NY TSB-A-99(12)C Corporation Tax 1999-01-27

Does a federally tax-free liquidation of a subsidiary (IRC 332/337) or a tax-free merger into the parent (IRC 368(a)(1)(A)) require any entire-net-income modification under Article 32 or Article 9-A?

Short answer: No. For both Article 32 (banking corporations, section 1453) and Article 9-A (section 208.9), entire net income starts from federal taxable income, and neither article contains any modification or adjustment for a transaction that is a federally tax-free complete liquidation of a subsidiary under IRC sections 332 and 337 or a tax-free statutory merger of a subsidiary into its parent under IRC section 368(a)(1)(A). So these transactions are treated the same for New York as for federal purposes and require no adjustment to the parent's federal taxable income starting point. (The opinion does not address the subsidiary's own tax.)

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

A practitioner asked whether two federally tax-free transactions create any New York entire net income (ENI) adjustment:
- Alternative One -- a subsidiary is completely liquidated into its parent (a commercial bank), tax-free under IRC sections 332 and 337.
- Alternative Two -- the subsidiary is merged into the parent in a tax-free reorganization under IRC section 368(a)(1)(A).

The Department held there is no New York modification in either case:

Article 32 (banking corporations). ENI under section 1453 starts from federal taxable income, and none of the section 1453(b)-(o) modifications addresses a 332/337 liquidation or a 368(a)(1)(A) merger. So the parent bank treats these transactions the same as federally, with no ENI adjustment.
Article 9-A. ENI under section 208.9 also starts from federal taxable income, and none of the section 208.9(a)-(k) or 210.3(d)/(e) modifications addresses these transactions either. So an Article 9-A parent likewise makes no adjustment.

In short, a federally tax-free liquidation or upstream merger flows through to New York unchanged. The opinion expressly does not address the subsidiary's own tax liability or filing.

What this means for you

Tax-free in, tax-free through

Because both articles begin from federal taxable income and neither adds a modification for these transactions, a federally tax-free 332/337 liquidation or 368(a)(1)(A) merger produces no New York ENI consequence for the parent.

The same answer for banks and general corporations

The result is identical under Article 32 and Article 9-A -- the absence of a relevant modification is the key in both.

The subsidiary is a separate question

This opinion is about the parent's ENI. The subsidiary's own liability and filing requirements are not covered.

Common questions

Q: Does a tax-free subsidiary liquidation create a New York ENI adjustment for the parent?
A: No. Neither Article 32 nor Article 9-A has a modification for an IRC 332/337 liquidation.

Q: What about a tax-free merger into the parent?
A: Same answer -- no modification for an IRC 368(a)(1)(A) merger under either article.

Q: Does this cover the subsidiary's tax?
A: No. The opinion does not address the subsidiary's own tax liability or filing requirements.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 1453 (Article 32 entire net income)
- Tax Law section 208.9 (Article 9-A entire net income)
- IRC sections 332 and 337 (tax-free liquidation of a subsidiary)
- IRC section 368(a)(1)(A) (tax-free statutory merger)
- Ernst & Young LLP, TSB-A-99(12)C (Jan. 27, 1999)

Source

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-99(12)C
Corporation Tax
January 27, 1999

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C981106A

On November 6, 1998, a Petition for Advisory Opinion was received from Ernst & Young
LLP, 787 Seventh Avenue, New York, New York 10019.
The issue raised by Petitioner, Ernst & Young LLP, is whether entire net income will be
recognized by a corporation (1) under Article 32 of the Tax Law, as defined in section 1453 of the
Tax Law, or (2) under Article 9-A of the Tax Law, as defined in section 208.9 of the Tax Law, as
a result of either of the two transactions described below.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Corporation B is a commercial bank doing business in New York State. Corporation B
currently files as a banking corporation pursuant to Article 32 of the Tax Law.
Corporation B owns all of the outstanding stock of a subsidiary ("Subsidiary"). Subsidiary
is a non-New York taxpayer. Subsidiary does not file on a combined report basis with Corporation
B in New York. Subsidiary's assets include, but are not limited to, investment securities and the
stock of companies owned in whole or in part by Subsidiary. For federal income tax purposes,
Subsidiary earns income in the form of interest, dividends and/or deemed dividend distributions
(pursuant to Subpart F of the Internal Revenue Code ("IRC"). Subsidiary has accumulated earnings
and profits which have never been subject to tax in New York State.
Under Alternative One, Subsidiary will be completely liquidated and will distribute all of its
assets to Corporation B. This transaction will qualify as a tax-free liquidation for federal income tax
purposes pursuant to sections 332 of the IRC (complete liquidation of a subsidiary) and 337 of the
IRC (nonrecognition for property distributed to a parent in complete liquidation of a subsidiary).
Under Alternative Two, Subsidiary will be merged into Corporation B in a tax-free
reorganization for federal income tax purposes pursuant to section 368(a)(1)(A) of the IRC (statutory
merger or consolidation).
Discussion
Section 1453(a) of Article 32 of the Tax Law provides that entire net income means total net
income from all sources which shall be the same as the entire taxable income (but not alternative
minimum taxable income) which the taxpayer is required to report to the United States Treasury

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Corporation Tax
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Department subject to the modifications and adjustments provided in section 1453(b) through (o)
of the Tax Law.
Section 18-2.2(b) of the Franchise Tax on Banking Corporations Regulations provides that
federal taxable income means taxable income as defined in section 63 of the IRC, and is the starting
point in computing entire net income. Section 1453(b) through (o) of the Tax Law does not contain
a modification or adjustment for either a transaction which constitutes a tax-free liquidation under
sections 332 and 337 of the IRC, or a transaction which constitutes a tax-free reorganization under
section 368(a)(1)(A) of the IRC.
Section 208.9 of the Tax Law provides that entire net income means total net income from
all sources which shall be presumably the same as the entire taxable income (but not alternative
minimum taxable income) which the taxpayer is required to report to the United States Treasury
Department subject to the modifications and adjustments provided in section 208.9(a) through (k)
of the Tax Law, and section 210.3(d) and (e) of the Tax Law.
Section 3-2.2(b) of the Business Corporation Franchise Tax Regulations provides that federal
taxable income is the starting point in computing entire net income, and generally, federal taxable
income means taxable income as defined in section 63 of the IRC. Sections 208.9(a) through (k) and
210.3(d) and (e) of the Tax Law do not contain a modification or adjustment for either a transaction
which constitutes a tax-free liquidation under sections 332 and 337 of the IRC, or a transaction
which constitutes a tax-free reorganization under section 368(a)(1)(A) of the IRC.
Conclusions
For purposes of Article 32 of the Tax Law, pursuant to section 1453(b) through (o) of the Tax
Law, there is no modification or adjustment applicable to a transaction where, for federal income tax
purposes a subsidiary is completely liquidated and all of the assets are distributed to its parent in a
tax-free liquidation under sections 332 and 337 of the IRC, or where a subsidiary is merged into its
parent in a tax-free reorganization under section 368 (a)(1)(A) of the IRC.
Therefore, for purposes of computing Corporation B's entire net income under section 1453
of the Tax Law, the transactions described in Alternative One and Alternative Two would be treated
the same as they are treated for federal income tax purposes, and they would not require a
modification or adjustment to federal taxable income, the starting point in computing such entire net
income for Corporation B.
Since Corporation B is a commercial bank, it is subject to franchise tax under Article 32 of
the Tax Law, rather than Article 9-A of the Tax Law. However, with respect to a parent corporation
that is taxable under Article 9-A of the Tax Law, there is no modification or adjustment under
sections 208.9(a) through (k) or 210.3(d) and (e) of the Tax Law that is applicable to a transaction

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Corporation Tax
January 27, 1999

where, for federal income tax purposes a subsidiary is completely liquidated and all of the assets are
distributed to its parent in a tax-free liquidation under sections 332 and 337 of the IRC, or where a
subsidiary is merged into its parent in a tax-free reorganization under 368(a)(1)(A) of the IRC.
Therefore, for purposes of computing a parent corporation's entire net income under section
208.9 of the Tax Law, the transactions described in Alternative One and Alternative Two would be
treated the same as they are treated for federal income tax purposes, and they would not require a
modification or adjustment to federal taxable income, the starting point in computing such entire net
income for the parent corporation.
Note that this advisory opinion does not address any tax liability or filing requirements of
the Subsidiary corporation.

DATED: January 27, 1999

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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