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In the budgets for years 2014-15 and 2015-16, the New York Department of Taxation and Finance (Department) enacted significant corporate tax reform that was designed to do three things:

  1. Modernize and streamline the tax code;
  2. Create clarity and certainty; and
  3. Address the most common areas of dispute between taxpayers and the Department. 

Most of the reform became effective for the tax years beginning on or after January 1, 2015.

In making the necessary updates to incorporate certain changes, it has recently issued combined reporting draft rules. The Department will accept public comments until April 21, 2016. This follows other drafts amendments, including for franchise tax regulations that we addressed last October, and for which the Department accepted comments through January 16, 2016. The combined reporting draft rules describe the requirements for filing a combined report, including detailed descriptions of the capital stock and unitary business requirements. They also describe the requirements for the commonly owned group election.

More specifically, there are two circumstances under which a group of corporations engaged in a unitary business is required to file a combined report:

  1. Where the group meets the capital stock requirement; and
  2. Where the group meets the unitary business requirement. 

Where a group meets the capital stock requirement, a group of commonly owned or controlled corporations may elect to file a combined report, referred to as the “commonly owned group election.”

The draft rules provide that the capital stock requirement is satisfied if:

  • The taxpayer owns or controls, directly or indirectly, more than 50 percent of the voting power of the capital stock of another corporation; or
  • More than 50 percent of the voting power of the capital stock of the taxpayer is owned or controlled, either directly or indirectly, by another corporation; or
  • More than 50 percent of the voting power of the capital stock of one or more other corporations, is owned or controlled, either directly or indirectly, by the same interests.

The draft provides that unitary business is characterized by a flow of value as evidenced by functional integration, centralized management, and economies of scale. These are to be analyzed in conjunction with each other for their cumulative effect, after considering all of the individual facts and circumstances of each case.

A corporation that satisfies the capital stock requirement is presumed to be engaged in a horizontally integrated unitary business when all of its activities are in the same general line of business. Corporations that satisfy the capital stock requirement are presumed to be engaged in a vertically integrated unitary business when they are engaged in different steps in a vertically structured enterprise.

Finally, corporations that satisfy the capital stock requirement and that otherwise might be considered as engaged in more than one unitary business are presumed to be engaged in one unitary business where there is strong capital management coupled with the existence of centralized departments or affiliates for functions like financing, advertising, research and development, or purchasing.

According to the draft rules, the Department would construe the term “unitary business” as broadly as possible under the federal and state constitutions, and pre-existing laws. 

To help taxpayers determine whether and how the rules would apply to them, the draft rules contain numerous examples and factual scenarios.

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