NY TSB-A-94(13)C Corporation Tax 1994-08-29

In a combined Article 9-A report, must the parent still add back interest on debt used to acquire a subsidiary that is itself included in the combined group?

Short answer: It is handled at two levels. When parent P and subsidiary S file a combined Article 9-A report, each must also file its own separate report. On P's separate report, P must make the section 208.9(b)(6) modification -- adding back to federal taxable income the interest on indebtedness directly attributable to acquiring subsidiary S. But on the combined report (CT-3-A), that same interest is allowed as a deduction, because under 20 NYCRR 3-6.6 the investment in S is eliminated from combined subsidiary capital -- so there is no subsidiary capital on the combined report to which the interest expense should be attributed.

Disclaimer: This is an official New York State Department of Taxation and Finance Advisory Opinion (TSB-A), issued by the Office of Counsel at a taxpayer's request. It is limited to the facts set forth in it and binds the Department only with respect to the petitioner to whom it was issued, and only if that petitioner fully and accurately described all relevant facts; another taxpayer cannot rely on it. It reflects the law, regulations, and Department policy in effect when issued and may since have changed. Taxpayer-identifying details are redacted. New York State and local sales taxes are administered centrally by the Department. This summary is informational only and is not legal or tax advice. Consult a licensed New York tax professional about your specific situation.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked at the bottom of this page, or PDF in the sidebar) is the authoritative source for any reliance.

View original ruling (PDF)

Plain-English summary

Richard W. Genetelli asked how the subsidiary-capital interest add-back works when a parent and its subsidiary file a combined Article 9-A report. Background: Article 9-A excludes income, gains, and losses from subsidiary capital from entire net income (section 208.9(a)(1)); to match that exclusion, section 208.9(b)(6) requires a corporation to add back the interest on debt directly attributable to acquiring that subsidiary capital. The question: if parent P borrowed to acquire subsidiary S, and P and S file combined, does P still add back that acquisition interest?

The answer is a two-level mechanic:

On the separate report: When P and S file combined, each must also file its own separate report (20 NYCRR 6-3.2). On P's separate report, P must make the section 208.9(b)(6) modification -- adding back the interest on the indebtedness directly attributable to acquiring S.
On the combined report: When P and S compute combined entire net income (form CT-3-A), the interest P added back on its separate report is allowed as a deduction. That is proper because, under 20 NYCRR 3-6.6, the investment in S (and indebtedness from S) is eliminated in computing combined subsidiary capital -- so there is no subsidiary capital on the combined report to which the interest expense should be attributed.

In short, the add-back applies on P's stand-alone report but is reversed at the combined level because the subsidiary capital itself disappears in combination.

What this means for you

File both: a combined report and a separate report per member

A combined Article 9-A filing does not replace the separate reports -- each corporation in the group files its own (CT-3) plus the group's combined report (CT-3-A).

The add-back happens on the separate report

On the parent's separate report, the section 208.9(b)(6) add-back of acquisition interest still applies, because at that level the subsidiary capital exists.

It is deducted again at the combined level

Because intercompany investments are eliminated in the combined report, there is no subsidiary capital there to support an add-back, so the interest is allowed as a deduction -- avoiding a double disallowance.

Common questions

Q: We borrowed to buy a subsidiary that we now combine with. Do we add back the interest?
A: On your separate report, yes (section 208.9(b)(6)). On the combined report, no -- it is deducted, because the subsidiary capital is eliminated in combination.

Q: Do we still file separate reports if we file combined?
A: Yes. Each member files a separate CT-3 in addition to the combined CT-3-A.

Q: Why is the interest deductible on the combined report?
A: Because 20 NYCRR 3-6.6 eliminates the investment in the included subsidiary, leaving no subsidiary capital on the combined report to which the interest is attributable.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 208.9(a)(1) (entire net income excludes income, gains, and losses from subsidiary capital)
- Tax Law section 208.9(b)(6) (add back interest on indebtedness directly attributable to subsidiary capital)
- Tax Law section 208.4(a) (definition of subsidiary capital)
- 20 NYCRR 3-6.6 (in a combined report, investments in and indebtedness from included subsidiaries are eliminated)
- 20 NYCRR 6-3.2 (a combined report plus a separate report for each member must be filed)

Source

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-94 (13) C
Corporation Tax
August 29, 1994

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C940330A

On March 30, 1994, a Petition for Advisory Opinion was received from Richard W.
Genetelli, c/o Genetelli & Associates, 400 Madison Avenue, Suite 907, New York, New York
10017.
The issue raised by Petitioner, Richard W. Genetelli, is whether for purposes of Article 9-A
of the Tax Law, a corporation that files a combined report with its subsidiary may deduct the interest
expense incurred on the funds borrowed and used to acquire the stock of the subsidiary.
P corporation acquired all of the stock of S corporation. In order to finance the acquisition,
P borrowed funds from an independent third-party. All of the borrowed funds were directly related
to the acquisition of S. P incurs interest on the borrowed funds.
P and S meet all of the requirements for combined reporting in New York, and have been
granted permission to file on such basis. There are no other affiliates of either P or S.
Section 208.9(a)(1) of the Tax Law provides that entire net income shall not include "income,
gains and losses from subsidiary capital . . . ." Section 208.9(b) provides, in pertinent part:
Entire net income shall be determined without the exclusion, deduction or credit of:
...
(6) in the discretion of the [Commissioner of Taxation and Finance], any amount of
interest directly or indirectly and any other amount directly or indirectly attributable
as a carrying charge or otherwise to subsidiary capital or to income, gains or losses
from subsidiary capital.
Subsidiary capital is defined in section 208.4(a) of the Tax Law as "investments in the stock
of subsidiaries and any indebtedness from subsidiaries . . . whether or not evidenced by written
instrument . . . provided, however, that, in the discretion of the commissioner of taxation and
finance, there shall be deducted from subsidiary capital any liabilities which are directly or indirectly
attributable to subsidiary capital".

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TSB-A-94 (13) C
Corporation Tax
August 29, 1994

TP-9 (9/88)

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TSB-A-94 (13) C
Corporation Tax
August 29, 1994

Section 3-6.6 of the Business Corporation Franchise Tax Regulations (hereinafter
"Regulations") provides that "[i]n computing combined subsidiary capital, all investments in the
stock of subsidiaries included in the combined report and any indebtedness from subsidiaries
included in the combined report must be eliminated."
Section 6-3.2 of the Regulations provides that in all cases where a combined report is
permitted, a combined franchise tax report must be submitted on form CT-3-A and a separate
franchise tax report must be filed for each corporation in the combined group on form CT-3.
Accordingly, pursuant to section 6-3.2 of the Regulations, when P and S file on a combined
basis, P and S must each file a separate franchise tax report in addition to the combined report. On
P's separate report, P must make the modification contained in section 208.9(b)(6) of the Tax Law,
that increases Federal taxable income by the amount of interest on indebtedness directly attributable
to the acquisition of subsidiary S. However, when P and S compute combined entire net income on
form CT-3A, the amount included on P's separate report as interest on indebtedness directly
attributable to the acquisition of subsidiary S should be allowed as a deduction. This is proper
because there is no subsidiary capital on the combined report to which to attribute the interest
expense.

DATED: August 29, 1994

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

NOTE: The opinions expressed in Advisory 0pinions
are limited to the facts set forth therein.