Before a proposed reorganization is even completed, can the Tax Department confirm in advance whether a holding company and its operating subsidiary will be allowed to file a combined New York franchise tax report?

Plain-English summary

Anchin, Block & Anchin asked, on behalf of an unnamed client, about a proposed non-tax-motivated financing restructuring. The client ("OLDCO"), a New York City equipment distributor and federal/New York S corporation, owns the building housing its distribution business. The plan: the sole shareholder forms a new holding company ("NEWCO") and contributes his OLDCO stock to it tax-free under IRC section 351, ending OLDCO's S-corporation status. NEWCO then borrows from a commercial lender (secured by the real property and OLDCO's receivables, with the shareholder guaranteeing the loan) and buys the building from OLDCO at fair market value, then leases it back to OLDCO at rent approximating NEWCO's financing and carrying costs. The two corporations would file a consolidated federal return. The question: will NEWCO and OLDCO be permitted to file a combined New York report, eliminating the intercompany gain on the building sale and the intercompany rent income/expense?

The Department's answer: it can't say yet. Combined reporting under Tax Law section 211.4 and Regulations Subpart 6-2 requires three things: (1) the 80%-or-more stock ownership/control test (Regulations 6-2.2(a)); (2) the unitary business test -- related activities, common products/services, shared customers (Regulations 6-2.2(b)); and (3) a finding that filing separately would distort the group's true New York income, business, or capital (Regulations 6-2.3) -- a determination the Department makes only on the actual facts of a completed transaction, per Matter of Coleco Inds. v State Tax Comm, 92 AD2d 1008. Citing Lone Star Industries, TSB-A-81(2)C, New York Futures Exchange/U.S. Surgical, and Schiavone-Bonomo, the Department explained that eligibility can only be assessed after the reorganization is actually completed, using a written request under Regulations section 6-2.4(a) -- filed within 30 days of the close of the taxable year and covering at least the first nine months of actual intercompany activity. Since the transaction here was still only proposed, the Department could not determine in this advisory opinion whether combined reporting will be permitted or required.

What this means for you

Businesses planning a sale-leaseback or holding-company restructuring

Don't expect an advance ruling on combined-reporting eligibility for a not-yet-completed transaction. Plan to file the written combined-report request under Regulations section 6-2.4(a) within 30 days after your first taxable year closes, supported by real operating data (at least nine months' worth) on intercompany transactions.

Accountants and tax professionals

The "distortion" standard under Regulations 6-2.3 is presumed where there are substantial intercorporate transactions (as little as 50% of receipts/expenses tied to qualifying activities with group members) -- a sale-leaseback with ongoing rent between a newly separated holding company and its former operating sub is a textbook candidate, but the Department won't confirm the presumption applies until it can see the actual post-closing facts.

Timing your combined-report request

Because the request deadline runs from the close of the taxable year and must include activity data for the first nine months, coordinate the transaction closing date with your tax year and be ready to compile the required intercompany data promptly.

Common questions

Q: Can the Tax Department pre-approve combined reporting for a transaction that hasn't closed yet?
A: No -- eligibility for combined reporting is a factual determination made only after the reorganization is complete, based on actual intercorporate activity.

Q: What has to be true for a group to even be considered for combined reporting?
A: 80% or more common stock ownership/control, a unitary business relationship between the corporations, and a showing that separate filing would distort the group's true New York income, business, or capital.

Q: When and how do you request permission to file combined?
A: A written request under Regulations section 6-2.4(a), filed no later than 30 days after the close of the taxable year, including detailed information on intercompany activity for at least the first nine months.

Citations and references

Statutes and regulations:

• Tax Law section 211.4 (combined reports, Commissioner's discretion)
• Business Corporation Franchise Tax Regulations sections 6-2.1 through 6-2.4 (combined reporting requirements and procedure)
• IRC section 351 (tax-free contribution to a controlled corporation)

Cases and prior opinions cited in the ruling:

• Matter of Coleco Inds. v State Tax Comm, 92 AD2d 1008, affd 59 NY2d 994
• Lone Star Industries, Inc., TSB-A-81(2)C
• New York Futures Exchange, Inc. and New York Futures Clearing Corporation, TSB-A-82(7)C
• United States Surgical Corporation, TSB-A-89(2)C
• Schiavone-Bonomo Corporation, TSB-A-85(17)C

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1991.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a91_25c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-91 (25) C
Corporation Tax
November 20, 1991

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C910820B

On August 20, 1991, a Petition for Advisory Opinion was received from Anchin, Block &
Anchin, 1375 Broadway, 18th Floor, New York, New York 10018.
The issue raised by Petitioner, Anchin, Block & Anchin, is whether an unnamed client will
be granted permission to file a combined report and thereby eliminate the intercorporate gain on the
sale of real property and eliminate the intercorporate rental income and rental expense.
Petitioner's unnamed client (hereinafter "OLDCO") is a distributor of equipment located in
New York City. It is an S corporation for federal and New York State tax purposes. If the proposed
transaction is completed, OLDCO will cease to be an S corporation.
OLDCO currently owns the building in which its distribution business is conducted. For
non-tax reasons related to its financing requirements, the following transaction is proposed. The sole
shareholder of OLDCO will organize a new corporation (hereinafter "NEWCO") and then contribute
his stock of OLDCO to NEWCO in exchange for the issuance to him of all of the outstanding shares
of NEWCO in a non-taxable transaction pursuant to section 351 of the Internal Revenue Code.
Therefore, immediately after the transaction, NEWCO will be a holding company with no assets
other than 100 percent of the shares of OLDCO, the operating company NEWCO will then borrow
money from a commercial lender and purchase the real property at fair market value from OLDCO.
The commercial lender will have a security interest in the real property and in the accounts
receivable of OLDCO. The sole shareholder will also guarantee the loan from the commercial
lender. NEWCO will rent the property to OLDCO. The rent will approximate the financing and
carrying charges of the building. The two corporations will file a consolidated federal income tax
return.
Section 211.4 of the Tax Law, provides, in pertinent part, that:
"In the discretion of the commissioner of taxation and finance, any taxpayer, which
owns or controls either directly or indirectly substantially all the capital stock of one
or more other corporations. . .may be required or permitted to make a report on a
combined basis covering any such other corporations and setting forth such
information as the commissioner may require. . ."
Section 6-2.1 of the Business Corporation Franchise Tax Regulations (hereinafter
"Regulations") provides that:
TP-9 (9/88)

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(a) Every corporation is a separate taxable entity and shall file its own report. However, the
[Commissioner], in [his] discretion, may require a group of corporations to file a combined report
or may grant permission to a group of corporations to file a combined report where:
(1) the requirement of stock ownership or control . . . is met;
(2) the group of corporations is engaged in a unitary business . . .and
(3) the other requirement set forth in section 6-2.3. . . of this Part . . . has been met.
(b) Each corporation in the combined report must compute and show the tax which would
have been required to be shown if filed on a separate basis.
(c) The decision to permit or require a combined report will be .... base, on the facts in each
case using the requirements set forth in this Part.
Section 6-2.2 of the Regulations provides:
(a) Capital stock requirement. (1) In deciding whether to permit or require a group of
corporations to file a combined report, the [Commissioner] will first determine whether:
(i) the taxpayer owns or controls, either directly or indirectly, substantially all of the
capital stock of all the other corporations which are to be included in the combined report; or
(ii) substantially all of the capital stock of the taxpayer is owned or controlled, either
directly or indirectly, by other corporations which are to be included in the combined report; or
(iii) substantially all of the capital stock of the taxpayer and substantially all of the capital
stock of the other corporations which are to be included in the combined report are owned or
controlled, either directly or indirectly, by the same interests.
(2) The term substantially all means ownership or control of 80 percent or more of the
voting stock. Ownership includes actual or beneficial ownership.
...(b) Unitary business requirement. (1) In deciding whether a corporation is part of a
unitary business, the [Commissioner] will consider whether the activities in which the corporation
engages are related to the activities of the other corporations in the group, such as:
(i) manufacturing or acquiring goods or property or performing services for other
corporations in the group; or

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(ii) selling goods acquired from other corporations in the group; or
(iii) financing sales of other corporations in the group.
(2) The [Commissioner], in deciding whether a corporation is part of a unitary business, will
also consider whether the corporation is engaged in the same or related lines of business as the other
corporations in the group, such as:
(i)
(ii)
(iii)

manufacturing or selling similar products; or
performing similar services; or
performing services for the same customers ....

Section 6-2.3 of the Regulations provides that:
(a) If the capital stock and unitary business requirements described in section 6-2.2 of this
Part have been met, the [Commissioner] may permit or require a group of taxpayers to file a
combined report if reporting on a separate basis distorts the activities, business, income or capital
in New York State of the taxpayers. The activities, business, income or capital of a taxpayer will
be presumed to be distorted when the taxpayer reports on a separate basis if there are substantial
intercorporate transactions among the corporations.
. . . .
(c) In determining whether there are substantial intercorporate transactions, the
[Commissioner] will consider transactions directly connected with the business conducted by the
taxpayer, such as:
(1) manufacturing or acquiring goods or property or performing services for
other corporations in the group;
(2) selling goods acquired from other corporations in the group;
(3) financing sales of other corporations in the group; or
(4) performing related customer services using common facilities and
employees.
Service functions will not be considered when they are incidental to the business of the corporation
providing such service. Service functions include, but are not limited to, accounting, legal and
personnel services. The substantial intercorporate transaction requirement may be met where as little
as 50 percent of a corporation's receipts or expenses are from one or more qualified activities
described in this subdivision. It is not necessary that there be substantial intercorporate transactions
between any one member with every other member of the group. It is, however, essential that each

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corporation have substantial intercorporate transactions with one other corporation or with a
combined or combinable group of corporations.
...(d) If a taxpayer fails to meet the presumption of distortion because it does not have
substantial intercorporate transactions with any corporation described in section 6-2.2 of this Part
or with a combined or combinable group of such corporations and if the filing of a report on a
separate basis nevertheless results in a distortion of such taxpayer's activities, business, income or
capital in New York State then the [Commissioner] will permit or require the filing of a combined
report. If a taxpayer meets the presumption of distortion because it has substantial intercorporate
transactions with any corporation described in section 6-2.2 of this Part or with a combined or
combinable group of such corporations and if the filing of a report on a separate basis does not result
in a distortion of such taxpayer's activities, business, income or capital in New York State, then the
[Commissioner] will not permit or require the filing of a combined report ....
Section 6-2.4(a) of the Regulations provides that:
A taxpayer must make a written request for permission to file a combined report. ...The
request must be received by the [Commissioner] not later than 30 days after the close of its taxable
year. . . . A request to file a combined report must include the following information:
(l) the exact name, address, employer identification number and the state of
incorporation of each corporation to be included in the combined report;
(2) information showing that each of the corporations meets the requirements
of sections 6-2.2 and 6-2.3 of this Part for the current year;
(3) the exact name, address, employer identification number and the state of
incorporation of all corporations (except alien corporations) which meet the capital
stock requirement of subdivision ia) of section 6-2.2 of this Part for the current year,
which are not to be included in the combined report;
(4) for at least the first nine months of the current year submit the following
information:
(i) the nature of the business conducted by each corporation
included in paragraphs (1) and (3) of this subdivision;
(ii) the source and amount of gross receipts of each
corporation and the portion derived from transactions with each of the
other corporations;

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(iii) the source and amount of total purchases, services and
other transactions of each corporation and the portion related to
transactions with each of the other corporations; and
(iv) any other data that shows the degree of involvement of the
corporations with each other; and
(5) a statement providing details as to why a combined report which would
include only the corporations listed in paragraph (1) of this subdivision will equitably
reflect the New York State activities of the corporations which meet the capital stock
requirement of subdivision (a) of section 6-2.2 of this Part and why the corporations
in paragraph (3) of this subdivision should be excluded.
The purpose of the combined reporting provision contained in section 211.4 of the Tax Law
is to avoid distortion of, and more realistically portray true income of, closely related businesses.
(Matter of Coleco Inds. v State Tax Comm, 92 AD2d 1008, affd 59 NY2d 994). A combined report
may not be required unless it will avoid distortion of and more realistically portray true income of
closely related businesses. No single factor is decisive in properly reaching a determination that
requiring combined reporting fulfills the statutory purpose (id. at 1009). Therefore, the existence
of distortion must be decided based on the factual situation in each case.
Several Advisory Opinions have been issued with respect to combined reporting. In Lone
Star Industries, Inc., Adv Op St Tax Comm, June 30, 1981, TSB-A-81(2)C, it was held that the
granting of permission to file on a combined basis is discretionary and is dependent upon the actual
facts and circumstances of each case and that permission to file a combined report may not be
granted in advance. Permission may only be granted after consummation of the planned
reorganization of functions and upon proper written application containing all of the information
required pursuant to section 6-2.4 of the Regulations. This would include detailed information
regarding activities of the corporations for the first nine months of the taxable year.
In New York Futures Exchange, Inc. and New York Futures Clearing Corporation, Adv 0p
St Tax Comm, June 8, 1982, TSB-A-82(7)C and United States Surgical Corporation, Adv Op Comm
T & F, January 31, 1989, TSB-A-89(2)C, it was held that eligibility for filing on a combined basis
is a question of fact that can only be determined on the basis of the actual circumstances of the
corporations for the taxable year.
In Schiavone-Bonomo Corporation, Adv Op St Tax Comm, September 23, 1985, TSB-A­
85(17)C, it was held that the existence of distortion pursuant to section 6-2.3 of the Regulations must
be decided based on the factual situation in each case and is not susceptible of determination in an
Advisory Opinion.
Herein, OLDCO is contemplating a proposed transaction. Under these circumstances,
the requirements of section 6-2.4 of the Regulations have not been met. Therefore, as discussed
in Lone Star Industries, supra., it is not possible to determine, at this point in time,

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whether a combined report including OLDCO and NEWCO will be permitted or required.
In any event, as discussed in Coleco Inds., supra., the determination of whether a combined
report will be permitted or required is a factual matter and as discussed in previous Advisory
Opinions issued to United States Surgical, supra, New York Futures Exchange, supra., and
Schiavone-Bonomo, supra., distortion and other questions of fact are not susceptible of
determination in an Advisory Opinion. An Advisory Opinion merely sets forth the applicability of
pertinent statutory and regulatory provisions to "a specific set of facts" Tax Law, § 171, subd.
twenty-fourth; 20 NYCRR 901.1(a). Therefore, a determination cannot be made in an Advisory
Opinion as to whether a combined report shall be permitted or required.
Accordingly, Petitioner's client, OLDCO and NEWCO, should follow the requirements for
combined reporting as set forth in Subpart 6-2 of the Regulations and should request permission to
file a combined report not later than 30 days after the close of the taxable year and supply all of the
information required by section 6-2.4(a) of the Regulations.

DATED: November 20, 1991

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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