A parent futures exchange wholly owns a clearing subsidiary whose only real function is clearing trades for the exchange's own members -- but in its startup months, 95% of the subsidiary's receipts actually came from investing its own capital contribution, not from clearing fees. Do the parent and subsidiary qualify to file a combined New York franchise tax return?

Plain-English summary

New York Futures Exchange, Inc. (NYFE), a wholly owned subsidiary of the New York Stock Exchange, operates a market where members trade futures in government debt obligations and foreign currencies; it also regulates that market, provides related services, and disseminates trade information. New York Futures Clearing Corporation (NYFCC), NYFE's own wholly owned subsidiary, exists solely to clear and settle NYFE members' trades. The two asked to file a combined Article 9-A franchise tax return starting with the 1980 tax year, NYFE/NYFCC's first.

Combined reporting under Tax Law § 211.4 is discretionary, and the Department's regulations set two requirements beyond 80%-or-greater common ownership (which NYFE/NYFCC clearly met, at 100%): (1) the corporations must be, in substance, parts of a unitary business engaged in the same or related lines of business, and (2) there must be "substantial intercorporate transactions" between them -- generally interpreted as at least 50% of a corporation's receipts coming from activities directly connected to the group's business (service functions like accounting, legal, or personnel don't count toward this threshold).

NYFE and NYFCC met the unitary-business test -- they're plainly engaged in related lines of business (running a futures market and clearing its trades). But during their first four months of operation (August 7 through December 31, 1980), NYFCC took in $367,000 in total receipts, and only 5% of that came from clearing services performed for NYFE and its members. The remaining 95% came from NYFCC simply investing the $5 million capital contribution it had received from NYFE. Because the "substantial intercorporate transactions" test looks at actual qualifying receipts, not capital structure or intent, NYFCC's startup-period numbers fell far short of the roughly 50% threshold, and the Department held combined filing was not available for 1980. It left open whether later years, once NYFCC was doing more actual clearing volume relative to its investment income, might satisfy the test on their own facts.

What this means for you

Newly formed subsidiaries in their startup period

A brand-new subsidiary that hasn't yet ramped up its intended intercompany business (here, clearing services) may fail the "substantial intercorporate transactions" test for combined filing even if it's wholly owned and part of an obviously unitary business -- investment income on initial capital doesn't count toward the qualifying-receipts threshold. Track your subsidiary's actual receipt mix each year rather than assuming eligibility based on ownership and business purpose alone.

Combined-filing eligibility is assessed year by year

The Department explicitly declined to make any determination about years after 1980, noting eligibility "can be determined only on the basis of the actual circumstances of the corporations in such subsequent years." If your subsidiary's intercompany transaction volume grows over time, a "no" for one year doesn't necessarily mean "no" going forward -- reassess the receipts test annually.

Common questions

Q: If a parent and subsidiary are 100% commonly owned and in the same line of business, can they automatically file combined?
A: No. Beyond ownership and the unitary-business test, New York also requires "substantial intercorporate transactions" -- generally around 50% or more of the subsidiary's qualifying receipts coming from activities connected to the group's business.

Q: Does investment income on a capital contribution count toward the intercorporate-transactions threshold?
A: Not in this ruling -- income from NYFCC investing NYFE's capital contribution didn't count as an intercorporate transaction; only the actual clearing-service receipts (a mere 5% of the total) counted.

Q: Can another exchange-and-clearing-subsidiary pair with similar startup economics rely on this Opinion?
A: No. It binds the Department only as to NYFE/NYFCC's own facts for the 1980 tax year and can't be relied upon by other taxpayers, even those with an apparently similar structure.

Citations and references

Statutes and regulations:

• Tax Law § 211.4 (combined reports)
• 20 NYCRR 6-2.2(b) (80% ownership test)
• 20 NYCRR 6-2.3(a), (b), (c) (unitary-business and substantial-intercorporate-transactions tests)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1982.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a82_7c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-82(7)C
Corporation Tax
June 9, 1982

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C810529A

On May 29, 1981, a Petition for Advisory Opinion was received from New York Futures
Exchange, Inc. and New York Futures Clearing Corporation, both located at 20 Broad Street, New
York, New York 10005.
The issue raised is whether the Petitioners may file a combined franchise tax report for the
1980 taxable year, and for subsequent taxable years as well. Petitioners are corporations subject to
tax under Article 9-A of the Tax Law, which imposes the Franchise Tax on Business Corporations.
New York Futures Exchange (hereinafter "NYFE") is a wholly owned subsidiary of the New
York Stock Exchange, Inc. It operates a futures exchange where its members trade futures in
governmental debt obligations and foreign currencies. NYFE also regulates trading in the market
which it provides, supplies market related services for its members and disseminates information
concerning trades to the financial community.
New York Futures Clearing Corporation (hereinafter "NYFCC") is a wholly owned
subsidiary of NYFE. The sole function of NYFCC is to provide clearing and settlement services for
members of NYFE with respect to transactions carried out on NYFE's trading floor.
During the period August 7 through December 31, 1980, the first four months of
NYFE/NYFCC operations, NYFCC's receipts totaled $367,000. Five percent of such receipts were
attributable to services performed by NYFCC for NYFE and its members. Ninety-five percent of
such receipts were attributable to the investment by NYFCC of a $5 million capital contribution
received from NYFE.
Section 211.4 of the Tax Law, contained in Article 9-A, provides, in pertinent part, that:
"In the discretion of the tax commission, any taxpayer, which owns
or controls either directly or indirectly substantially all the capital
stock of one or more other corporations . . . may be required or
permitted to make a report on a combined basis covering any such
other corporations . . . . "
The State Tax Commission has exercised the discretionary powers granted under this
provision by promulgating regulations establishing the requirements for filing on a combined basis.
Thus, section 6-2.2(b) of the Business Corporation Franchise Tax Regulations (20 NYCRR 6-2.2(b))
provides that in determining ownership of capital stock for purposes of section 211.4 of the Tax
Law, "the term 'substantially all' means ownership or control of 80 percent or more of the voting
stock."
JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

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

-2­
TSB-A-82(7)C
Corporation Tax
June 9, 1982

Section 6-2.3(a) of such regulations provides, in part, as follows:
"In deciding whether to permit or require combined reports the
following two broad factors must be met:
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."
Section 6-2.3(b) of the same regulations provides that the Tax Commission will consider a
corporation to be part of a unitary business if it is engaged in the same or related lines of business
as the other corporations in the group.
Section 6-2.3(c) of the same regulations provides, in 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 described in paragraph (1), (2) or (3) of subdivision
(b) of this Section. Service functions, such as accounting, legal and
personnel will not be considered. The substantial intercorporate
transaction requirement may be met where as little as 50 percent of
a corporation's receipts are from any qualified activities . . . . "
Petitioners meet the requirements of section 6-2.2(b) of the Business Corporation Franchise
Tax Regulations inasmuch as NYFE owns 100% of the stock of NYFCC. Petitioners also meet the
first requirement set forth in section 6-2.3(a) of such regulations, inasmuch as the two corporations
are parts of a unitary business and are engaged in related lines of business. However, Petitioners fail
to meet the second requirement contained in section 6-2.3(a) of such regulations, inasmuch as only
five per cent of NYFCC's receipts were attributable to intercorporate transactions. With respect to
the 1980 taxable year, then, Petitioners do not meet the requirements which the State Tax
Commission has established, by virtue of the discretionary authority provided for by section 211.4
of the Tax Law, for filing a combined return. Eligibility for filing on a combined basis for subsequent
years can be determined only on the basis of the actual circumstances of the corporations in such
subsequent years.

DATED: June 8, 1982

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau