NY TSB-A-99(6)C Corporation Tax 1999-01-27

Is a utility's PSC-mandated transfer of $100 million to its holding company to fund unregulated activities an excess dividend under section 186?

Short answer: No. Rochester Gas and Electric's transfer of $100 million to its holding company, made for the express purpose of fulfilling the PSC's mandate to fund certain unregulated activities under its Competitive Opportunities settlement, is part of the mandated restructuring and does not represent a distribution of the utility's profits. Following Adams Electric, it is not a dividend subject to the section 186 excess dividends 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

Rochester Gas and Electric (RG&E), a section 186 utility reorganizing into a holding company under the PSC's Competitive Opportunities restructuring, would transfer $100 million to the holding company to fund certain unregulated activities, as its PSC settlement (Opinion 98-1) required. It asked whether that transfer is an excess dividend under section 186.

The Department held it is not:

A section 186 dividend is a distribution of profits (Adams Electric).
The $100 million transfer is made for the express purpose of fulfilling the PSC mandate, as part of the restructuring under which RG&E reorganizes into the holding-company structure.
Such a transfer does not represent a distribution of RG&E's profits, so it is not a dividend subject to the excess dividends tax.

What this means for you

Mandated funding transfers are not dividends

A capital transfer the PSC requires the utility to make to its holding company to fund unregulated activities is a restructuring step, not a distribution of profits.

Purpose and mandate matter

Because the transfer exists to satisfy the PSC settlement, it falls within the protected restructuring series rather than being an ordinary distribution to a shareholder.

Consistent with the PowerChoice-era line

This continues the Department's treatment of PSC-mandated restructuring distributions as outside the excess dividends tax.

Common questions

Q: Is the $100 million transfer to the holding company a dividend?
A: No. It is a PSC-mandated restructuring transfer, not a distribution of profits.

Q: Why does the PSC mandate matter?
A: Because distributions made to fulfill the mandated restructuring are not distributions of the utility's profits under Adams Electric.

Q: Would a non-mandated transfer be different?
A: Yes. A distribution to the holding company outside the mandated restructuring could be a taxable excess dividend.

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)
- Rochester Gas and Electric Corporation, TSB-A-99(6)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(6)C
Corporation Tax
January 27, 1999

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C980922C

On September 22, 1998, a Petition for Advisory Opinion was received from Rochester Gas
and Electric Corporation, 89 East Avenue, Rochester, New York 14649.
The issue raised by Petitioner, Rochester Gas and Electric Corporation, is whether
Petitioner's distribution of funds to its holding company for the express purpose of fulfilling the New
York State Public Service Commission's ("PSC") mandate under its Competitive Opportunities
proceeding its commitment as implemented pursuant to its Settlement Agreement, as amended by
PSC Opinion 98-1, to fund certain unregulated activities, will be treated as a dividend subject to the
tax on excess dividends ("Excess Dividends Tax") under section 186 of the Tax Law?
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is a regulated public utility incorporated in New York State that supplies utility
services in western New York. Its principal offices are located in Rochester, New York and its
common stock is publicly traded. In 1998, Petitioner commenced a stock repurchase program
pursuant to which it has repurchased and will continue to repurchase its common stock on the open
market, subject to PSC approval and market conditions.
Under a proposed reorganization that is expected to take effect in the spring of 1999,
Petitioner will become a subsidiary of Holding Company ("Holding Company"). Pursuant to the
proposed reorganization, the following steps will occur:
1. Petitioner will create Holding Company as a first tier, wholly owned subsidiary.
2. In accordance with a plan of share exchange adopted pursuant to section 913 of the
Business Corporation Law, each share of Petitioner's common stock immediately
prior to the effective time of the reorganization will be exchanged for one share of
Holding Company common stock.
3. As a result of the binding share exchange, Holding Company will own 100
percent of Petitioner's common stock. The current preferred shareholders of
Petitioner will remain preferred shareholders of Petitioner after the exchange.
4. Simultaneously with or shortly before the binding share exchange, it is expected
that Petitioner will contribute the stock of certain unregulated subsidiaries to Holding

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Company so that after the binding share exchange such companies will be first tier
subsidiaries of Holding Company.
After the binding share exchange, Holding Company will become a publicly traded company and
will be subject to taxation under Article 9-A of the Tax Law. Before and after the reorganization,
Petitioner will be taxed under section 186 of the Tax Law.
Petitioner is engaging in the proposed reorganization in response to the PSC's direction to
restructure the electric utility industry in New York State. In 1994, the PSC commenced hearings
to explore restructuring the electric utility industry to encourage competition and permit customers
to choose their electricity providers. In PSC Opinion and Order Regarding Competitive
Opportunities for Electric Service, Opinion No. 96-12, issued May 20, 1996, the PSC enunciated its
desire to bring New York consumers the innovations and efficiencies of competitive markets,
together with economic development, lower electric prices and greater consumer choice, while, at
the same time, maintaining the safety and reliability of electric service. In furtherance of this stated
goal, the PSC required Petitioner, along with other utilities, to file plans to create a competitive
electricity market in New York State.
In response to Opinion No. 96-12, Petitioner submitted its plan on October 1, 1996, and the
PSC instituted Case 96-E-0898 for the purpose of examining Petitioner's submission. The initial
Settlement Agreement was filed on April 8, 1997, and after revisions, an Amended and Restated
Settlement Agreement ("Revised Settlement") was reached on October 23, 1997 by Petitioner PSC
staff, Multiple Intervenors, Joint Supporters, and the National Association of Energy Service
Companies. The Revised Settlement was revised by the PSC's Opinion and Order Adopting Terms
of Settlement Subject to Conditions and Changes, Opinion No. 98-1 ("Order"), issued and effective
January 14, 1998. On July 30, 1998, Petitioner submitted to the PSC its Petition to Form a Holding
Company and for Certain Related Transactions.
In response to the Order, and subject to PSC approval of its July 30, 1998 submission,
Petitioner will establish a holding company structure under which one regulated and one or more
unregulated companies may operate. The holding company structure is responsive to the PSC's
directive to promote competition in the utility industry, while at the same time protecting Petitioner's
customers and the regulated businesses from the risks inherent in operating competitive businesses.
This is accomplished by establishing Petitioner, which will operate the regulated businesses, as a
direct subsidiary of Holding Company. Current and future unregulated businesses will operate in
companies that are subsidiaries of Holding Company. This corporate structure will protect the
regulated businesses from the risks inherent in the Holding Company's competitive businesses.
As part of the Revised Settlement with the PSC, as amended by the Order, the PSC has
authorized Petitioner to commit $100 million to fund unregulated activities. Petitioner will fulfill
this commitment by paying funds to Holding Company that are earmarked for the express purpose

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of funding unregulated activities. Holding Company will, in turn, use such funds for the express
purposes set forth in the Revised Settlement, as amended by the Order.
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 of the Tax Law "[a] dividend on corporate
stock implies a division or distribution of corporate profits." In that case, the Court held that the
transfer of a portion of earned surplus to its non-par capital stock account, pursuant to a resolution
of its board of directors, was not a distribution of dividends for tax purposes. Neither money nor
property nor stock dividend went into the hands of stockholders. No stockholder acquired a right
to receive any equivalent of the amount transferred unless further corporate action was taken.
On July 29, 1998, an advisory opinion issued to Central Hudson Gas & Electric Corporation
(Adv Op Comm T&F, July 29, 1998, TSB-A-98(12)C), addressed several questions pertaining to
the tax ramifications resulting from its corporate restructuring under the PSC's Competitive
Opportunities Proceeding. One of the holdings in that opinion stated that "Petitioner's distribution
to Holdco, directly after the Share Exchange, of all of the common stock of the corporations included
in the Existing Subsidiaries Spin-Off and any Genco Spin-Off, is part of the 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 Order (Opinion No. 96-12), and
implemented under the restructuring plan described in the Restated Settlement Agreement dated
January 2, 1998 and modified February 26, 1998, whereby Petitioner is reorganized into the holding
company structure. It does not represent a distribution of the profits of Petitioner. Accordingly,
these restructuring distributions are not treated as dividends subject to the Excess Dividends Tax
under section 186 of the Tax Law." The opinion held further that the answer would not change if
Petitioner invests up to $100 million of equity in the Existing Subsidiaries prior to the Share
Exchange and the Existing Subsidiaries Spin-Off.
In this case, Petitioner's transfer of $100 million to Holding Company for the express purpose
of funding unregulated activities is part of the series of transactions being entered into by Petitioner
as mandated by the PSC pursuant to the Competitive Opportunities Proceeding and the PSC's policy

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objectives set forth in its order Opinion No. 96-12, and implemented under the restructuring plan
described in the Revised Settlement dated October 23, 1997, modified January 14, 1998 and
incorporated into the Order, whereby Petitioner is reorganized into the holding company structure.
This transfer does not represent a distribution of the profits of Petitioner as contemplated in Adams
Electric, supra.
Accordingly, the transfer of the $100 million to Holding Company for the express purpose
of funding unregulated activities pursuant to the Order, would not be treated as a dividend subject
to the Excess Dividends Tax under section 186 of the Tax Law.

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.