On a combined New York franchise tax return, a parent's investment in subsidiaries included in the combined group has to be eliminated so it isn't taxed as an asset of the combined group. Is that elimination made entirely against the parent's subsidiary capital, or does part of it have to come out of business capital too?

Plain-English summary

C.I.T. Financial Corporation and Combined Subsidiaries filed one of three related petitions on the same day (May 5, 1982) -- this one, Petition A, raised a computational question about combined New York franchise tax reporting under Tax Law § 211.4. (Petition B became TSB-A-83(1)C, on a national-bank subsidiary-capital question, and Petition C became TSB-A-83(7)C, on sourcing finance income.)

A parent corporation filing a combined Article 9-A report with a group of "included" subsidiaries has to eliminate intercorporate stockholdings -- the parent's investment in those subsidiaries -- so the combined group isn't taxed on an asset that, from the group's own perspective, is just an internal transfer. Petitioner asked, using a hypothetical numeric example, exactly how that elimination should be split between the two components of the tax base: subsidiary capital (investments in subsidiary stock, net of related current liabilities) and business capital (everything else).

Working through the hypothetical figures, the Department explained that "subsidiary capital" under § 208.4 is the parent's stock investment reduced by current liabilities attributable to that investment (loans used to fund it, essentially). In Petitioner's example, the parent invested $1,250 in the included subsidiaries but only truly "owned" $1,000 of that free and clear -- the parent had borrowed the other $250, which showed up as a current liability. So the parent's subsidiary capital attributable to the included subsidiaries was only $1,000, even though the full $1,250 investment appeared as an asset. The Department held that the full $1,250 intercorporate stockholding must be eliminated from the combined group's tax base, but it can't all come out of subsidiary capital (which only had $1,000 to eliminate) -- so the remaining $250 has to be eliminated from combined business capital instead. The Department noted that failing to make this second elimination would produce an "anomalous situation" where the combined figures for subsidiary capital plus business capital would exceed total capital, which can't be right.

What this means for you

Corporations filing combined New York franchise tax reports

If your combined group includes subsidiaries you've partly financed with borrowed money, don't assume the § 211.4 elimination for intercorporate stockholdings comes entirely out of subsidiary capital. Where your investment exceeds your subsidiary-capital figure for those subsidiaries (because some of the investment is offset by a current liability), you need to also eliminate the excess from business capital to avoid overstating the combined tax base.

Accountants preparing combined reports (Form CT-3A, Schedule M)

This opinion works through a full numeric example of the combined-capital computation and is a useful worked illustration of how the elimination interacts across subsidiary capital and business capital -- worth reviewing directly if you're preparing a Schedule M combined-capital computation with similarly leveraged intercompany investments.

Common questions

Q: When eliminating a parent's investment in combined subsidiaries, does the elimination always come entirely out of subsidiary capital?
A: Not necessarily. If the investment exceeds the parent's subsidiary-capital figure for those subsidiaries (because part of the investment is offset by a current liability), the excess must also be eliminated from combined business capital.

Q: Why does it matter which capital category absorbs the elimination?
A: Because failing to eliminate the full intercorporate stockholding correctly can cause the combined subsidiary-capital and business-capital figures to add up to more than total capital -- an inconsistent result the statute's elimination requirement is meant to prevent.

Q: Can another combined filer with a similar leveraged-investment structure rely on this Opinion?
A: No. It binds the Department only as to C.I.T. Financial's own hypothetical facts and can't be relied upon by other taxpayers, though the worked computation illustrates the Department's general approach to § 211.4 eliminations.

Citations and references

Statutes:

• Tax Law § 208.4 (subsidiary capital)
• Tax Law § 211.4 (combined reports; elimination of intercorporate stockholdings)
• Tax Law § 210.1(a)(2) (tax on business and investment capital)

Related rulings (same petitioner, filed the same day, May 5, 1982):

• TSB-A-83(1)C -- Petition B, whether a one-bank holding company had to include its national-bank subsidiary's shares in subsidiary capital
• TSB-A-83(7)C -- Petition C, how to source finance-agreement income for the receipts factor

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1983.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a83_3c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-83(3)C
Corporation Tax
June 30, 1983

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C820505A

On May 5, 1982 a Petition for Advisory Opinion was filed by C.I.T. Financial Corporation
and Combined Subsidiaries, 650 Madison Avenue, New York, New York 10022.
Petitioner poses two related questions arising under Article 9-A of the Tax Law, which
imposes New York's Franchise Tax on Business Corporations. The questions raised are as follows:
In filing a Combined Franchise Tax Report as permitted by Tax Law Sec. 211.4, should an
intercompany elimination be allowed for the parent company's total investment in subsidiaries which
are included in the combined report? Should this elimination be allowed on Form CT-3A as a
reduction of Business Capital to the extent that it is not eliminated as Subsidiary Capital?
Petitioner posits a hypothetical example so as to simply frame its questions as to the proper
method of computing business capital and subsidiary capital on a combined report. The facts of such
hypothetical are as follows. A parent corporation has two groups of wholly owned subsidiaries. The
parent files its franchise tax report on a combined basis with one such group (the "included
subsidiaries"), but is not permitted to include on a combined report the second group of subsidiaries
(the "excluded subsidiaries"). The parent has an investment in the included subsidiaries of $1250,
and an investment in the excluded subsidiaries of $750. The parent also has current liabilities of
$250 attributable to its investment in the included subsidiaries, a current liability of $150 with
respect to its investment in the excluded' subsidiaries, and an additional current liability of $600
attributable to neither subsidiary capital nor investment capital. The included subsidiaries have
$2,000 in assets, and $750 in current liabilities. Neither the parent nor the included subsidiaries have
any investment capital, and the included subsidiaries themselves have no subsidiary capital. The
combined group computes its tax on the basis of total business and investment capital, pursuant to
section 210.1(a)(2) of the Tax Law.

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

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TSB-A-83(3)C
Corporation Tax
June 30, 1983

The situation here described is expressed in the following table:
Table 1
FINANCIAL STATEMENTS

Parent

Included
Subsidiaries

Excluded
Subsidiaries

Investment in
Subsidiaries

$2,000

$

$

Other Assets

3,000

2,000

1,000

Total Assets

$5,000

2,000

$1,000

Current
Liabilities

1,000

750

250

Total Capital

$4,000

$1,250

$ 750

-

-

Section 208.4 of the Tax Law defines the term "subsidiary capital," in relevant part, as
"investments in the stock of subsidiaries . . . [reduced by the amount of] any liabilities payable by
their terms on demand or within one year from the date incurred, other than loans or advances
outstanding for more than a year as of any date during the year covered by the report, which are
attributable to subsidiary capital." The parent's subsidiary capital would thus be equal to $2,000
(investments in the stock of subsidiaries) reduced by $400 (current liabilities of the parent
attributable to its investment in all of its subsidiaries), or $1600. This computation is set forth in the
following table:
Table II
SUBSIDIARY CAPITAL

Parent
Investment in
Subsidiaries
Less current liabilities of the
parent attributable to its
investment in its subsidiaries
Subsidiary
Capital

Subsidiary Capital
with respect to
Included
Subsidiaries

Subsidiary Capital
with respect to
Excluded
Subsidiaries

$2,000

$1,250

$750

400

250

150

$1,600

$1,000

$600

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TSB-A-83(3)C
Corporation Tax
June 30, 1983

Section 211.4 of the Tax Law provides for the filing of franchise tax reports on a combined
basis. Under this procedure a parent and a subsidiary or group of subsidiaries are treated as a single
entity. The various elements going to make up the applicable tax base, such as the entire net income,
business capital, investment capital and subsidiary capital of each included corporation, are added
together to arrive at combined figures. However, inasmuch as such an addition would result in a
distortion where any of the factors comprising these elements arises from an intercorporate
transaction, the statute provides for the elimination of such factors arising from intercorporate
transactions. For example, a long-term debt from a subsidiary to its parent might constitute an asset
of the parent, includible on its own individual report, but does not represent an asset of the combined
group and thus is required to be eliminated.
The portion of section 211.4 of the Tax Law applicable to the present matter provides as
follows:
In the case of a combined report the tax shall be measured by the . .
. combined capital of all the corporations included in the report . . .
[In] computing combined business . . . capital intercorporate
stockholdings shall be eliminated and in computing combined
subsidiary capital intercorporate stockholdings shall be eliminated.
Pursuant to this statutory provision, then, the parent's holding of $1250 worth of stock in its included
subsidiaries in our example is not to be included in the base subject to tax. That is, the parent's
ownership of the included subsidiaries is not an asset of the combined group taken as a whole. It is
necessary to determine, then, the manner in which such elimination is to be made. As indicated in
the above-quoted statutory provision, the parent's subsidiary capital is required to be reduced by the
amount of intercorporate stockholdings included therein. The parent's subsidiary capital, as shown
in Table II, supra, is $1600. The portion of such $1600 which represents its investment in the
included subsidiaries is $1000. Accordingly, in computing the subsidiary capital of the combined
group the parent's subsidiary capital of $1600 would be augmented by any subsidiary capital owned
by the included subsidiaries, which in this case is zero, and the resultant figure of $1600 would then
be reduced by making an elimination of $1000 (the investment in the included subsidiaries which
is contained in the parent's subsidiary capital of $1600). In computing combined business capital
(neither the parent nor its subsidiaries having any investment capital) the business capital of the
parent of $2400 (i.e., total capital of $4,000 from Table I reduced by subsidiary capital of $1600
from Table II) is added to the business capital of the included subsidiaries of $1250, to produce a
sum of $3650. Section 211.4 of the Tax Law requires the elimination of inter-corporate
stockholdings "in computing combined business capital." Of the intercorporate stockholding (viz.,
of the parent in the included subsidiaries) of $1250, $1000 was eliminated in the computation of
combined subsidiary capital. The remaining intercorporate stockholding of $250 must therefore be
eliminated from combined business capital, as required by the statute. The correctness of this
interpretation is made manifest by the following consideration. Included in the sum of $3650

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TSB-A-83(3)C
Corporation Tax
June 30, 1983

(combined business capital) is the included subsidiaries' business capital of $1250, representing the
parent's investment in these subsidiaries. It will be remembered, however, that in order to make this
investment the parent used only $1,000 of its own funds and borrowed $250. That is why the parent's
subsidiary capital with respect to the included subsidiaries is only $1,000. Similarly, the combined
group owns, free of current liabilities, only $1,000 of the business capital of the included
subsidiaries. The remaining $250 should not be subjected to taxation. Hence its elimination.
The proper computation of the tax base of the combined group is shown in the following
completed, albeit abbreviated, version of Schedule M (Computation of Combined Capital) of Form
CT-3A (New York State Combined Franchise Tax Report):
Parent

Total Capital
Subsidiary Capital
Business Capital

4000
1600
2400

Included
Subsidiaries

Total

Intercorporate Combined
Eliminations Totals

1250
-­
1250

5250
1600
3650

1250
1000
250

4000
600
3400

It may be noted that to exclude the elimination of $250 from business capital would result in the
anomalous situation of having the sum of the resultant combined business capital ($3650) and
combined subsidiary capital ($600) exceed combined total capital($4000)
Accordingly, under the hypothetical conditions posited by Petitioner, in computing the
combined tax bases there should be an intercorporate elimination of the total amount of the parent's
investment in the included subsidiaries, including an elimination of that portion of such investment
otherwise included in combined business capital.

DATED: June 27, 1983

s/FRANK J. PUCCIA
Director
Technical Services Bureau