May a New York parent file a combined Article 9-A report with its wholly owned foreign sales corporation subsidiary organized in a U.S. possession?

Plain-English summary

Price Waterhouse asked whether a New York parent corporation may file a combined Article 9-A report with its wholly owned subsidiary -- a foreign sales corporation (FSC) organized under the laws of the U.S. Virgin Islands (electing FSC status under IRC section 922). The parent and FSC are engaged in a unitary business with substantial intercorporate transactions, and both are profitable.

A U.S. possession is not a foreign country. So the FSC is a foreign corporation but not an alien corporation. That matters because alien corporations historically could not be combined -- but section 6-2.7 was amended on December 9, 1992 to allow all FSCs, including alien ones, to be included in a combined report.

The Commissioner may require or permit the combination. Under section 211.4, the Commissioner has discretion over combined reporting; a foreign corporation not itself taxable in New York is included only if the Commissioner determines it is necessary (section 6-2.5). Given the unitary business and substantial intercorporate transactions, the Commissioner is not precluded from requiring or permitting the FSC's inclusion in the parent's combined report -- even for years before 1993. But whether a combined report is actually necessary is a question of fact an advisory opinion cannot finally decide.

This is the companion to Atlantic Control Systems, TSB-A-93(3)C, decided the same week on the same U.S.-possession-FSC points.

What this means for you

A U.S.-possession FSC is foreign but not alien

Because a U.S. possession is not a foreign country, a Virgin Islands FSC is not an alien corporation -- and all FSCs may now be included in a combined report.

Combination of a unitary FSC is within the Commissioner's discretion

With a unitary business and substantial intercorporate transactions, the Commissioner may require or permit combining the FSC with its New York parent.

Whether to combine is factual

An advisory opinion cannot decide whether a combined report is necessary; that depends on the facts.

Common questions

Q: Can we combine our New York parent with its U.S. Virgin Islands FSC?
A: Possibly. A U.S.-possession FSC is foreign but not alien, and the Commissioner may require or permit combining a unitary FSC subsidiary with substantial intercorporate transactions.

Q: Does it matter that the FSC is in a U.S. possession?
A: Yes -- it makes the FSC foreign but not alien, and the regulations now allow all FSCs to be combined.

Q: Is combination automatic?
A: No. It is within the Commissioner's discretion and depends on whether a combined report is necessary -- a question of fact.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 211.4 (combined reports)
- 20 NYCRR 6-2.7 (FSCs may be included in a combined report; amended December 9, 1992)
- 20 NYCRR 6-2.5 (foreign corporation not taxable in New York included only if needed)
- IRC section 922 (foreign sales corporation election)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1993.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a93_1c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-93 (1) C
Corporation Tax
January 5, 1993

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C920728A

On July 28, 1992, a Petition for Advisory Opinion was received from Price Waterhouse, 1900
Lincoln First Tower, Rochester, New York 14604.
The issue raised by Petitioner, Price Waterhouse, is whether under Article 9-A of the Tax
Law, a domestic corporation is eligible to file a combined report with its subsidiary that is
incorporated under the laws of the U.S. Virgin Islands.
A New York corporation (hereinafter "Parent") is a C-corporation for federal and New York
State tax purposes and owns 100 percent of the outstanding stock of its subsidiary corporation. The
subsidiary corporation is organized under the laws of the U.S. Virgin Islands and has elected, under
section 922 of the Internal Revenue Code, to be treated as a foreign sales corporation (hereinafter
"FSC").
The Parent and FSC are engaged in a unitary business and they have substantial
intercorporate transactions. Both Parent and FSC are profitable.
Section 211.4 of the Tax Law authorizes the Commissioner of Taxation and Finance
(hereinafter "Commissioner"), in his discretion, to require or permit a parent corporation and its
wholly-owned subsidiaries to file a franchise tax report on a combined basis. However, a combined
report including a corporation not a taxpayer (i.e., a foreign corporation not doing business in New
York) cannot be required unless the Commissioner deems such a report necessary, in order to
properly reflect the tax liability under Article 9-A because there are intercompany transactions or
some agreement, understanding, arrangement 'or transaction referred to in section 211.5 of the Tax
Law.
Section 6-2.5(b) of the Business Corporation Franchise Tax Regulations (hereinafter
"Regulations") provides that an alien corporation may not be included in a combined report.
However, for taxable years beginning on or after January 1, 1993, section 6-2.5(b) of the Regulations
was amended on December 9, 1992 to provide that all FSCs, including those that are alien
corporations, may be included in a combined report.
Section 1-2.3(a) of the Regulations states that:
[t]he term "corporation" means an entity created as such under the laws of the United
States, any state, territory or possession thereof, the District of Columbia, or any
foreign country ....
(1) The term "domestic corporation" means a corporation
incorporated by or under the laws of the State or colony of New York
State.
TP-9 (9/88)

-2­
TSB-A-93 (1) C
Corporation Tax
January 5, 1993

(2) The term "foreign corporation" means a corporation which is not
a domestic corporation. (Emphasis added)
Accordingly, a possession of the United States is not a foreign country for purposes of Article
9-A of the Tax Law.
Section 3-8.3 of the Regulations defines an "alien corporation" as a corporation organized
under the laws of a country other than the United States.
Herein, FSC is organized in the U.S. Virgin Islands which is a possession of the United
States. Therefore, FSC is a foreign corporation but is not an alien corporation.
Section 6-2.5 of the Regulations provides that a foreign corporation not subject to tax in New
York will not be required to be included in a combined report unless the Commissioner determines
that inclusion of the corporation is necessary to properly reflect the tax liability of one or more
taxpayers included in the group either because of substantial intercorporate transactions or because
of some agreement, understanding, arrangement or transaction whereby the activity, business,
income or capital of any taxpayer is improperly or inaccurately reflected.
Accordingly, for all taxable years, including those beginning prior to January 1, 1993, the
Commissioner is not precluded from requiring or permitting the inclusion of FSC in a combined
report of Parent under the circumstances described herein if the Commissioner determines that
inclusion is necessary to properly reflect the tax liability of Parent.
Whether the inclusion of a corporation in a combined report is necessary is a question of fact
not susceptible of determination in an Advisory Opinion. An Advisory Opinion merely sets forth
the applicability of pertinent statutory and regulatory provisions to a "specified set of facts". Tax
Law, § 171, subd. twenty-fourth; 20 NYCRR 2376.1(a). Therefore, a determination cannot be made
in an Advisory Opinion as to whether a combined report shall be permitted or required.

DATED: January 5, 1993

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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