§ 11-91 Combined Reports: When Required or Permitted.
(§ 11-605(4), Administrative Code.)
(a) Every corporation is a separate taxable entity and shall file its own report. However, the Commissioner of Finance, in his discretion, may require a group of corporations to file a combined report or may grant permission to a group of corporations to file a combined report where:
(1) the requirement of stock ownership or control (as described in 19 RCNY § 11-91(e)(1) is met,
(2) the group of corporations is engaged in a unitary business (as described in subdivision (b) of 19 RCNY § 11-91(e)(2)), and
(3) the other requirement set forth in 19 RCNY § 11-91(f) or 19 RCNY § 11-92(a), as the case may be, has been met.
(b) Each corporation in the combined report must compute and show the tax which would have been required to be shown if it had filed on a separate basis.
(c) The decision to permit or require a combined report will be based on the facts in each case using the requirements set forth in this Section.
(d) Domestic International Sales Corporations (DISC). (§ 11-605(4), Administrative Code.)
(1) A taxpayer which owns or controls either directly or indirectly substantially all the capital stock of a domestic international sales corporation (DISC) which is a tax-exempt DISC for purposes of Article 9-A of the New York State Tax Law must file a combined report with DISC whether or not the latter is doing business in New York City.
(2) In the case of a DISC which is a taxable DISC for purposes of Article 9-A of the State Tax Law, the Commissioner may permit or require a combined report where the requirements described in 19 RCNY § 11-91(e) and (f) are met. The provisions of 19 RCNY §§ 11-91(g) and 11-92 apply to the taxable DISC and its corporate shareholder.
(3) The combined report permitted or required under this subdivision is to be filed for the taxable year of the corporate shareholder. If any DISC included in a combined report has a taxable year which differs from that of its corporate shareholder, the combined report should include the results of the DISC's operations for its taxable year which ends within the taxable year of its corporate shareholder. For example, if the shareholder reports on a calendar-year basis and the DISC has a taxable year ending on January 31 the combined report for the calendar year 1983 will include the DISC's activities for its taxable year ended January 31, 1983.
(4) If any corporation required to file a combined report under this subdivision believes that such filing should not be required, it must nevertheless file on a combined basis and attach to the report a statement setting forth the reasons for its belief that a combined report should not be required. After considering such statement, the Commissioner of Finance, in his sole discretion, may waive the requirement that a combined report be filed.
(5) In addition to the circumstances described above in which a combined report is required, the Commissioner of Finance may require a combined report in other situations if he determines that such a report is necessary in order to properly reflect the tax due from a corporate shareholder and one or more DISC's. Similarly, a corporation not required or permitted under this subdivision to file a combined report, which believes that it should be permitted to file such a report, may apply to the Commissioner of Finance for permission to file a combined report.
(e) Capital Stock and Unitary Business Requirements. (§ 11-605(4), Administrative Code.)
(1) Capital stock requirement. (i) In deciding whether to permit or require a group of corporations to file a combined report, the Commissioner of Finance will first determine whether
(A) the taxpayer owns or controls, either directly or indirectly, substantially all of the capital stock of all the other corporations which are to be included in the combined report; or
(B) substantially all the capital stock of the taxpayer is owned or controlled, either directly or indirectly, by other corporations which are to be included in the combined report; or
(C) substantially all of the capital stock of the taxpayer and substantially all of the capital stock of the other corporations which are to be included in the combined report are owned or controlled, either directly or indirectly, by the same interests.
(ii) The term "substantially all" means ownership or control of 80 percent or more of the voting stock. Ownership includes actual or beneficial ownership. To be considered the owner, the stockholder must have the right to vote and the right to receive dividends. The term "control" refers to all cases where the taxpayer controls the stock of all the other corporations or the stock of the taxpayer is controlled by other corporations or the taxpayer and the other corporations are controlled by the same interests. The decision as to whether or not a corporation is controlled by the same interests will be determined by the facts in each case.
Example 1: The taxpayer, X Corporation, owns 70 percent of the voting stock of Y Corporation. The remaining voting stock is owned by three employees of X Corporation. These employees have agreed in writing to sell their stock to X Corporation when they leave the corporation. As part of the agreement, the employees have given X Corporation their voting proxy. Thus, X Corporation owns or controls 80 percent or more of the voting stock of Y Corporation.
(2) Unitary business requirement.
(i) In deciding whether a corporation is part of a unitary business, the Commissioner of Finance will consider whether the activities in which the corporation engages are related to the activities of the other corporations in the group, such as:
(A) manufacturing or acquiring goods or property or performing services for other corporations in the group, or
(B) selling goods acquired from other corporations in the group, or
(C) financing sales of other corporations in the group.
(ii) The Commissioner of Finance, in deciding whether a corporation is part of a unitary business, will also consider whether the corporation is engaged in the same or related lines of business as the other corporations in the group, such as:
(A) manufacturing or selling similar products; or
(B) performing similar services, or
(C) performing services for the same customers.
(iii) Examples:
Example 2: A manufacturing corporation organizes an 80 percent or more owned subsidiary and transfers all of its selling activities to the subsidiary. The subsidiary sells only the parent's products for which it receives a commission. The subsidiary has a place of business of its own and its own employees. The corporations are conducting a unitary business.
Example 3: The taxpayer, a manufacturing corporation, forms a holding company which is also subject to tax. The holding company owns all of the manufacturing company's stock. The only activity of the parent-holding company is to receive dividends from the manufacturing corporation. The corporations are not conducting a unitary business.
(f) Other requirements. (§ 11-605(4), Administrative Code.)
(1) If the capital stock and unitary business requirements described in 19 RCNY § 11-91(e) have been met, the Commissioner of Finance may permit or require a group of taxpayers to file a combined report if reporting on a separate basis distorts the activities, business, income or capital in New York City of the taxpayers. The activities, business, income or capital of a taxpayer will be presumed to be distorted when the taxpayer reports on a separate basis if there are substantial intercorporate transactions among the corporations.
(2) If the requirements described in 19 RCNY § 11-91(e) have been met, the Commissioner of Finance may permit a corporation which is not a taxpayer to be included in a combined report if reporting on a separate basis distorts the activities, business, income or capital of one or more taxpayers. (For rules for requiring a corporation which is not a taxpayer to be included in a combined report, see 19 RCNY § 11-92(a).) The activities, business, income or capital of a taxpayer will be presumed to be distorted when the taxpayer reports on a separate basis if there are substantial intercorporate transactions among the corporations.
(3) In determining whether there are substantial intercorporate transactions, the Commissioner of Finance will consider transactions directly connected with the business conducted by the taxpayer, such as:
(i) manufacturing or acquiring goods or property or performing services for other corporations in the group; or
(ii) selling goods acquired from other corporations in the group; or
(iii) financing sales of other corporations in the group; or
(iv) performing related customer services using common facilities and employees. Service functions will not be considered when they are incidental to the business of the corporation providing such services. Service functions include, but are not limited to, accounting, legal and personnel services. The substantial intercorporate transaction requirement may be met where as little as 50 percent of a corporation's receipts or expenses are from one or more qualified activities described in this subdivision. It is not necessary that there be substantial intercorporate transactions between any one member with every other member of the group. It is, however, essential that each corporation have substantial intercorporate transactions with one other corporation or with a combined or combinable group of corporations.
Example: Corporation Z sells 30 percent of its product to Corporation X and 40 percent of its product to Corporation Y. If Corporations X and Y constitute a combined or combinable group, there are substantial intercorporate transactions between Corporation Z and such a combined group because 70 percent of Corporation Z's sales are to such combined group. If Corporations X and Y do not constitute a combined or combinable group, there are not substantial intercorporate transactions between Corporation Z and Corporations X and Y.
(4) If a taxpayer fails to meet the presumption of distortion because it does not have substantial intercorporate transactions with any corporation described in 19 RCNY § 11-91(e) or with a combined or combinable group of such corporations and if the filing of a report on a separate basis nevertheless results in a distortion of such taxpayer's activities, business, income or capital in New York City then the Commissioner of Finance will permit or require the filing of a combined report. If a taxpayer meets the presumption of distortion because it has substantial intercorporate transactions with any corporation described in 19 RCNY § 11-91(e) or with a combined or combinable group of such corporations and if the filing of a report on a separate basis does not result in a distortion of such taxpayer's activities, business, income or capital in New York City then the Commissioner of Finance will not permit or require the filing of a combined report.
(5) Notwithstanding the fact that the members of one or more existing or proposed combined group or groups of corporations within an entire group meet, in addition to the requirements of 19 RCNY § 11-91(e), the requirement of the Commissioner of Finance may permit or require a different combination of such corporations within such entire group with respect to a combined report if any such different combination or combinations, in addition to meeting the requirements of such 19 RCNY § 11-91(e) would result in less distortion of the activities, business, income or capital in New York City of such corporations within. the entire group.
(6) Examples:
Example 1: Corporation A manufactures goods, of which 40 percent are distributed through five 80 percent or more owned subsidiaries. Corporation A and its subsidiaries are taxpayers. The only function of the subsidiaries is to act as distributor for Corporation A. Because there are substantial intercorporate transactions, it is presumed that reporting on a separate basis will result in a distortion of the activities, business, income or capital of Corporation A and its subsidiaries. However, if the subsidiaries were engaged in other activities from which they received significant income the result could be changed.
Example 2: Corporation B manufactures goods which it sells through unrelated retailers. Corporation B will accept notes of the retailers' customers as part payment for its goods. These notes are sold to an 80 percent or more owned finance subsidiary of Corporation B. The subsidiary obtains funds by borrowing from a bank. The subsidiary's income is the difference between the interest charged to the retail customers and the interest paid to the bank. All of the subsidiary's business is obtained from Corporation B. Corporation B and the finance subsidiary are taxpayers. Because there are substantial intercorporate transactions, it is presumed that reporting on a separate basis will result in a distortion of the activities, business, income or capital of Corporation B and its finance subsidiary.
Example 3: A taxpayer's sole activity is to provide a management service for four 80 percent or more owned subsidiaries which are also taxpayers. The four subsidiaries manufacture the same type of product. Each of the four subsidiaries pays 25 percent of the parent's income for management services. There are no intercorporate transactions among the subsidiaries. Because there are insufficient intercorporate transactions among the corporations, it is presumed that reporting on a separate basis will not result in a distortion of the activities, business, income or capital of any of the corporations.
Example 4: Corporation C is a manufacturer. At the bank's insistence, its new factory building in New York City is owned by an 80 percent or more owned subsidiary. This is the only activity of the subsidiary. The manufacturer pays a rent to the subsidiary equal to principal, interest and taxes on the factory building. Corporation C and its subsidiary are taxpayers. Because there are substantial intercorporate transactions, it is presumed that reporting on a separate basis will result in a distortion of the activities, business, income or capital of Corporation C and its subsidiary.
Example 5: Assume the same facts as in Example 4 except that the factory building is located outside New York City and the subsidiary is not a taxpayer. Because there are substantial intercorporate transactions, it is presumed that reporting on a separate basis will result in a distortion of the activities, business, income or capital of Corporation C and a combined report may be permitted. (For rules for requiring a corporation which is not a taxpayer to be included in a combined report, see 19 RCNY § 11-92(a).)
Example 6: A corporation is in the plumbing contracting business. In order to assure itself of a sufficient supply of a certain material, it acquires 80 percent or more of the voting stock of a corporation which produces that material. However, this subsidiary sells only 35 percent of its output to the parent which is 25 percent of the parent's total purchases. The parent and the subsidiary are taxpayers. Because there are insufficient intercorporate transactions between the corporations, it is presumed that reporting on a separate basis will not result in a distortion of the activities, business, income or capital of either taxpayer.
Example 7: Corporation H owns 80 percent or more of the stock of Corporations D, E and F. All four corporations are taxpayers. Corporation H's only activities are to receive the dividends of Corporations D, E and F and to pay dividends to its shareholders. Corporation D sells stocks, Corporation E sells municipal bonds and Corporation F sells corporate bonds. Corporations D, E and F each have their own employees. However, the employees of one corporation are authorized to and do sell extensively the securities sold by the other corporations. Eighty percent of the receipts of Corporation D, seventy percent of the receipts of Corporation E and sixty percent of the receipts of Corporation F are generated by sales made by the common pool of employees of Corporations D, E and F. All three corporations carry on their activities at or using common facilities. Because there are substantial intercorporate transactions, it is presumed that reporting on a separate basis will result in a distortion of the activities, business, income or capital of Corporations D, E and F. Corporation H will not be permitted or required to be included in a combined report since it is not conducting a unitary business with Corporations D, E and F.
Example 8: The taxpayer, an advertising corporation, owns 80 percent or more of the voting stock of a publishing corporation which is also a taxpayer. The parent has total receipts of $900,000. $100,000 of the parent's receipts are from services performed for the subsidiary and $300,000 are from services performed for unrelated corporations. The parent also receives $500,000 in dividends from its subsidiary. Since dividends are not considered in determining whether there are substantial intercorporate transactions, it is presumed that reporting on a separate basis will not result in a distortion of the activities, business, income or capital of either taxpayer.
Example 9: Corporation T and three 80 percent or more owned subsidiaries, Corporations X, Y and Z, manufacture the same type product. All of the corporations are taxpayers. Corporation T conducts all research and development activities for the group without any direct charges to the subsidiaries. The parent owns all patents relating to the manufacture and marketing of each company's product and charges the subsidiaries fees or royalties for the use of the patents. The parent receives this type of income only from its subsidiaries. Corporation T's operations are located entirely in New York City. Each subsidiary has facilities in and out of the City. The following tabulation shows the business activities of each corporation for a particular taxable year.
T X Y Z
Receipts from Products 30,000 30,000 30,000 30,000
Royalty Income (expense) 10,000 (3,000) (3,000) (4,000)
Dividends from Subsidiaries 50,000
Research & Development Expenditures (25,000)
Other Deductions (3,000) (7,000) (7,000) (6,000)
Entire Net Income 12,000 20,000 20,000 20,000
Portion to New York City 100% 30% 40% 20%
Allocated Income 12,000 6,000 8,000 4,000
The only intercompany transactions within the group are the royalty payments which represent 25 percent of Corporation T's business income and are 40 percent or less of any subsidiary's total expenses. The royalties are based on a percentage of sales and do not represent adequate compensation to Corporation T for the value of the patents or the research and development expenditures.
Since the research and development expenditures are incurred only by Corporation T on behalf of the group, the entire net income of Corporation T is understated and that of the subsidiaries is overstated. The research and development expenditures represent a major portion of the group's overall expenses. Individually, these expenditures are allocated 100 percent to New York City whereas the income derived as a result of these expenditures is allocated to New York City at percentages ranging from 20 percent to 100 percent. The result is a distortion of the activities and income within New York City when the corporations report on a separate basis. A combined report will be permitted or required.
(g) Permission for filing combined reports. (§ 11-605(4), Administrative Code.)
(1) A group of corporations meeting the requirements set forth in 19 RCNY § 11-91(e) and (f) does not need to request prior permission to file on a combined basis. To file on a combined basis, the group must file a completed combined report. The first year the group files on a combined basis, and each year thereafter in which the composition of the group changes, the group must include the following information, either on the report or attached thereto:
(i) the exact name, address, employer identification number and the state of incorporation of each corporation included in the combined report,
(ii) information showing that each of the corporations meets the requirements of 19 RCNY § 11-91(e) and (f) for the taxable year,
(iii) the exact name, address, employer identification number and the state of incorporation of all corporations (except alien corporations) which meet the capital stock requirement of 19 RCNY § 11-91(e)(1) for the taxable year, which are not included in the combined report,
(iv) for the taxable year:
(A) the nature of the business conducted by each corporation included in subparagraphs (i) and (iii) of this paragraph,
(B) the source and amount of gross receipts of each corporation and the portion derived from transactions with each of the other corporations for the taxable year,
(C) the source and amount of total purchases, services and other transactions of each corporation and the portion related to transactions with each of the other corporations for the taxable year, and
(D) any other data that shows the degree of involvement of the corporations with each other,
(v) a statement providing details as to why a combined report including only the corporations listed in subparagraph (i) of this paragraph equitably reflects the New York City activities of the corporations which meet the capital stock requirement of 19 RCNY § 11-91(e)(1) and why the corporations listed in subparagraph (iii) of this paragraph should be excluded, and
(vi) a statement indicating whether each corporation listed in subparagraphs (i) or (iii) of this paragraph files on a combined basis for purposes of Article 9-A of the New York State Tax Law for the same taxable year and indicating the first taxable year each such corporation filed on a combined basis for State purposes. A copy of the State letter authorizing that corporation to file on a combined basis, if one was received, and any subsequent document authorizing the continued filing on a combined basis, must be submitted with this statement. In addition, if any corporation was required to file on a combined basis for purposes of Article 9-A of the State Tax Law, documentation evidencing that such combined filing has been required must also be submitted.
(2) The filing of a combined report or the inclusion of a corporation in, or the exclusion of a corporation from, a combined report is subject to revision or disallowance on audit in which event the Commissioner of Finance may compute and assess the tax of each taxpayer not permitted to be included in a combined report on a separate basis.
(3) If a corporation properly reports on a combined basis, it must continue to file its reports on a combined basis until the facts relevant to the requirements of 19 RCNY § 11-91(e) and (f) materially change.
(4) If the New York State Department of Taxation and Finance disallows the filing of a combined report or the inclusion of a corporation in, or the exclusion of a corporation from, a combined report, for purposes of Article 9-A of the New York State Tax Law, the taxpayer must report such fact to the Commissioner of Finance within 30 days following such disallowance.
