New York Codes, Rules and Regulations › Title 20 - DEPARTMENT OF TAXATION AND FINANCE › Chapter I - Franchise and Certain Business Taxes › Subchapter A - Business Corporation Franchise Tax › Part 3 - COMPUTATION OF TAX › Subpart 3-6 - EXAMPLES OF INCOME AND CAPITAL › Section 3-6.1 - Examples

Current through Register Vol. 46, No. 28, July 10, 2024
The following are examples intended to address only the
						determination of whether the capital is business capital or investment capital.
						The examples do not address the corporation's entire tax computation, such as
						the apportionment of amounts deemed business income.
Example 1: Fossil Fuel Corporation ("Fossil") is a
						vertically integrated oil business. Fossil recently sold off 60% of its 100%
						ownership interest in Northwest Exploration, Inc. ("NWE"), a subsidiary engaged
						in oil exploration in far northern latitudes. While Fossil no longer owns a
						majority of NWE's stock, it remains the largest shareholder. In addition, NWE
						continues to operate as part of Fossil's vertically integrated oil business,
						benefiting from functional integration, centralized management and economies of
						scale.
NWE and Fossil are engaged in a unitary business but
						cannot be included in a combined report because they do not meet the capital
						stock requirement. Because Fossil and NWE are unitary, Fossil's NWE stock is
						other unitary corporation stock. Fossil's NWE stock is business capital because
						other unitary corporation stock is always business capital. In addition, the
						dividend income Fossil receives from NWE would constitute other unitary
						corporation dividends and, as such, other exempt income. Any gain on the sale
						of additional NWE stock by Fossil would be business income.
Example 2: NewsCo is a newspaper publisher incorporated
						in Delaware and commercially domiciled in Illinois that publishes local
						newspapers in New York and 10 other states. In 2020, anticipating a serious
						shortage of newspaper print, NewsCo acquires 30% of the stock of PaperCo, a
						paper mill company with facilities in North Carolina, Georgia and Oregon. This
						action is taken in an attempt to mitigate the risk of a shortage of newsprint.
						Based on its significant ownership share, NewsCo is given two seats on
						PaperCo's 15-member board of directors. No changes are made in PaperCo's senior
						management, and the relationship of the two businesses largely remains that of
						purchaser and supplier. In 2022, when it appears the newsprint shortage is
						over, NewsCo sells its stock in PaperCo for a gain of $80 million.
NewsCo and PaperCo are not engaged in a unitary
						business. They are in related but distinct lines of business, and while NewsCo
						owns 30% of PaperCo's stock and has two seats on the board of directors, no
						steps were taken toward functional integration or centralized management.
						However, while the two corporations are not engaged in a unitary business,
						NewsCo's investment in PaperCo, Inc. serves an operational function for
						NewsCo's that is, to facilitate NewsCo's access to newsprint during the
						shortage. Consequently, the PaperCo stock owned by NewsCo is not
						constitutionally protected investment capital.
If the stock meets all of the criteria in section
						3-4.1(a)(1) or
						(a)(2)  of this Part, the stock would be
						considered either actual or presumed investment capital, respectively. Dividend
						income received from PaperCo and the $80 million gain from the sale of
						PaperCo's stock would be income from investment capital.
If the stock did not meet the criteria in section
						3-4.1(a)(1) or
						(a)(2)  of this Part, then the stock would be
						business capital. As a result, any dividend income received from PaperCo would
						be business income and the $80 million gain from the sale of PaperCo's stock
						would be business income.
Example 3: Ore Corporation, a mining company
						incorporated and commercially domiciled in Utah, routinely invests its cash on
						hand in short-term debt instruments that yield interest income. These
						investments serve an operational function in Ore corporation's business and
						therefore are not constitutionally protected investment capital. Consequently,
						these debt instruments are business capital, and the income they generate is
						business income.
Example 4: EquipmentCo, a manufacturer of farm equipment
						incorporated in Delaware and commercially domiciled in Iowa, operates sales and
						distribution facilities in New York State. EquipmentCo maintains a portfolio of
						stocks and bonds in the telecommunications sector managed to generate long-term
						gains. As such, its investments in telecommunications stocks and bonds are not
						part of EquipmentCo's unitary farm equipment business in New York State and do
						not serve an operational function in EquipmentCo's business. The dividend and
						interest income generated by the telecommunication stocks and bonds do not have
						the constitutionally required connection to EquipmentCo's business in New York
						State. The stocks and bonds qualify as constitutionally protected investment
						capital and the income from the stocks and bonds is income from investment
						capital.
Example 5: MMW, Inc. is engaged in a multistate
						manufacturing and wholesaling business incorporated and commercially domiciled
						in New Jersey. In connection with that business, it maintains a special reserve
						fund available for use in the case of a natural disaster or other extraordinary
						event. The securities in the reserve fund include both "blue chip" stocks and
						AAA bonds. The fund serves an operational function for MMW, Inc. " ensuring the
						unitary business can remain operational in the event of a natural disaster or
						other extraordinary event. Since the securities in the fund serve an
						operational function, the securities are not constitutionally protected
						investment capital. Because actual and presumed investment capital is limited
						by law to stocks, the bonds are prohibited from being investment capital and
						any interest income or net gains generated by those bonds is business income.
						In order for the stocks in the special reserve fund to be considered investment
						capital, the stocks must satisfy the criteria in section
						3-4.1(a)(1) or
						(a)(2)  of this Part. If the stocks are
						investment capital, the dividends from the stock and the net gains from the
						sale of the stock would be income from investment capital. If the stocks do not
						satisfy these criteria, the stocks would be business capital and the dividends
						and net gains from those stocks would be business income.
Example 6: MNO is incorporated and commercially
						domiciled in California. It develops software. In 2022, MNO issued a stock
						offering, netting $300 million. The explicitly stated purpose of the offering
						was to provide additional capital for the acquisition of companies and products
						in the same line of business as, or complementary to, MNO's line of business.
						Consistent with that purpose, MNO kept the funds acquired in segregated
						accounts. Within those accounts, MNO invested in a broad array of securities,
						including both stocks and bonds.
Because the explicit stated purpose of the funds and
						assets in the segregated accounts is clearly tied to the unitary software
						development business of MNO, the funds and securities serve an operational
						function for all years the funds and securities are at MNO's disposal. As such,
						the securities are not constitutionally protected investment capital. Because
						actual and presumed investment capital is limited by law to stocks, the bonds
						are prohibited from being investment capital and any income earned from those
						bonds is business income. If the stocks in the segregated accounts meet all the
						criteria in section
						3-4.1(a)(1) or
						(a)(2)  of this Part, the stocks would be
						considered actual or presumed investment capital, respectively, and the
						dividends and net gains from the stocks would be income from investment
						capital. If the stocks do not satisfy all of those criteria, the stocks would
						be business capital and the dividends and net gains from those stocks would be
						business income.
Example 7: Retail Corp, incorporated and commercially
						domiciled in North Carolina, earns substantial revenue from its retail
						operations located solely within New York. It invests a large portion of the
						revenue in fixed income securities that are divided into three
						categories:
(a) short-term securities
					 held pending use of the funds in the taxpayer's retail business;
(b) short-term securities held pending
					 acquisition of other companies or favorable developments in the long-term money
					 market; and
(c) long-term
					 securities held as an investment. The income generated by both types of
					 short-term securities serves an operational function for Retail Corp. As a
					 result, the short-term securities are not constitutionally protected investment
					 capital. If the securities in category (a) or (b) include stocks and the stocks
					 meet all the criteria in section
					 3-4.1(a)(1) or
					 (a)(2)  of this Part, the stocks would be
					 considered actual or presumed investment capital, respectively, and the
					 dividends and net gains from the stocks would be income from investment
					 capital. The stocks in categories (a) and (b) above that do not meet all the
					 criteria to be considered actual or presumed investment capital and any other
					 securities in categories (a) and (b) above are business capital and any
					 interest income, dividends or net gains from those securities are business
					 income. The interest income, dividends or net gains from the long-term
					 securities in category (c) held as an investment do not have the
					 constitutionally required connection to the retail operations in New York
					 State. These long-term securities qualify as constitutionally protected
					 investment capital and any interest income, dividends or net gains from the
					 securities are income from investment capital.
Example 8: Manu Corp. is a manufacturer incorporated and
						commercially domiciled in California with facilities in New York and other
						states. In 2018, Manu Corp. purchases, at a deep discount, corporate bonds
						issued by Grocery, Inc., a large supermarket chain in default on its interest
						payments and on the verge of bankruptcy. Manu Corp. believes that Grocery, Inc.
						will be able to emerge from its difficulties as a viable business and that the
						Grocery, Inc. bonds it holds will sell at a considerably higher price at some
						future date. Manu Corp. sells the bonds in 2022 for a significant gain. Even
						though Manu Corp's investment is in corporate bonds, the nature of the
						investment is more akin to an investment in stock held for long-term
						appreciation. Manu Corp. will not be receiving interest income from the bonds
						or using the bonds as collateral. The bonds, therefore, are not serving an
						operational function. The investment in the bonds is an investment separate and
						apart from the unitary business of Manu Corp. The net gain on the sale of the
						bonds does not have the constitutionally required connection to Manu Corp's
						operations in New York. The bonds are constitutionally protected investment
						capital and the net gain is income from investment capital.
Example 9: Same facts as example 9, except that the
						purchaser of the Grocery, Inc. corporate bonds is FISCO, which is incorporated
						and commercially domiciled in Connecticut and operates a diversified financial
						services business. In addition to being a dealer in securities, it buys and
						sells securities for its own account. The purchase of the Grocery, Inc. bonds
						is within the scope of FISCO's unitary financial services business of buying
						and selling securities. Therefore, the bonds are not constitutionally protected
						investment capital. In the hands of FISCO, the Grocery Inc. corporate bonds are
						business capital and the net gain on the sale of the bonds is business
						income.
Example 10: VinylCo is incorporated and commercially
						domiciled in Delaware and is a manufacturer of rubber and vinyl products. In
						2022, it purchased a 15% interest in SupplierCo, which supplies VinylCo with
						synthetic rubber, to obtain status as a preferred customer. In all other
						respects, VinylCo and SupplierCo operate independently. VinylCo and SupplierCo
						are not engaged in a unitary business. However, VinylCo's investment in
						SupplierCo serves an operational function for VinylCo by helping VinylCo to
						maintain an ongoing supply of synthetic rubber. As such, the stock VinylCo owns
						in SupplierCo is not constitutionally protected investment capital. If the
						stock meets all the criteria in section
						3-4.1(a)(1) or
						(a)(2)  of this Part, the stock would be
						considered actual or presumed investment capital, respectively, and the
						dividends and net gains from the stock would be income from investment capital.
						If the stock does not satisfy all of these criteria, the stock would be
						business capital and the dividends and net gains from the stock would be
						business income.
Example 11: RDS is incorporated and commercially
						domiciled in Connecticut, and is principally engaged in the operation of a
						chain of retail department stores within and without New York State. RDS also
						holds stock in several corporations, including QRS Inc., which designs,
						develops and markets "off-the-shelf" computer programs. In 2022, RDS sells its
						stock in QRS Inc. which it purchased in 2014, at a $100 million net gain.
						Because RDS's investment in the stock of QRS Inc. was not part of RDS's unitary
						retail business and did not serve an operational function, the stock is
						constitutionally protected investment capital and the net gain is income from
						investment capital.
Example 12: Corporation A has entire net income (ENI) of
						$15,000. Included in that amount is $0 of gross other exempt income and $2,000
						of gross investment income before the gross investment income limitation
						provided for in section
						3-4.5(c)  of this
						Part, broken down as follows:
* $1,700 from constitutionally protected investment
						capital; and
* $300 from actual investment capital.
The gross investment income limitation in section
						3-4.5(c)  of this
						Part provides that gross investment income is limited to greater of the income
						from constitutionally protected investment capital of $1,700 or 8% of ENI of
						$15,000, or $1,200. As a result, Corporation A has $1,700 of gross investment
						income in the tax year.
Corporation A elects to use the safe harbor reduction
						method of this Part when computing investment income and therefore reduces the
						$1,700 of gross investment income by 40%. The result is $1,020 of investment
						income claimed in the tax year.
Example 13: Same facts as example 12, except that
						Corporation A did not elect to use the safe harbor method election and
						determines it has $400 of interest deductions directly or indirectly
						attributable to gross investment income and investment capital.
Corporation A must reduce its gross investment income of
						$1,700 by $400, the total interest deductions directly or indirectly
						attributable to gross investment income and investment capital. The result is
						$1,300 of investment income claimed in the tax year.
Example 14: Corporation A has ENI of $100,000 in the 2021
						tax year. Included in that amount is $0 of gross other exempt income and
						$20,000 of gross investment income before the gross investment income
						limitation in section
						3-4.5(c)  of this
						Part, broken down as follows:
* $2,000 from constitutionally protected investment
						capital;
* $7,000 from actual investment capital; and
* $11,000 from presumed investment capital.
The gross investment income limitation in section
						3-4.5(c)  of this
						Part provides that gross investment income is limited to the greater of the
						$2,000 of the income from constitutionally protected investment capital or 8%
						of ENI, which is $8,000. As a result, Corporation A has gross investment income
						of $8,000 in the 2021 tax year.
Corporation A does not elect to use the safe harbor
						reduction method and determines it has $1,750 of interest deductions directly
						or indirectly attributable to gross investment income and investment
						capital.
Corporation A must reduce the $8,000 of gross investment
						income by $1,750, the total amount of interest deductions directly or
						indirectly attributable to gross investment income and investment capital. The
						result is $6,250 of investment income claimed in the 2021 tax year.
After filing the report for the 2021 tax year,
						Corporation A disposes of its 2021 presumed investment capital before it is
						held for more than one year. Based on the ordering rules in section
						3-4.5(b)  of this
						Part, the $8,000 of gross investment income claimed in the 2021 tax year was
						comprised of $2,000 from constitutionally protected investment capital and
						$6,000 from actual investment capital. Corporation A is not subject to the
						requirements in section
						3-4.4  of this Part because the
						amount of investment income claimed in the 2021 tax year, after applying the
						gross investment income limitation in section
						3-4.5(c)  of this
						Part, did not include income from presumed investment capital that failed to
						meet the holding period requirement.
Example 15: Corporation D has $50,000 in ENI in the 2021
						tax year. Included in that amount is $0 of gross other exempt income and
						$20,000 of gross investment income before the gross investment income
						limitation in section
						3-4.5(c)  of this
						Part, broken down as follows:
* $3,000 from stock A that is actual investment
						capital;
* $2,000 from stock B that is presumed investment
						capital; and
* $15,000 from stock C that is presumed investment
						capital.
The gross investment limitation in section
						3-4.5(c)  of this
						Part provides that gross investment income is limited to the greater of income
						from constitutionally protected investment capital, which is $0, or 8% of ENI,
						which is $4,000. As a result, Corporation D has gross investment income of
						$4,000 in the 2021 tax year.
Corporation D does not elect to use the safe harbor
						reduction method and determines it has $1,170 of interest deductions directly
						or indirectly attributable to gross investment income and investment capital.
						Corporation D must reduce its gross investment income of $4,000 by $1,170, the
						total amount of interest deductions directly or indirectly attributable to
						gross investment income and investment capital. The result is $2,830 in
						investment income claimed in the 2021 tax year.
After filing the report for the 2021 tax year,
						Corporation D disposes of Stock B after it is held for more than one year and
						Stock C before it is held for more than one year. Based on the ordering rules
						in section
						3-4.5(b)  of this
						Part, the $4,000 of gross investment income claimed in the 2021 tax year was
						comprised of $3,000 from Stock A (the actual investment capital) and $1,000
						from Stock B (the presumed investment capital held for more than one year).
						Corporation D is not subject to the requirements in section
						3-4.4  of this Part because the
						amount of investment income claimed in the 2021 tax year, after applying the
						gross investment income limitation in section
						3-4.6(c)  of this
						Part, did not include income from presumed investment capital that failed to
						meet the holding period requirement.
Example 16: InvestCo is a foreign corporation that owns
						a minority interest in Asset Manager, a partnership operating solely in New
						York State that performs a variety of investment activities. InvestCo and Asset
						Manager are not engaged in a unitary business. Aside from its investment in
						Asset Manager, InvestCo has no physical presence or activities in New York
						State.
In 2022, InvestCo sells its interest in Asset Manager
						for a gain. Because the increase in Asset Manager's value was a result of its
						activities within New York State and the benefits provided by New York State,
						InvestCo's interest in Asset Manager is not constitutionally protected
						investment capital. As such, the interest in Asset Manager is business capital
						and the gain from disposition of such interest is business income.