If a corporation is part of a federal consolidated group but files its own separate New York franchise tax report, does it report its allocated 'share' of the group's consolidated federal taxable income, or the income it would have reported had it filed its own separate federal return?

Plain-English summary

An accountant asked a general structural question on behalf of unnamed corporate clients: when several affiliated corporations file a single, consolidated FEDERAL income tax return together, but each files its OWN separate New York State franchise tax report, how does each corporation compute its "entire net income" for New York purposes? Two possibilities: (1) allocate to each corporation its proportionate "share" of the consolidated group's federal taxable income, or (2) have each corporation recompute the income it WOULD have reported had it filed its own standalone federal return.

The Department confirmed the second approach. Tax Law § 210.1(a) computes the franchise tax on "entire net income" (among other alternative bases), and § 208.9 defines entire net income as presumptively the same as the Federal taxable income the taxpayer is "required to report to the United States treasury department." 20 NYCRR 3-2.2(b) ties that Federal taxable income concept to the definition in IRC § 63 -- which is inherently a standalone, per-corporation concept, not a consolidated-group concept. So a corporation that's part of a federal consolidated group, but files separately for New York, computes its Federal taxable income figure as if it had filed its own separate federal return, irrespective of its actual participation in the group's consolidated federal filing. The Department gave two concrete examples of what that means in practice: such a corporation must compute its own capital loss and net operating loss deductions as if filing a separate federal return (20 NYCRR 3-7.1(a), 3-8.1(a)), rather than relying on however those items were computed or absorbed at the consolidated group level; and the same standalone-computation principle governs charitable contribution deduction limits, which apply per-corporation rather than at the group level.

What this means for you

Corporate groups that file federal consolidated but New York separate

Don't try to allocate a "share" of the federal group's consolidated taxable income to each New York-separate-filing member. Instead, each member must independently recompute its Federal taxable income figure as though it had never joined the consolidated group -- including recomputing its own capital loss, net operating loss, and charitable contribution items on a standalone basis.

A foundational rule that recurs across many later Opinions

This standalone-computation principle is the general rule behind more specific applications the Department reaches in later Opinions -- for example, TSB-A-84(14)C (issued about five months later) applies this exact same principle to determine that a corporation filing separately must include, in its hypothetical standalone federal taxable income, an item that a federal consolidated-return regulation would otherwise have eliminated at the group level -- before then applying New York's own separate subsidiary-capital exclusion to that item.

Common questions

Q: My company files federal taxes as part of a consolidated group but files its own separate New York franchise tax report. How do I compute my New York income?
A: Recompute your Federal taxable income as if you had filed your own standalone federal return -- don't use an allocated share of the consolidated group's federal taxable income.

Q: Does this affect items like net operating losses or capital losses?
A: Yes -- compute those as if you filed a separate federal return, not based on how they were absorbed or computed at the consolidated group level.

Q: Can another taxpayer rely on this general guidance?
A: No. It binds the Department only as to the facts presented by this specific inquiry and can't be relied upon by other taxpayers, even those asking an identical structural question -- though the Department has applied the same principle consistently in later, more fact-specific Opinions.

Citations and references

Statutes and regulations:

• Tax Law § 210.1(a), § 208.9
• 20 NYCRR 3-2.2(b), 3-7.1(a), 3-8.1(a)

Related rulings:

• TSB-A-84(14)C -- applies this same standalone-computation principle a few months later, in the specific context of a subsidiary-capital exclusion for a consolidated-return-eliminated item

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1984.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a84_2c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-84 (2) C
Corporation Tax
May 10, 1984

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C820924A

On September 24, 1982 a Petition for Advisory Opinion was received from Leonard Koval,
CPA, of Spahr, Lacher, Berk and Naimer, 3000 Marcus Avenue, Lake Success, New York 11042.
Petitioner inquires as to whether corporations included in a Federal consolidated return, but
filing separate New York State Franchise Tax reports, would include in their separate franchise tax
reports their respective "shares" of the Federal taxable income of the group, or the income they
would have reported had they filed separate Federal tax returns.
Section 210.1(a) of the Tax Law provides for two computations of the franchise tax based
in whole or part on entire net income. Section 208.9 defines "entire net income" as "total net income
from all sources, which shall be presumably the same as the entire taxable income which the
taxpayer is required to report to the United States treasury department . . .", with certain
modifications not here germane. The Federal taxable income referred to in the preceding statutory
provision is defined as "taxable income as defined in section 63 of the Internal Revenue Code." 20
NYCRR 3-2.2(b). That is, the Federal taxable income of a corporate taxpayer is computed separately
for purposes of filing a separate New York return, irrespective of its participation in the filing of a
consolidated Federal return. Thus, for example, such a corporation would be required to compute
its capital loss and net operating loss deductions as if it were filing a separate Federal return. 20
NYCRR 3-7.1(a); 3-8.1(a). Similar considerations would apply with respect to charitable
contribution deductions. These would be subject to the limits applicable to each corporation
considered separately.

DATED: March 16, 1984

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.

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

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