For a multi-tier chain of controlled foreign corporations, does a company's share of a lower-tier CFC's Subpart F income keep the character (subsidiary capital vs. investment income) of the company's OWNERSHIP IN THAT LOWER-TIER CFC, or does it instead take on the character of the company's ownership in the FIRST-TIER CFC through which the income is deemed distributed?

Plain-English summary

American International Group, Inc. (AIG), an insurance holding company operating through a chain of controlled foreign corporations (CFCs), had received two earlier advisory opinions: TSB-A-87(23)C (Sept. 1987), holding that federal Subpart F income is deemed a dividend for New York Article 9-A and Article 33 purposes, and TSB-A-88(7)C (Mar. 1988), holding that the taxable 50% portion of a Subpart F deemed dividend from a CFC AIG had NO direct stock investment in (a second-tier CFC owned by AIG's own first-tier CFC) had to be treated as ordinary business income, not investment income, because it wasn't derived from AIG's own investment capital.

This 1992 modification changes that second-tier conclusion, for taxable years beginning on or after January 1, 1992. Rather than analyzing a lower-tier CFC's Subpart F income in isolation, the Department now treats it as flowing UP the ownership chain: a bottom-tier CFC's Subpart F income is deemed a dividend to the next CFC up, which is deemed to have received it and, in turn, deemed to have paid a dividend (including that amount) to the CFC above it, and so on, until the taxpayer's own directly-owned, first-tier CFC is deemed to pay the taxpayer a single dividend bundling its own Subpart F income together with all the income received (deemed) from every lower tier. Because that whole bundled deemed dividend is now attributed to the taxpayer's ownership of the FIRST-TIER CFC, its character (subsidiary capital vs. investment) turns entirely on how much of that first-tier CFC's voting stock the taxpayer directly owns — not on whether the taxpayer has any direct stock stake in the deeper CFC that actually generated the income. A worked numeric example in the ruling shows a domestic corporation owning 100% of one first-tier CFC and 40%/10% of two others, each with different resulting deductions and investment-income splits, based purely on first-tier ownership regardless of the deeper CFC layers involved.

What this means for you

Multinational corporations and insurance groups with multi-tier CFC ownership structures

If your Subpart F income traces back through more than one layer of foreign subsidiaries, don't analyze each tier's ownership separately (as the 1988 opinion required) for tax years 1992 and after. Instead, look only at your direct ownership percentage in the first-tier CFC through which the income is deemed to flow — that percentage now controls the subsidiary-capital-vs-investment-income split for the entire bundled deemed dividend, including amounts originally generated three or four tiers down.

Accountants and tax professionals

This is a genuine reversal, not a mere clarification, of the specific second-tier holding in TSB-A-88(7)C — worth flagging clearly in any file memo, since the earlier opinion's "second-tier income is automatically business income" rule no longer applies for years starting in 1992. Article 33 (insurance franchise tax) is treated as in pari materia with Article 9-A for this purpose, so insurance holding companies get identical treatment. Also note the opinion explicitly disclaims controlling federal tax treatment — this is a New York State Franchise Tax computation only.

Common questions

Q: Does this change apply retroactively to tax years before 1992?
A: No. The modification is expressly limited to "taxable years beginning on or after January 1, 1992" — for earlier years, the original TSB-A-88(7)C second-tier business-income treatment should still control.

Q: Does this affect the treatment of a taxpayer's own first-tier CFC's Subpart F income?
A: No — the first-tier analysis is unchanged from the original opinions (100% subsidiary-capital deduction if majority-owned, 50% deduction otherwise). Only the treatment of income generated by deeper, lower-tier CFCs changed.

Q: Does this modification apply to Article 33 (insurance company) taxpayers the same way?
A: Yes — the opinion states Article 33 is in pari materia with Article 9-A for Subpart F income purposes, so the same rules apply to insurance holding companies.

Q: Can another multinational corporation rely on this specific numeric example?
A: No. This opinion binds the Department only for AIG's facts; the worked example illustrates the methodology but each taxpayer's own ownership chain must be independently analyzed.

Citations and references

Statutes:

• Tax Law § 208.3 (subsidiary definition); § 208.9(a)(1), (2) (dividend deductions)
• IRC § 951 (Subpart F inclusion); § 957 (CFC); § 958 (constructive ownership); § 961 (basis adjustment)
• Treasury Regulations § 1.961-1(c)
• Modifies: TSB-A-87(23)C (Sept. 9, 1987); TSB-A-88(7)C (Mar. 18, 1988)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a87_23_1c_a88_7_1c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-87 (23.1)C
TSB-A-88 (7.1)C
Corporation Tax
November 2, 1992

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
MODIFIED ADVISORY OPINIONS PETITION NO. C870408B
PETITION NO. C871123A
Advisory Opinions were issued to American International Group, Inc., 70 Pine Street, 24th
Floor, New York, New York 10270, on September 9, 1987 with respect to Petition No. C870408B
(TSB-A-87(23)C) and on March 18, 1988 with respect to Petition No. C871123A (TSB-A-88(7)C).
The issues raised by Petitioner, American International Group, Inc., were whether Subpart
F income constitutes a dividend for purposes of Article 9-A and Article 33 of the Tax Law. If
Subpart F income does constitute a dividend and it is attributable to an investment which qualifies
as subsidiary capital, may it be excluded from entire net income. Additionally, if it is attributable to
an investment that does not qualify as subsidiary capital, may 50 percent of it be excluded from
entire net income. Further, does the portion that is included in entire net income constitute
investment income.
After a current review of the issue of whether Subpart F income that is deemed a dividend
is attributable to subsidiary capital and whether the "50 percent of dividends other than from
subsidiaries" that is included in entire net income is investment income, such Advisory Opinions are
modified to the extent discussed herein, for taxable years beginning on or after January 1, 1992.
Petitioner is a holding company which, through its direct and indirect subsidiaries, is
primarily engaged in a wide range of insurance and insurance related activities in the United States
and overseas. Petitioner's foreign operations are conducted by foreign subsidiaries and through
branch operations of domestic subsidiaries. Some of Petitioner's foreign subsidiaries are owned by
Article 9-A subsidiaries and others by Article 33 subsidiaries.
Petitioner's foreign operations in many cases are conducted by its controlled foreign
corporations (hereinafter "CFC") as that term is defined by section 957 of the Internal Revenue Code.
Pursuant to the federal Subpart F income rules, Petitioner is required to report as taxable income
certain of the earnings of its CFCs. Section 958 of the Internal Revenue Code provides that in
determining CFC status, constructive ownership rules apply. Thus, Petitioner reports as Subpart F
income the earnings of directly and indirectly owned CFCs.
For federal income tax purposes, Petitioner reports Subpart F income from CFCs in which
it has an indirect investment in addition to the Subpart F income from CFCs in which it has a direct
investment. The amount reported is in proportion to Petitioner's ownership of each CFC. In addition,
section 961 of the Internal Revenue Code requires that where Petitioner includes in gross income
Subpart F income that has not actually been distributed to it, Petitioner must increase its basis in the
stock of its directly owned CFC by such amount. Further, when an actual distribution of earnings and
profits is made by a CFC, the amount of the distribution that was previously treated as Subpart F
TP-9 (9/88)

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TSB-A-88 (7.1)C
Corporation Tax
November 2, 1992
income is not treated as a dividend, however, Petitioner must reduce its basis in the stock of its
directly owned CFC by such amount. Section 1.961-1(c) of the Treasury Regulations provides the
following example:
Example (1). Domestic corporation M owns 800 of the 1,000 shares of the
one class of stock in controlled foreign corporation R which owns all of the one class
of stock in controlled foreign corporation S. Corporations M, R, and S use the
calendar year as a taxable year. In 1964, S Corporation has $100,000 of earnings and
profits after the payment of $11,250 of foreign income taxes, and $100,000 of
subpart F income. Corporation R has no earnings and profits. With respect to S
Corporation, M Corporation is required to include in gross income $80,000
(800/1,000 X $100,000) under section 951(a), and $9,000 ($80,000/$100,000 X
$11,250) under section 78. On December 31, 1964, M Corporation must increase the
basis of each share of its stock in R Corporation by $100 ($80,000/800).
As discussed in the original Advisory Opinions, for purposes of Article 9-A of the Tax Law,
Subpart F income is deemed to be a dividend that is directly related to ownership of stock. Further,
if a taxpayer under Article 9-A of the Tax Law is the owner of more than 50 percent of the voting
stock of a CFC, the Subpart F income should be considered as being in the nature of a dividend from
subsidiary capital. When computing entire net income, 100 percent of the dividend may be deducted
from the taxpayer's federal taxable income pursuant to sect/on 208.9(a)(1) of the Tax Law.
In addition, it was determined that if a taxpayer under Article 9-A of the Tax Law is the
owner of less than a majority of the voting stock of a CFC, the Subpart F income cannot be
considered to be attributable to a subsidiary of the taxpayer but should be treated as a dividend 50
percent of which may be deducted from the taxpayer's federal taxable income pursuant to section
208.9(a)(2) of the Tax Law.
A review, for New York State Franchise Tax purposes, of the issue of how to determine what
portion of Subpart F income is attributable to subsidiary capital and what portion is investment
income results in the following opinion for taxable years beginning on or after January 1, 1992.
The purpose of the federal enactment of the Subpart F rules was to meet the perceived
problem of deferral of domestic tax through foreign corporate tax havens. Under federal Subpart
F rules, Subpart F income is deemed a dividend paid to the domestic taxpayer even though no
amount was actually distributed during the taxable year. For New York State Franchise Tax
purposes, a dividend may only be paid to a shareholder. That is, the Subpart F income of the lowest
tier CFC is deemed paid to the next higher tier CFC. That CFC, in turn, is deemed to have paid a
Subpart F deemed dividend to the next higher tier CFC and so on, until such Subpart F deemed
dividend is deemed paid by the first tier CFC which is directly owned by the taxpayer. The taxpayer's
directly owned CFC is deemed to have paid a dividend to the taxpayer consisting of the Subpart F
income from such CFC as well as the Subpart F income of the lower tier CFCs. Accordingly, for
New York State Franchise Tax purposes, the Subpart F income that a taxpayer includes in federal

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Corporation Tax
November 2, 1992
gross income is deemed a dividend received from its directly owned CFC. Where a taxpayer includes
Subpart F income in federal gross income, the taxpayer increases the basis in the stock of its directly
owned CFC by the amount of such deemed dividend even though a portion of such deemed dividend
may be related to earnings and profits of a second or lower tier CFC. Further, where the taxpayer
receives a distribution of a CFC's earnings and profits that was previously included in Subpart F
income, such distribution is not treated as a dividend and taxed again, but rather the basis of the
taxpayer's stock in the directly owned CFC must be reduced. This includes a distribution related to
the earnings and profits of a second or lower tier CFC.
Therefore, where a taxpayer under Article 9-A of the Tax Law is the owner of more than 50
percent of the voting stock of a CFC, the taxpayer's pro-rata share of such CFC's Subpart F income
is deemed to be a dividend from such CFC and is attributable to subsidiary capital. In addition,
where such CFC is a shareholder of another CFC (second-tier CFC), the taxpayer's pro-rata share
of the second-tier CFC's Subpart F income is deemed to be a dividend that has been paid to the firsttier CFC. This dividend, in turn, is deemed to have been paid by the first-tier CFC to the taxpayer.
Since the taxpayer's pro-rata share of the second-tier CFC's Subpart F income is deemed paid by the
first-tier CFC to the taxpayer, such deemed dividend is attributable to the taxpayer's ownership in
the first-tier CFC and is attributable to subsidiary capital.
Where a taxpayer under Article 9-A of the Tax Law owns less than 50 percent of the stock
of a CFC, the taxpayer's pro-rata share of such CFC's Subpart F income is deemed to be a dividend
from such CFC, that is attributable to the stock of such CFC and such dividend is investment
income. In addition, where such CFC is a shareholder of another CFC (second-tier CFC), the
taxpayer's pro-rata share of the second-tier CFC's Subpart F income is deemed to be a dividend that
has been paid to the first-tier CFC. This dividend, in turn, is deemed to have been paid by the firsttier CFC to the taxpayer. Since the taxpayer's pro-rata share of the second-tier CFC's Subpart F
income is deemed paid by the first-tier CFC to the taxpayer, such deemed dividend is attributable
to the taxpayer's ownership in the first-tier CFC and is investment income.
When computing entire net income, 100 percent of the Subpart F income that is deemed to
be a dividend that is attributable to subsidiary capital may be deducted from the taxpayer's federal
taxable income pursuant to section 208.9(a)(1) of the Tax Law.
Where the taxpayer is the owner of less than a majority of the voting stock of a CFC, the
Subpart F income cannot be considered to be attributable to a subsidiary of the taxpayer, but is
treated as a dividend 50 percent of which may be deducted from the taxpayer's federal taxable
income pursuant to section 208.9(a)(2) of the Tax Law. The remaining 50 percent of the deemed
dividend that is included in entire net income is investment income.
Since Article 33 of the Tax Law is regarded as being in pari materia with Article 9-A of the
Tax Law with regards to Subpart F income, the principles outlined herein, with respect to Subpart
F income under Article 9-A, also apply to Article 33 of the Tax Law.

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TSB-A-88 (7.1)C
Corporation Tax
November 2, 1992
The following example sets forth, for New York State Franchise Tax purposes, the
application of the principles outlined herein.
Example
Corp A is a domestic corporation that is an Article 9-A taxpayer. Corp A
owns 100% of the voting stock of CFC-B, 40% of the voting stock of CFC-C and
10% of the voting stock of CFC-D. CFC-B owns 20% of the voting stock of CFC-D,
and CFC-C owns the other 70% of the voting stock of CFC-D. For taxable year 1992,
CFC-B has Subpart F income of $50, CFC-C has Subpart F income of $10 and CFCD has Subpart F income of $100.
CFC-D's Subpart F income that is deemed a dividend paid to CFC-B is $20
($100 x 20%). The $20 deemed dividend and CFC-B's own Subpart F income of $50,
a total of $70, is deemed to have been paid by CFC-B to Corp A ($70 x 100%).
CFC-D's Subpart F income that is deemed a dividend paid to CFC-C is $70
($100 x 70%). The portion of CFC-C's own Subpart F income of $10 and the $70
deemed dividend from CFC-D that is deemed to have been paid by CFC-C to Corp
A is $32 ($80 x 40%).
CFC-D's Subpart F income that is deemed a dividend paid directly to Corp
A is $10 ($100 x 10%).
Since CFC-B is a subsidiary of Corp A pursuant to section 208.3 of the Tax
Law, the Subpart F deemed dividend of $70 from CFC-B is attributable to subsidiary
capital an 100 percent of the deemed dividend may be deducted from the taxpayer's
federal taxable income pursuant to section 208.9(a)(1) of the Tax Law.
Corp A does not own more than 50 percent of the stock of CFC-C. Therefore,
CFC-C is not a subsidiary pursuant to section 208.3 of the Tax Law, and the Subpart
F deemed dividend of $32 from CFC-C is not attributable to subsidiary capital.
Section 208.9(a)(2) of the Tax Law provides that 50 percent of the deemed dividend
of $32 from GFC-C may be deducted from Corp A's federal taxable income. The
remaining $16 that is included in entire net income is investment income.
Corp A does not own more than 50 percent of the stock of CFC-D. Therefore,
CFC-D is not a subsidiary pursuant to section 208.3 of the Tax Law, and the Subpart
F deemed dividend of $10 from CFC-D is not attributable to subsidiary capital.
Section 208.9(a)(2) of the Tax Law provides that 50 percent of the deemed dividend
of $10 from CFC-D may be deducted from Corp A's federal taxable income. The
remaining $5 that is included in entire net income is investment income.
Therefore, for taxable years beginning on or after January 1, 1992, when Petitioner or its
domestic subsidiary includes Subpart F income in its computation of federal taxable income, such

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Corporation Tax
November 2, 1992
Subpart F income is deemed to be a dividend for purposes of computing entire net income under
both Article 9-A and Article 33. If Petitioner or its domestic subsidiary is the owner of more than
50 percent of the voting stock of a CFC, the Subpart F income that is deemed a dividend from such
CFC (including Subpart F income such CFC is deemed to have received from a second-tier CFC,
or lower tier CFC through the second-tier CFC) is attributable to subsidiary capital and 100 percent
of such deemed dividend may be deducted from Petitioner's or its domestic subsidiary's federal
taxable income pursuant to section 208.9(a)(1) of the Tax Law.
For taxable years beginning on or after January 1, 1992, when Petitioner or its domestic
subsidiary is the owner of less than a majority of the voting stock of a CFC, and Petitioner or its
domestic subsidiary has Subpart F income that is deemed a dividend from such CFC (including
Subpart F income such CFC is deemed to have received from a second-tier CFC, or lower tier CFC
through the second-tier CFC), 50 percent of such deemed dividend may be deducted from the
subsidiary's federal taxable income pursuant to section 208.9(a)(2) of the Tax Law. The 50 percent
taxable portion of such deemed dividend is attributable to Petitioner's or its domestic subsidiary's
ownership of the CFC and is investment income.
It should be noted, that the opinion rendered herein represents the treatment of Subpart F
income for New York State Franchise Tax purposes and does not necessarily represent the treatment
of such income for federal income tax purposes.

DATED: November 2, 1992

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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