Is a utility's PSC-mandated transfer of a subsidiary's stock to its new holding company a dividend paid subject to the section 186 excess dividends tax?

Plain-English summary

Niagara Mohawk Power, a section 186 utility, was reorganizing under the PSC's PowerChoice restructuring into a holding company (Holdco) structure. After the binding share exchange, it would transfer the stock of its subsidiary Opinac N.A. up to Holdco. It asked whether that transfer is a "dividend paid" subject to the section 186 excess dividends tax.

The Department held it is not:

• A section 186 dividend is a distribution of profits (Adams Electric).
• The transfer of the Opinac N.A. stock to Holdco is part of the series of transactions mandated by the PSC (Opinion No. 96-12, PowerChoice/Opinion 98-8, and the holding-company compliance order), under which Niagara Mohawk is reorganized into the holding-company structure.
• Like Central Hudson and the NYSEG opinion, such a restructuring distribution does not represent a distribution of the utility's profits, so it is not a dividend subject to the excess dividends tax.

What this means for you

Mandated up-stream stock transfers are restructuring, not dividends

Moving a subsidiary's stock to the new holding company as a required step of the PSC restructuring is not a distribution of profits, so the excess dividends tax does not apply.

The "within the mandate" test again controls

As in the Department's other PowerChoice-era opinions, distributions made as part of the PSC-mandated restructuring series are outside the excess dividends tax.

Adams Electric remains the touchstone

The dividing line is always whether the transaction distributes corporate profits; a compelled restructuring step does not.

Common questions

Q: Is transferring the subsidiary stock to the holding company a dividend?
A: No. As a PSC-mandated restructuring step, it is not a distribution of profits.

Q: What makes the difference?
A: The transfer is part of the required restructuring series, so under Adams Electric it is not a profit distribution.

Q: Does this follow earlier opinions?
A: Yes -- it follows Central Hudson and the NYSEG opinion on mandated restructuring distributions.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 186 (franchise tax; excess dividends tax)
- People ex rel Adams Electric Light Co v Graves, 272 NY 77
- Central Hudson Gas & Electric Corporation, TSB-A-98(12)C (July 29, 1998)
- Niagara Mohawk Power Corporation, TSB-A-99(3)C (Jan. 26, 1999)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1999.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a99_3c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-99(3)C
Corporation Tax
January 26, 1999

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C980715A

On July 15, 1998, a Petition for Advisory Opinion was received from Niagara Mohawk
Power Corporation, 300 Erie Boulevard West, Syracuse, New York 13202.
The issue raised by Petitioner, Niagara Mohawk Power Corporation, is whether the proposed
transfer of Opinac N.A. stock from Petitioner to Holdco after the share exchange will constitute a
"dividend paid" for purposes of the tax imposed under section 186 of the Tax Law on excess
dividends paid.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is an investor-owned public utility company incorporated in New York and it is
primarily engaged in the generation, transmission, distribution and sale of electricity and the
distribution of natural gas in New York. Petitioner presently owns 100 percent of the outstanding
common stock of three domestic corporations: NM Receivable ("NMR"), NM Holdings ("NMH")
and Opinac N.A. ("Opinac NA") Opinac NA owns all of the outstanding common stock of two
corporations: Opinac Energy Corporation ("Opinac"), a Canadian corporation, and Plum Street
Enterprises, Inc. ("PSE"), a Delaware corporation.
Petitioner is one of several utilities in New York State that are restructuring their corporate
organizations and possibly selling off some of their business enterprises to unrelated third parties
in order to make their businesses more competitive and to bring down electric rates paid by
customers.
Petitioner's proposed restructuring, described below, is in response to the Competitive
Opportunities Proceeding instituted in 1994 by the New York Public Service Commission ("PSC")
in Case No. 94-E-0952 ("Competitive Opportunities Proceeding"), which endorsed a fundamental
restructuring of the electric utility industry in New York State based on competition in the generation
and energy services sectors of that industry. The PSC enunciated its policy objectives in an order
(Opinion No. 96-12), issued May 20, 1996 ("Generic Order"). The PSC's Generic Order, among
other things, required all the electric utilities subject to the Competitive Opportunities Proceeding
to file a restructuring plan by October 1, 1996, which plan was required to address, among other
things, the structure of the utility, both in the short and long term, a schedule for the introduction of
retail access and a rate plan to be effective for a significant portion of the transition to retail access.

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On February 24, 1998, the PSC approved a rates and restructuring plan ("PowerChoice") for
Petitioner aimed at reducing electricity rates for many of Petitioner's current customers and allowing
the customers to choose their energy supplier.
Subsequently, on March 20, 1998, the PSC issued to Petitioner, Opinion 98-8, Opinion and
Order Adopting Terms of Settlement Agreement Subject to Modifications and Conditions (Case
94-E-0098 and Case 94-E-0099) (the "Order") which, inter alia, approved PowerChoice. The key
elements of the Order include:
(i) approval of Petitioner's Master Restructuring Agreement ("MRA") (discussed infra),
(ii) a revenue reduction of $111.8 million (exclusive of reductions in the New York State
Gross Receipts Tax) for all customer classes to be phased in over a three-year period
beginning upon the consummation of the MRA,
(iii) a cap on prices to electric customers in years four and five of the five-year rate plan,
(iv) an allowance for Petitioner to recover stranded costs (including the costs associated with
the MRA),
(v) permission by the PSC to establish a regulatory asset, reflecting the recoverable costs of
the MRA which will be amortized over a maximum of ten years ("MRA Regulatory Asset")
(discussed infra),
(vi) an agreement by Petitioner to divest its fossil and hydro electric generating facilities
within a defined time period and retain its nuclear generating facilities with a commitment
to explore their divestiture at a later date,
(vii) an agreement by Petitioner to provide its retail electric customers with the option to
choose their supplier of electricity by no later than December 1999, and
(viii) an agreement to allow Petitioner to form a holding company structure to separate its
utility businesses from its unregulated businesses.
As previously stated, the PSC approved the MRA which allowed Petitioner to terminate,
restructure or amend 27 of its power purchase agreements ("PPAs") with 14 independent power
producers ("IPPs"). Seventeen PPAs were terminated.1 All of the IPPs which had their PPAs with
1

As part of the Public Utility Regulatory Policies Act of 1978, Pub. L. 95-617, 92 Stat,
3117 ("PURPA"), Petitioner was required to offer to purchase electricity from qualifying small
power producers and qualifying cogenerators (collectively "QFs"). Pursuant to PURPA, the

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Petitioner terminated, restated, or amended, qualify as QFs. In exchange for terminating,
restructuring or amending the PPAs, on June 30, 1998, the IPPs received from Petitioner
approximately $3.9 billion in cash, 42.9 million shares of Petitioner's common stock (representing
approximately 23 percent of Petitioner's outstanding shares following issuance), and financial
instruments structured as indexed swap contracts. Petitioner will be permitted to recover its MRA
related costs for book purposes over a ten-year period by establishing the MRA Regulatory Asset
which will be amortized ratably.2 Petitioner's rates as contemplated under PowerChoice are designed
to permit recovery of the MRA Regulatory Asset over this ten-year period. The Order limited the
estimated value of the Regulatory Asset to approximately four billion dollars, resulting in a charge
to earnings of $190 million in 1997.
As a result of making the payments under the MRA, Petitioner will have neither accumulated
earnings and profits, nor current earnings and profits in 1998, the year the payments are made.
Earnings and profits ("E&P") is the standard promulgated under the Internal Revenue Code of 1986
("IRC"), as amended and in effect, to measure whether a corporation's distribution of cash or
property is a dividend for tax purposes.3 For book purposes, Petitioner would no longer have

Federal Energy Regulatory Commission ("FERC") promulgated regulations which mandated that
a utility purchase electricity from a QF at a rate up to the utility's full forecasted avoided cost.
Avoided cost is the additional cost that the utility would have incurred had it instead generated
the purchased electricity itself or obtained it from another source. Specific implementation of the
QF rules under PURPA was delegated in New York to the PSC. In 1981, the PSC passed the
"Six-Cent Law" establishing six cents per kilowatt as the floor on avoided costs for projects less
than 80 megawatt in size. PURPA and the Six-Cent Law, in combination with other factors,
attracted large numbers of QFs to New York State. Since PURPA and the Six-Cent Law passed,
Petitioner has been required to purchase electricity from QFs in quantities in excess of its
demand and at prices in excess of that available to Petitioner by internal generation or for
purchase in the wholesale market. In order to mitigate the escalating costs of the PPAs,
Petitioner entered into negotiations with the QFs to terminate, amend or restate the PPAs. These
negotiations led to the MRA. On June 30, 1998, the MRA was consummated and Petitioner
terminated 17 of its PPA with QFs.
2

A regulatory asset is created by a regulatory directive to defer an otherwise current
expenditure until such time as the asset is to be charged off per the directive. Such charge off
generally coincides with the rate-recovery period allowed the PSC.
3

Section 316(a) of the IRC provides as follows: "For purposes of this subtitle, the term
'dividend' means any distribution of property made by a corporation to its shareholders � (1) out
of its earnings and profits accumulated after February 28, 1913, or (2) out of its earnings and
profits of the taxable year (computed as of the close of the taxable year without diminution by
reason of any distributions made during the taxable year), without regard to the amount of the
earnings and profits at the time the distribution was made. Except as provided in this subtitle,

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retained earnings as well in 1998, but for the specific provision in the Order establishing the MRA
Regulatory Asset which allows Petitioner to account for the payments under the MRA over a ten­
year period. Without the creation of the MRA Regulatory Asset as mandated by the PSC,
Petitioner's retained earnings would be completely eliminated by the payments to IPPs under the
MRA.
As part of PowerChoice, subsequent to the consummation of the MRA, Petitioner will, under
the authority of the Order and with the assent of the PSC, restructure its present corporate structure
into a holding company structure. In order to transform its present corporate structure to a holding
company structure, Petitioner intends to complete the following three transactions in the order
presented ("Restructuring Transactions"):
(1) Petitioner will form a wholly owned subsidiary ("Holdco") in a tax-free transaction that
qualifies under section 351 of the IRC.4
(2) Complete a share exchange between the shareholders of Petitioner pursuant to section
913 of the Business Corporation Law5, whereby shares of Petitioner are exchanged for the
shares of Holdco (no actual physical exchange occurs, but rather the shares are deemed
exchanged).
(3) Petitioner will then transfer all of the common stock of Opinac NA to Holdco.
As a result of the Restructuring Transactions, the former public shareholders of Petitioner
will own all of the outstanding common stock of Holdco, and Petitioner will become a wholly owned
subsidiary of Holdco. Holdco will also own all of the common stock of Opinac NA. Petitioner will

every distribution is made out of earnings and profits to the extent thereof, and from the most
recently accumulated earnings and profits. To the extent that any distribution is, under any
provision of this subchapter, treated as a distribution of property to which section 301 applies,
such distribution shall be treated as a distribution of property for purposes of this subsection."
4

Section 351(a) of the IRC provides, in pertinent part, "No gain or loss shall be
recognized if property is transferred to a corporation by one or more persons solely in exchange
for stock in such corporation and immediately after the exchange such person or persons are in
control (as defined in section 368(c)) of the corporation".
5

A binding share exchange is a transaction in which one corporation, the "acquiring"
corporation, obtains all the shares of a "subject" corporation in an exchange that is binding on the
owners of the shares of the acquired corporation. A share exchange differs from a merger or
consolidation in that the acquired corporation does not lose its identity but continues in existence
as a wholly owned subsidiary of the acquiring corporation.

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continue to own all the common stock of NMR and NMH. Opinac NA will continue to hold all of
the common stock of Opinac and PSE.
Petitioner states that it is presently and will continue to be subject to tax pursuant to sections
186 and 186-a of Article 9 of the Tax Law.
Discussion
Section 186 of the Tax Law imposes a franchise tax upon every corporation, joint-stock
company or association formed for or principally engaged in the business of supplying gas, when
delivered through mains or pipes, or electricity, "for the privilege of exercising its corporate
franchise or carrying on its business in such corporate or organized capacity in this state". The tax
is three-quarters of one percent on the taxpayer's gross earnings from all sources within New York
State, and four and one-half percent on the amount of dividends paid during each year ending on the
thirty-first day of December in excess of four percent on the actual amount of paid-in capital
employed in New York State by the taxpayer.
In People ex rel Adams Electric Light Co v Graves, 272 NY 77,79, the Court of Appeals
stated that under the franchise tax imposed by section 186, "[a] dividend implies a division or
distribution of corporate profits."
Petitioner is one of several utilities in New York State being compelled by the PSC to
reorganize their corporate structure and possibly sell off some of their business to unrelated third
parties pursuant to the PSC's Competitive Opportunities Proceeding and the PSC's policy objectives
set forth in the Generic Order (Opinion No. 96-12). With respect to such mandated restructuring,
the Commissioner of Taxation and Finance has issued Advisory opinions to Central Hudson Gas &
Electric Corporation, Adv Op Comm T&F, July 29, 1998, TSB-A-98(12)C, and New York State
Electric & Gas Corporation, Adv Op Comm T&F, July 29, 1998, TSB-A-98(11)C. In each of those
opinions, it was held that a distribution, to the newly organized holding company, of all of the
common stock of certain subsidiaries of the petitioner implementing the petitioner's restructuring
agreement that was confirmed by a PSC order, does not represent a distribution of the profits of the
petitioner. Accordingly, these restructuring distributions were not treated as dividends subject to the
excess dividends tax under section 186 of the Tax Law.
In this case, Petitioner's distribution to Holdco, directly after the share exchange, of all of the
outstanding common stock of Opinic NA, is part of a series of transactions being entered into by
Petitioner as mandated by the PSC pursuant to the Competitive Opportunities Proceeding and the
PSC's policy objectives set forth in the Generic Order (Opinion No. 96-12), and implemented under
the restructuring plan described in PowerChoice and approved in PSC Opinion No. 98-8 issued
March 20, 1998, the Order, and PSC Order Concerning Compliance Filing Regarding Holding
Company, issued and effective September 30, 1998, whereby Petitioner is reorganized into the
holding company structure. It does not represent a distribution of the profits of Petitioner.

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Accordingly, like Central Hudson, supra, and NYS Gas & Electric, supra, these restructuring
distributions are not treated as dividends subject to the excess dividends tax under section 186 of the
Tax Law.

DATED: January 26, 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.