A parent and its wholly owned subsidiary have filed combined Article 9-A franchise tax reports since 1972 based on their existing unitary cement/aggregates business. The parent is planning a reorganization that will make the two companies even MORE closely integrated (the subsidiary will sell 100% of its output to the parent and transfer its sales force). Will the companies still qualify to file combined after the reorganization -- and can the Department confirm that in advance?

Plain-English summary

Lone Star Industries, Inc., a Delaware cement, concrete, and construction-aggregates producer, had filed combined Article 9-A franchise tax reports with its wholly owned subsidiary, New York Trap Rock Corporation (NYTR, a quarrying and aggregate-crushing business), since 1972 -- reflecting the two companies' existing unitary operation supplying many of the same northeastern customers. Lone Star was now planning a reorganization that would pull certain NYTR activities into Lone Star's own divisional structure: NYTR would sell 100% of its products to Lone Star (rather than directly to outside customers), and NYTR's sales staff would transfer to Lone Star to sell the combined product range. Lone Star wanted to know whether the two companies could keep filing combined after this closer integration.

Combined filing under Tax Law § 211.4 requires (1) ownership or control of "substantially all" (80%+) of the subsidiary's voting stock, (2) that the corporations are, in substance, parts of a single unitary business, and (3) substantial intercorporate transactions between them (20 NYCRR §§ 6-2.2(b), 6-2.3(a)). The Department found that the post-reorganization facts -- Lone Star's 100% ownership, both companies remaining in the same building-materials line of work, and NYTR selling its ENTIRE output to Lone Star -- would satisfy all three requirements, if anything MORE clearly than before given the increased intercompany sales volume.

But there's a catch: the Department made clear that granting permission to file combined is a discretionary, fact-dependent decision that cannot be made in advance of the actual reorganization. Lone Star would need to complete the reorganization first, then submit a proper written application containing all the information required under 20 NYCRR § 6-2.4, before the Department would actually grant (or deny) permission to continue combined filing.

What this means for you

An Advisory Opinion can confirm you'd MEET the legal tests without actually granting the underlying permission

This ruling illustrates an important limit on Advisory Opinions in the combined-filing context: the Department can tell you your planned facts would satisfy the unitary-business and substantial-intercorporate-transactions tests, while still declining to actually grant combined-filing permission until after you've completed the transaction and formally applied.

Increasing intercompany integration generally strengthens (not weakens) a combined-filing case

If you're restructuring to sell more of a subsidiary's output internally and consolidate sales functions, that tends to make the unitary-business and substantial-intercorporate-transactions showing easier to satisfy, not harder -- but you still need the formal post-reorganization application.

Don't skip the formal application under 20 NYCRR § 6-2.4 just because you got a favorable Advisory Opinion

Even a favorable read on the legal tests in an Advisory Opinion doesn't substitute for actually filing the written application with all required information after the transaction closes.

Common questions

Q: If the Department confirms my planned reorganization would meet the combined-filing tests, do I still need to formally apply afterward?
A: Yes -- under this ruling, permission cannot be granted in advance; you must complete the reorganization and then submit a proper written application under 20 NYCRR § 6-2.4.

Q: Does having a subsidiary sell 100% of its output to the parent help or hurt a combined-filing case?
A: It helps -- it strengthens the "substantial intercorporate transactions" showing required for combined filing under 20 NYCRR § 6-2.3(a).

Citations and references

Statutes and guidance:

• Tax Law § 211.4
• 20 NYCRR § 6-2.2(b)
• 20 NYCRR § 6-2.3(a)-(c)
• 20 NYCRR § 6-2.4

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a81_2c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-81 (2) C
Corporation Tax
July 1, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C810420B

On April 20, 1981, a Petition for Advisory Opinion was received from Lone Star Industries,
Inc., One Greenwich Plaza, Greenwich, Connecticut 06830.
At issue is whether Lone Star Industries, Inc., and its wholly-owned subsidiary, New York
Trap Rock Corporation, will be permitted to continue to make reports on a combined basis for
purposes of the New York State Franchise Tax on Business Corporations, in view of a planned
reorganization.
Lone Star Industries, Inc. (hereinafter "Lone Star"), a Delaware corporation taxable in New
York, is primarily engaged in producing cement, concrete and construction aggregates for the
building industry. New York Trap Rock Corporation (hereinafter "NYTR"), also a Delaware
corporation taxable in New York, is a wholly-owned subsidiary of Lone Star engaged in quarrying
and crushing aggregates.
In the past, Lone Star and NYTR have acted as a unitary business in supplying the needs of
customers in the northeastern United States, with NYTR supplying aggregates to many of the same
vendees to whom Lone Star supplies cement. In recognition of this fact, the related lines of business
of the two companies, the substantial intercorporate transactions involved, and other factors,
permission was received in 1972 to file Business Corporation Franchise Tax reports on a combined
basis.
At the present time, Lone Star proposes to reorganize its operations in the northeast region
of the United States so as to bring within its divisional structure certain activities carried out in the
past by NYTR, with the result that the two companies will be more closely unified in the conduct
of their business and have more intercorporate transactions than previously.
Under this new arrangement NYTR will sell 100% of its products to Lone Star. NYTR's
sales personnel will be transferred to Lone Star and henceforth will sell to customers the entire range
of Lone Star products.
Section 211.4 of of the Tax Law, in pertinent part, grants the Tax Commission discretion to
permit or require the filing of a report on a combined basis by a corporation which owns or controls
either directly or indirectly substantially all the capital stock of one or more corporations.
Section 6-2.2(b) of the Business Corporation Franchise Tax Regulations (20 NYCRR 6­
2.2(b)) provides, in pertinent part, that the term "substantially all" means ownership or control of
80% or more of the voting stock.
Section 6-2.3(a) of the Business Corporation Franchise Tax Regulations (20 NYCRR 62.3(a))
provides, in pertinent part, that in deciding whether to permit or require corporations to file a
combined report, two broad pre-requisities must be satisfied, as follows:
JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-81 (2) C
Corporation Tax
July 1, 1981

"(1)

The corporations are in substance parts of a unitary business conducted by the entire
group of corporations, and

(2)

there are substantial intercorporate transactions among the corporations."

The same regulation, in Section 6-2.3(b), provides that, "In deciding whether each
corporation is a part of a unitary business, the Tax Commission will consider whether the activities
in which the corporation engages are related to the activities of the other corporations in the group,
such as:
(1)

manufacturing or acquiring goods or property for other corporations in the group; or

(2)

selling goods acquired from other corporations in the group; or . . ." 20 NYCRR
6-2.3(b).

Section 6-2.3(c) of such Regulations provides, in pertinent part, that in determining whether
the substantial intercorporate transaction requirement is met, the Tax Commission will consider only
transactions directly connected with the business conducted by the taxpayer such as are described
in the preceding quoted portions of the Business Corporation Franchise Tax Regulations. Service
functions such as accounting, legal and personnel will not be considered.
Since Lone Star owns all of the capital stock of NYTR, since Lone Star will continue to
produce cement, concrete and construction aggregates for use in the building industry and NYTR
will continue to engage in quarrying and crushing aggregates for use in the building industry, since
NYTR will sell 100% of its products to Lone Star, which will sell to customers the entire range of
NYTR's products, Petitioner will meet the requirements of the regulations concerning percentage of
stock ownership, unitary business and substantial intercorporate activities.
However, the granting of permission to file on a combined basis is discretionary and is
dependent upon the actual facts and circumstances of each case. Permission to file a combined
return may not be granted in advance and may only be granted after consummation of the planned
reorganization of functions and upon proper written application containing all of the information
required pursuant to section 6-2.4 of the Business Corporation Franchise Tax Regulations. (20
NYCRR 6-2.4).

DATED: June 30, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau