New York Advisory Opinion TSB-A-10(1)C: Are distributions from a charitable remainder unitrust to its corporate beneficiary business income or investment income under Article 9-A?

Plain-English summary

A corporation in the business of investing (real estate, partnerships, securities) had set up a charitable remainder unitrust (CRUT), funding it with about $15 million of publicly-traded stock. The trust required annual payouts of roughly 8% of its value back to the corporation. The corporation asked whether those distributions are business income or investment income under New York's Article 9-A franchise tax -- the distinction matters because business income and investment income are allocated to New York by different percentages.

The Department concluded the distributions are business income. New York divides a corporation's entire net income into business income and investment income; investment income comes from "investment capital," which means stocks, bonds, and other securities. But the corporation here is not receiving income from securities it owns -- it is receiving distributions from a trust it established. Because an interest in a trust is specifically not investment capital (20 NYCRR 3-3.2[a][2][iii]), the payouts cannot be investment income. The fact that the federal ordering rules under IRC section 664(b) may treat part of each distribution as capital gain does not change the New York characterization.

What this means for you

Corporations that fund charitable remainder trusts

Money flowing back to you from a CRUT you created is taxed by New York as ordinary business income for franchise-tax allocation, regardless of how the federal four-tier rules label the pieces of each payment. You are taxed on your interest in the trust, not on the trust's underlying securities.

Accountants and tax professionals

The federal character of a CRUT distribution (ordinary, capital gain, etc.) under IRC section 664(b) does not control the business-vs-investment-income split for Article 9-A. The key move is that a trust interest is excluded from investment capital, so the distributions fall into business income by default.

Common questions

Q: Are charitable remainder trust distributions investment income for New York franchise tax?
A: No. The Department treated them as business income, because the corporation receives an interest in the trust, and a trust interest is not investment capital.

Q: Does it matter that part of the distribution is capital gain federally?
A: No. The federal ordering rules under IRC section 664(b) do not require New York to treat any portion as investment income.

Citations and references

• Tax Law § 208.5 (definition of investment capital); Tax Law § 208.6 (investment income); Tax Law § 208.8 (business income)
• Tax Law § 210.1 (four alternative tax bases)
• IRC § 664(b) (character/ordering of charitable remainder trust distributions)
• 20 NYCRR 3-3.2[a][2][iii] (an interest in a trust is not investment capital)
• Matter of Anametrics, Inc., Tax Appeals Tribunal, December 21, 1989

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2010.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a10_1c.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Counsel
Advisory Opinion Unit

TSB-A-10(1)C
Corporation Tax
March 4, 2010

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C081017A

The Department of Taxation and Finance received a Petition for Advisory Opinion on October 17,
2008 from name redacted. Petitioner asks whether certain distributions from a charitable remainder unitrust
to its corporate beneficiary should be treated as business income or investment income under Article 9-A of
the Tax Law. We conclude that the distributions should be treated by the corporate beneficiary as business
income.
Facts
Petitioner is in the business of investing in different markets such as real estate, partnerships and
securities. Petitioner and its shareholders have made the federal S corporation election. The New York S
corporation election has not been made but it is likely Petitioner will be deemed to have made the New York
election under Tax Law section 660(i).
Petitioner formed a charitable remainder unitrust (the “Trust”) in 2003, and in that year contributed
to the trust about $15,000,000 in publicly-traded common stock with an approximate basis of $400,000. The
Trust agreement requires annual distributions to Petitioner of about 8% of the fair market value of the Trust’s
assets. The Trust sold the contributed stock in 2003 and used the sale proceeds for alternative, and more
diversified, investments and to make the required distributions to Petitioner. The sale produced a substantial
long-term capital gain for federal income tax purposes. Since that sale in 2003, the Trust has had modest
earnings – mostly dividends and interest – from the securities purchased with the sale proceeds from the
contributed stock.
The income currently being earned by the Trust would constitute investment income if it were earned
directly by Petitioner. The gain on the sale of the contributed stock would have been investment income if
the stock had been directly sold, and the gain directly realized by, Petitioner.
Analysis
Corporations taxable under Article 9-A of the Tax Law must compute their tax on four alternative
tax bases, and pay the highest amount computed on those bases plus a tax on subsidiary capital. Tax Law §
210.1 One of these four bases is the entire net income base. The entire net income base is the portion of the
taxpayer’s entire net income allocated within the state. Tax Law § 210.1(a). The starting point for the
determination of entire net income is the corporation's federal taxable income, and amounts are then added
and subtracted as required by statute. See, Tax Law § 208.9. Once entire net income is computed, it is
divided into business income and investment income. See § 3.2-1(b) of the Business Corporation Franchise
Tax Regulations (hereinafter the “Article 9-A Regulations”). In general terms, investment income is income,
including capital gains in excess of capital losses, from investment capital to the extent included in
computing entire net income, less permitted deductions and a portion of net operating losses. Tax Law §
208.6. Business income is the taxpayer’s entire net income minus its investment income. Tax Law § 208.8.
The portion of a corporate taxpayer’s entire net income allocated to the State is determined by multiplying a
taxpayer’s business income by the business allocation percentage, and its investment income by the

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TSB-A-10(1)C
Corporation Tax
March 4, 2010

taxpayer’s investment allocation percentage, and then adding the results together. Article 9-A Regulations
§ 3.2-1(b).
Investment capital means investments in stocks, bonds and other securities, corporate and
governmental, not held for sale to customers in the regular course of business, exclusive of subsidiary capital
and stock issued by the taxpayer. Tax Law § 208.5. Investment capital does not include securities of an
individual, partnership, trust or other nongovernmental entity which is not a corporation. Article 9-A
Regulations § 3-3.2[a][2][iii]. Business capital means all assets of the taxpayer other than investment capital
and subsidiary capital, less certain liabilities and any cash on hand or on deposit that the taxpayer has elected
to treat as investment capital. Tax Law § 208.7(a).
Petitioner receives distributions from the charitable remainder unitrust that it established. Those
distributions are characterized as income to Petitioner for federal tax purposes in accordance with the
ordering rules set forth in IRC § 664(b), and may be treated as ordinary income, capital gain or other income
under that Code provision. While some of that income may be treated as a capital gain, that federal tax
treatment does not require a determination that the distribution, or any portion of it, is investment income.
See Matter of Anametrics, Inc., Tax Appeals Tribunal, December 21, 1989. Petitioner receives distributions
from the trust it established. Petitioner is not receiving income from the assets owned by the trust. Since
investment capital does not include an interest in a trust (Article 9-A Regulations § 3-3.2[a][2][iii]), the
distributions from the charitable remainder unitrust, to the extent included in Petitioner’s entire net income,
are considered business income and are not investment income.

DATED: March 4, 2010

NOTE:

/S/
Jonathan Pessen
Director of Advisory Opinions
Office of Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to
the facts set forth therein and is binding on the Department only with respect to the
person or entity to whom it is issued and only if the person or entity fully and
accurately describes all relevant facts. An Advisory Opinion is based on the law,
regulations, and Department policies in effect as of the date the Opinion is issued or
for the specific time period at issue in the Opinion.