and each unattached related group. The resulting group is the Step 7 tentative combined group.
Step 8: Add to the Step 7 tentative combined group each related corporation that has substantial intercorporate transactions with the Step 7 tentative combined group.
Step 9: Repeat the processes set forth in Steps 4, 6, 7, and 8 until no more corporations can be added to the tentative combined group.
Step 10: Eliminate from the tentative combined group those corporations that are formed under the laws of another country (alien corporations), that are taxable under a different article of the Tax Law, or that compute their business allocation percentage using a statutory method that is different from the taxpayer's. If two or more like corporations are eliminated, it is possible that they will constitute a combined group if they have substantial intercorporate transactions (e.g., one group could consist of trucking corporations and another could consist of manufacturing corporations). However, the law provides that alien corporations are not to be included in a combined group.
In addition, even if substantial intercorporate transactions are absent, the Department may require or permit a taxpayer to file a combined report with one or more related corporations if doing so is necessary to properly reflect the taxpayer's Article 9-A tax liability because of intercompany transactions or some agreement, understanding, arrangement, or transaction.
If a combined report will include more than one taxpayer, the corporations in the group must designate which of the taxpayers is to be "the taxpayer" for the purposes of computing and assessing the tax. The memorandum notes that the taxpayer so designated is often referred to as the parent corporation, even though it may not be the parent of the other related corporations included in the combined report. If a related corporation does not have the same tax year as the parent, then the related corporation's activities for its taxable year that ends during the parent's taxable year should be used for purposes of reporting and filing as part of a combined report.
The memorandum also provides a detailed explanation of the terms "related corporation" and "substantial intercorporate transactions" and sets forth a number of examples illustrating the application of the new rules.
TSB-M-07(6)C , Technical Services Bureau, Taxpayer Services Division, New York Department of Taxation and Finance, June 25, 2007, ¶405-770
Other References:
Explanations at ¶11-550