Opinion ID: 2587324
Heading Depth: 1
Heading Rank: 1

Heading: the city's tax law

Text: New York City imposes a general corporation tax, based upon net income, on both domestic and foreign corporations [f]or the privilege of doing business, or of employing capital, or of owning or leasing property in the city in a corporate or organized capacity, or of maintaining an office in the city (Administrative Code of City of New York § R46-3.0 [1]). Consistent with this purpose, the City has established rules for allocating corporate income for tax purposes, depending upon the connection between that income and the City. The allocation rules differ for income derived from a taxpayer's business operations (business income) and income derived from a taxpayer's investments (investment income). Allocated income is taxed at a rate of 9%. The portion of a taxpayer's business income allocated to the City is determined by multiplying the taxpayer's total business income by the taxpayer's business allocation percentage (BAP) ( see , Administrative Code § R46-4.0 [3] [a]). The BAP essentially seeks to measure the percentage of the taxpayer's business income derived from property, sales, services and receipts in the City. Thus, if a taxpayer conducts 60% of its business in the City, its BAP is 60%, and it will be taxed on 60% of its business income. The portion of a taxpayer's investment income allocated to the City, in contrast, is derived by measuring the contacts of the issuers of the obligations or securities in which the taxpayer invests, rather than the contacts of the taxpayer. In the case of corporate obligations, this measurement, called the investment allocation percentage (IAP), is the issuer's BAP. Thus, if a taxpayer's investments consist solely of the securities of one corporation, the portion of the taxpayer's investment income to be allocated to the City is determined by multiplying the taxpayer's total investment income by the BAP of the corporation issuing those securities ( see , Administrative Code § R46-4.0 [3] [b]). Although investment income from government obligations is treated somewhat differently, that difference logically flows from the principle that investment income is ordinarily taxable to the extent that the issuer has quantifiable contacts with the City. The City (and the taxpayer) can determine the BAP of an issuer of a corporate obligation simply by examining the issuer's report containing this information (Administrative Code § R46-4.0 [3] [b] [1]), which must be filed by all corporations doing business in the City (Administrative Code § R46-5.0). The absence of any report by a corporate issuer would indicate no business in the City, and the issuer's BAP (which becomes the taxpayer's IAP with respect to that issue) would be zero. Governmental authorities, however, do not file such returns or reports with the City from which the extent of their connection with the City might be measured. Since the City cannot readily quantify those contacts, it has developed the following rules to determine a taxpayer's IAP with respect to investments in government obligations (Administrative Code § R46-4.0 [3] [b] [3]).  Obligations of the 49 States other than New York are allocated wholly outside the City.  Obligations of the Federal Government and of New York State, as well as cash and cash equivalents, are allocated in accordance with the taxpayer's IAP based on all other investments. However, if a taxpayer's IAP is zero  i.e., if a taxpayer has not invested in corporate obligations or has invested in corporate obligations of issuers all of which have BAP's of zero  income from these obligations is allocated based on the taxpayer's BAP. Again applying the principle that investment income is taxable to the extent of the issuer's connection with the City, the theory behind these rules appears to be that States other than New York generally have little if any contact with the City. Therefore, it is appropriate to allocate their obligations entirely outside the City. The Federal Government and New York State, on the other hand, plainly have a substantial presence in the City. But because that presence is unquantified, it is necessary and appropriate to attribute to their obligations the allocation percentage of a taxpayer's investments where the allocation percentages are more than zero and quantifiable. Administrative Code § R46-4.0 (3) (b) sets forth the method for determining a taxpayer's investment allocation percentage. In essence, the taxpayer's IAP is a fraction. The numerator is the combined allocated fair market value of all corporate obligations held by a taxpayer. The denominator is the taxpayer's total investment capital, including the combined fair market value of corporate securities and the obligations of the other 49 States, but excluding obligations of the United States and its instrumentalities and obligations of the state of New York, its political subdivisions and its instrumentalities, as well as cash or cash equivalents, such as bank accounts.