NY TSB-A-99(19)C Corporation Tax 1999-06-24

Is the Article 9-A exclusion for dividends received from subsidiary capital limited to the amount of those dividends excluded for federal income tax purposes?

Short answer: No. In computing entire net income under Article 9-A, the exclusion for dividends received from subsidiary capital under section 208.9(a)(1) is not limited to the amount the corporation excluded (or deducted) for federal income tax purposes. On its separate pro forma federal return the corporation adds back any subsidiary-capital dividends it deducted under IRC section 243, then subtracts all dividends, interest and gains from subsidiary capital that were included in gross income under IRC section 61 -- so the full subsidiary-capital dividend is excluded for New York regardless of the federal amount.

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

S. Nobile & Company belongs to an affiliated group that files a federal consolidated return but files separately for New York under Article 9-A. Because New York limits net-operating-loss (NOL) carrybacks, the company carried losses forward in New York; to enlarge its New York NOL deduction it had reduced its federal dividend exclusion on its separate pro forma Form 1120, so it did not exclude 100% of the dividends it received from subsidiaries federally. It asked whether the New York exclusion for dividends from subsidiary capital is capped at the federally excluded amount.

The Department held it is not:

Article 9-A starts from federal taxable income computed on a separate (pro forma) basis (20 NYCRR 3-2.2).
Under section 208.9(b)(2) and 20 NYCRR 3-2.3(a)(1), the corporation adds back to that figure any dividend income for which a federal deduction was allowed (such as the IRC section 243 dividends-received deduction).
Under section 208.9(a)(1) and 20 NYCRR 3-2.4(a)(1), it then subtracts all dividends, interest and gains from subsidiary capital that were included in gross income under IRC section 61.

The net effect is that the entire subsidiary-capital dividend is removed from entire net income for New York -- the exclusion is not tied to how much the company chose to exclude or deduct federally.

What this means for you

The New York exclusion stands on its own

Income, gains and losses from subsidiary capital are excluded from Article 9-A entire net income by statute. The amount you excluded or deducted on a federal return does not limit the New York exclusion.

It is a two-step adjustment on the pro forma return

Add back the federally deducted dividends, then subtract everything received from subsidiary capital. The add-back and the subtraction are governed by different subsections, and together they fully back out subsidiary-capital dividends.

Watch the federal/New York NOL difference

This issue arose precisely because New York treats NOL carrybacks differently from the federal rules. Coordinating the dividend exclusion with the New York NOL deduction is where taxpayers in consolidated groups can go wrong.

Common questions

Q: Is the subsidiary-capital dividend exclusion capped at the federal exclusion amount?
A: No. Section 208.9(a)(1) excludes the full amount of dividends, interest and gains from subsidiary capital regardless of the federal figure.

Q: How is the adjustment made on the return?
A: On the separate pro forma federal return, add back dividends deducted under IRC section 243, then subtract all subsidiary-capital dividends included in gross income under IRC section 61.

Q: Why did the company reduce its federal exclusion in the first place?
A: To increase its New York NOL deduction, because New York could not exceed the federal NOL deduction and limits carrybacks differently.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 208.9 (entire net income)
- Tax Law section 208.9(a)(1) (income, gains and losses from subsidiary capital excluded)
- Tax Law section 208.9(b)(2) (no deduction for dividends except subsidiary capital)
- 20 NYCRR 3-2.2, 3-2.3(a)(1), 3-2.4(a)(1) (Article 9-A entire net income adjustments)
- IRC sections 61, 63, 241, 243 (gross income; corporate dividends-received deduction)
- S. Nobile & Company, TSB-A-99(19)C (June 24, 1999)

Source

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-99(19)C
Corporation Tax
June 24, 1999

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C990323A

On March 23, 1999, a Petition for Advisory Opinion was received from S. Nobile &
Company, 135 West 41st Street, Suite 1600, New York, New York 10036.
The issue raised by Petitioner, S. Nobile & Company, is whether the exclusion allowed for
dividends received from subsidiary capital, pursuant to section 208.9(a)(1) of the Tax Law, in
computing entire net income is limited to the amount excluded for federal income tax purposes.
Petitioner submits the following facts as the basis for this Advisory Opinion.
A corporation which is a member of an affiliated group of corporations is included in a
federal consolidated return with its subsidiaries but files on a separate company basis for purposes
of New York State franchise tax purposes under Article 9-A of the Tax Law.
For federal income tax purposes net operating losses (NOL) were carried back, but, due to
the New York State limitation with respect to NOL carrybacks, such losses were carried forward for
purposes of Article 9-A of the Tax Law. In order to increase the amount of NOL deduction for
purposes of Article 9-A (New York NOL deduction cannot exceed federal NOL deduction), taxpayer
reduced the amount of dividend exclusion and increased the amount of the NOL deduction on its
separate federal proforma return. The corporation did not exclude 100 percent of the dividends it
received from its subsidiaries in computing its federal taxable income at line 30 of its federal
proforma Form 1120.
Discussion
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 which the taxpayer is
required to report to the United States Treasury Department, except as provided in section 208.9 and
section 210.3(d) and (e) of the Tax Law.
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)(2) of the Tax Law provides that entire net income shall be determined
without the deduction of any part of any income from dividends or interest on any kind of stock,
securities or indebtedness, except as provided in section 208.9(a)(1) and (2) of the Tax Law.

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Corporation Tax
June 24, 1999

Section 3-2.2(b) of the Business Corporation Franchise Tax Regulations ("Article 9-A
Regulations") provides that federal taxable income is the starting point in computing entire net
income. Generally, federal taxable income means taxable income as defined in section 63 of the
Internal Revenue Code ("IRC"). After determining federal taxable income, it must be adjusted as
required by sections 3-2.3, 3-2.4, 3-2.5 and 3-2.6 of the Article 9-A Regulations.
Section 63 of the IRC provides that the term "taxable income" means gross income minus
the deductions allowed by Chapter 1 of the IRC. Section 61 of the IRC defines "gross income"
generally, as all income from whatever source derived, and includes dividend income. Section 241
of the IRC provides that in computing taxable income, in addition to the deductions provided in
sections 161 through 198 of the IRC, there shall be allowed other special deductions for
corporations, including a deduction for dividends received by corporations that is contained in
section 243 of the IRC.
Section 3-2.2(c) of the Article 9-A Regulations provides that each corporation included in
a federal consolidated group must compute its federal taxable income for purposes of Article 9-A
of the Tax Law as if such corporation had computed its federal taxable income on a separate basis
for federal income tax purposes (a federal proforma Form 1120 return).
Section 3-2.3(a)(1) of the Article 9-A Regulations provides that in computing entire net
income, federal taxable income must be adjusted by adding to it any part of any income from
dividends or interest on any kind of stock, securities or indebtedness for which a deduction has been
allowed for federal income tax purposes.
Section 3-2.4(a)(1) of the Article 9-A Regulations provides that in computing entire net
income, federal taxable income is adjusted by subtracting from it all dividends, interest and gains
from subsidiary capital with certain exceptions not relevant in this case.
Accordingly, in this case, when the corporation computes its entire net income pursuant to
section 208.9 of the Tax Law, the corporation's starting point, pursuant to section 3-2.2(b) of the
Article 9-A Regulations, is federal taxable income, as determined under section 63 of the IRC. Since
the corporation is included in a federal consolidated group, but files separately for purposes of
Article 9-A of the Tax Law, pursuant to section 3-2.2(c) of the Article 9-A Regulations, the
corporation must compute its federal taxable income for purposes of Article 9-A of the Tax Law as
if such corporation had computed its federal taxable income on a separate basis for federal income
tax purposes. In computing such federal taxable income, dividends are included in gross income
pursuant to section 61 of the IRC, and under section 243 of the IRC, a special deduction is allowed
for dividends received by corporations.
After determining its federal taxable income on a proforma basis, the corporation must make
the adjustment as required by section 208.9(b)(2) of the Tax Law and section 3-2.3(a)(1) of the

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June 24, 1999

Article 9-A Regulations to add back to such federal taxable income the amount of dividends received
from subsidiary capital that was subtracted as a special deduction pursuant to section 243 of the IRC.
The corporation must also make the adjustment as required by section 208.9(a)(1) of the Tax Law
and section 3-2.4(a)(1) of the Article 9-A Regulations to subtract from such federal taxable income,
the amount of dividends received from subsidiary capital that was included in gross income under
section 61 of the IRC.

DATED: June 24, 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.