Is a section 183 utility's liquidation into its parent (or conversion to a single-member LLC) treated as paying a dividend for the section 183 franchise tax?

Plain-English summary

Pegasus Cellular Telephone Company is a utility taxed under section 183 of Article 9 of the New York Tax Law. As part of a corporate-group restructuring, it would either be liquidated into its parent or converted into a single-member LLC (treated as a branch of the parent). For federal purposes, either route is a liquidating dividend from a complete liquidation of a subsidiary under IRC section 332. The questions: does that liquidating distribution count as the payment of a "dividend" when computing the section 183 franchise tax, and does the answer change depending on whether IRC section 332 or section 368 applies?

The Department held the liquidation does NOT create a "dividend" for section 183:

• Section 183 imposes a franchise tax on transportation and transmission corporations; one of the three alternative computations is based on the value of capital stock on which dividends are paid at 6% or more. "Dividends paid" is not defined in section 183.
• Distributions in complete or partial liquidation (in redemption of stock) have historically not been treated as "dividends." A dividend is a recurrent return on stock paid by a going corporation that does not reduce the holder's stock (Hellmich v. Hellman, 276 US 233); a distribution of assets winding up the corporation is not (People ex rel. Ridgewood Land & Improvement Co. v. Saxe).
• Therefore a liquidating dividend from either the liquidation into the parent or the SMLLC conversion (with the petitioner dissolved) is not a "dividend" for purposes of computing the section 183 tax.
• The result is the same whether IRC section 332 (liquidations) or section 368 (reorganizations) governs the federal transaction.

What this means for you

Liquidations are not "dividends paid" under section 183

A utility's section 183 tax can rise with dividends paid at 6% or more on its capital stock. A liquidating distribution that winds the company up -- whether a straight liquidation into the parent or a conversion to a disregarded SMLLC -- is not a "dividend" for that calculation. It is a return of capital in redemption of the stock interest, not a recurrent return to a going concern.

Article 9 is not federally conformed

Article 9 does not piggyback on the Internal Revenue Code. The Department looks to section 183's own terms, case law, and GAAP -- so the federal "liquidating dividend" label does not, by itself, create a New York "dividend." It happens to reach the same place here.

Form of the federal transaction does not matter

Whether the deal qualifies federally as a section 332 liquidation or a section 368 reorganization, the section 183 treatment is the same: no dividend.

Common questions

Q: Does liquidating a section 183 utility into its parent count as paying a dividend?
A: No. A liquidating distribution in redemption of stock is not a "dividend" for the section 183 franchise tax.

Q: What about converting it into a single-member LLC owned by the parent?
A: Same answer -- the conversion/dissolution is a liquidating distribution, not a dividend.

Q: Does it matter whether IRC section 332 or section 368 applies?
A: No. The section 183 treatment does not differ between a federal liquidation and a federal reorganization.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 183 (Article 9 franchise tax on transportation and transmission corporations; dividends-paid computation)
- Tax Law former section 182 (predecessor franchise tax)
- Internal Revenue Code section 332 (complete liquidation of subsidiary)
- Internal Revenue Code section 368 (corporate reorganizations)
- Hellmich v. Hellman, 276 US 233 (meaning of dividend)
- People ex rel. Ridgewood Land & Improvement Co. v. Saxe, 174 App Div 344, affd 219 NY 637
- Pegasus Cellular Telephone Company, TSB-A-01(2)C (Jan. 10, 2001)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2001.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a01_2c.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-01(2)C
Corporation Tax
January 10, 2001

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C001114A

On November 14, 2000, a Petition for Advisory Opinion was received from Pegasus Cellular
Telephone Company, c/o SBC Communications Inc., 175 E. Houston, Room 8-H-60, San Antonio,
Texas 78205.
The issues raised by Petitioner, Pegasus Cellular Telephone Company, are:
1. Whether the liquidation of Petitioner into its parent company would be considered the
payment of a dividend for purposes of computing tax under section 183 of the Tax Law.
2. Whether the conversion of Petitioner to a single member limited liability company
(“SMLLC”) owned by the parent would be considered the payment of a dividend for
purposes of computing tax under section 183 of the Tax Law.
3. Whether the treatment of a liquidating dividend under section 183 differs depending on
whether section 332 of the Internal Revenue Code (“IRC”) (under liquidations) or 368 of the
IRC (under reorganizations) applies.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is a utility subject to tax under section 183 of Article 9 of the Tax Law, and is a
subsidiary within a corporate group. The corporate group needs to reconfigure its corporate structure
to become better aligned with future business plans. To this end, one of the following two methods
will be employed for restructuring:
(a) liquidating Petitioner into its parent, or
(b) converting Petitioner into a SMLLC which would then be treated as a
branch of its parent.
For federal income tax purposes, both method (a) and method (b) above will likely result in
a liquidating dividend from a complete liquidation of a subsidiary under section 332 of the IRC.
Discussion
The provisions of Article 9 of the Tax Law are not federally conformed. Therefore, while
the treatment of an item under the provisions of the IRC may be considered, the determination of

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Corporation Tax
January 10, 2001

the treatment of such item for purposes of section 183 is made using the definitions contained in
such section, including case law in the area, and applying generally accepted accounting principles.
Section 183 of Article 9 of the Tax Law provides for a franchise tax on transportation and
transmission corporations based on the net value of issued capital stock employed in New York
State. The franchise tax required to be paid under section 183 is the highest tax computed by the
following three methods:
1. Allocated value of issued capital stock multiplied by the tax rate of 1.5
mills.
2. Allocated value of issued capital stock on which dividends are paid at a
rate of 6 percent or more multiplied by the tax rate of .375 mills for each 1 percent
of dividends paid. The rate of 1.5 mills is applied to capital stock on which
dividends are not paid or are paid at a rate of less than 6 percent.
3. Minimum tax of $75.
The phrase "dividends paid" is not defined in section 183 of the Tax Law. However,
historically, distributions in complete or partial liquidation of corporations have not been construed
to constitute the payment of “dividends” where they are in redemption for stock interests. The
Supreme Court of the United States stated in Hellmich v Hellman, 276 US 233, 237, that the term
“dividends” in the sense in which it is “generally understood and used, refers to the recurrent return
upon stock paid to stockholders by a going corporation in the ordinary course of business which does
not reduce their stock holdings and leaves them in a position to enjoy future returns upon the same
stock.”
This basic concept of the distinction between the declaration and payment of “dividends” and
payments in liquidation of a corporation by distribution of its assets has been recognized and
followed by the New York courts with respect to corporate taxation. With respect to former section
182 of Article 9 of the Tax Law, as in effect for taxable year 1913, which provided a franchise tax
on corporations, and imposed a tax similar to the tax imposed under section 183, the Appellate
Division of the New York State Supreme Court commented on the meaning of the word “dividends”
in People ex rel Ridgewood Land & Improvement Co, v Saxe et al, (174 App Div 344, 348, affd 219
NY 637). The Appellate Division stated:
The tax is “for the privilege of doing business or exercising its corporate
franchises in this State” (§182), and when it refers to the “dividends made or declared
upon the par value of the capital stock,” the statute refers naturally to the dividends
growing out of the use of the capital stock, and has no reference to the action of the
corporation in distributing its capital to its stockholders when all of the debts have

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Corporation Tax
January 10, 2001

been paid and the purposes of the incorporation are at an end. This view becomes
certain when we read the provisions of section 28 of the Stock Corporation Law
(Consol. Laws, chap. 59; Laws of 1909, chap. 61), which provides that “The directors
of a stock corporation shall not make dividends, except from the surplus profits
arising from the business of such corporation, nor divide, withdraw or in any way pay
to the stockholders, or any of them, any part of the capital of such corporation, or
reduce its capital stock except as authorized by law... But this section shall not
prevent a division and distribution of the assets of any such corporation remaining
after the payment of all its debts and liabilities upon the dissolution of such
corporation or the expiration of its charter,” etc. The Legislature forbids the making
of dividends except from the surplus profits arising from the business of such
corporation, and speaks intelligently of the “division and distributions of the assets,”
and these two statutes, dealing with the power to make dividends and the taxation of
the capital stock based upon the making or declaring of dividends, are to be
understood as using the word “dividends” in the same sense, unless the context
clearly points to the contrary. (Perkins v Smith, 116 NY 441.)
In this case, Petitioner will either be liquidated into its parent, or be converted into a SMLLC
that is owned by its parent. Petitioner states that for federal income tax purposes either transaction
will result in a liquidating dividend under section 332 of the IRC which provides that “no gain or
loss shall be recognized on the receipt by a corporation of property distributed in complete
liquidation of another corporation.”
Based on Hellmich, supra, and Ridgewood, supra, a liquidating dividend resulting from either
the liquidation of Petitioner into its parent, or the conversion of Petitioner into a SMLLC owned by
its parent, whereby Petitioner will be dissolved, will not constitute a “dividend” for purposes of
computing the tax imposed under section 183 of the Tax Law. Further, the treatment of a liquidating
dividend under section 183 will not differ whether the provisions of section 332 or section 368 of
the IRC apply for federal income tax purposes.

DATED: January 10, 2001

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist III
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.