For a regulated investment company whose entire New York taxable income for a year consists solely of foreign taxes withheld on foreign investments, must the investment allocation percentage be computed using ALL of the company's investment capital, or only the specific foreign investments that produced that income?

Plain-English summary

Niagara Share Corporation, a federally regulated investment company (RIC) under IRC Sections 851-852, is a New York Article 9-A taxpayer subject to a special entire-net-income definition (Tax Law Section 209.7) enacted in 1979 to keep New York's treatment of RICs closer to the federal model -- RICs generally aren't taxed twice, once at the corporate level and again when income passes through to shareholders. That special definition starts from the federal "investment company taxable income" figure (which already deducts dividends paid to shareholders) and adds back two specific New York modifications: foreign taxes withheld on foreign investments (Section 208.9(b)(3)) and the New York franchise tax itself (Section 208.9(b)(4)) -- modifications the Legislature deliberately did NOT exempt RICs from, unlike the non-subsidiary-dividend and net-operating-loss modifications it did exempt them from.

For the years at issue, Niagara Share's entire net income consisted SOLELY of foreign taxes withheld on foreign investments that themselves carried a zero percent "issuer's allocation percentage" (the mechanism used to source investment income to New York or elsewhere). Niagara Share argued that since the Legislature intended Section 209.7 to functionally eliminate New York tax on RICs, and since this income was entirely foreign-sourced with a zero allocation percentage, the investment ALLOCATION percentage computation should logically be limited to just the foreign investments that generated the taxable income -- rather than the company's entire investment portfolio -- to avoid what it saw as an inequitable result (an allocation percentage built from investment capital that isn't even the source of the taxable income).

The Department rejected this reading of the statute. Tax Law Section 210.3(b)(1) requires the investment allocation percentage to be built from investment capital "invested in each stock, bond or other security (other than governmental securities)" -- with no textual limitation to only the investments that produced the entire net income being allocated. Since Niagara Share's entire net income for the years at issue was properly categorized as investment income (through the mandatory Section 208.9(b)(3)/(4) modifications), Business Corporation Franchise Tax Regulations Section 4-7.1(b) required it to allocate that income using the investment allocation percentage computed from ALL of its qualifying investment capital, not a carved-out subset. The Department also declined Niagara Share's fallback request for a discretionary adjustment under Section 210.8, noting that granting or denying such adjustments is outside the scope of what an Advisory Opinion can decide -- that's an audit-stage determination.

What this means for you

Regulated investment companies computing New York franchise tax

Don't expect to narrow the investment allocation percentage computation to only the specific holdings that generated your taxable income in a given year. Section 210.3(b)(1) requires using investment capital across your qualifying portfolio broadly, even in a year where your entire net income happens to derive from a narrow slice of it (like foreign withholding taxes on a subset of foreign holdings).

RICs and their accountants navigating the § 209.7 special income definition

Remember that Section 209.7 does NOT exempt RICs from the § 208.9(b)(3) foreign-tax-withholding add-back or the § 208.9(b)(4) NY-franchise-tax add-back, even though it does exempt them from the non-subsidiary-dividend and NOL modifications. These two add-backs can produce New York taxable income even in years where the RIC's federal investment company taxable income is at or near zero.

Taxpayers considering a discretionary adjustment under § 210.8

An Advisory Opinion won't grant or evaluate a discretionary adjustment request as a fallback if the primary legal argument fails -- that determination is reserved for the audit process.

Common questions

Q: Can a regulated investment company limit its investment allocation percentage computation to only the investments that generated its taxable income?
A: No. Tax Law § 210.3(b)(1) requires the computation to be based on investment capital across the company's qualifying portfolio, not a narrowed subset tied to the specific source of a given year's income.

Q: Does New York's special RIC income definition (§ 209.7) exempt foreign tax withholding from entire net income?
A: No -- the Legislature specifically did NOT exempt RICs from the § 208.9(b)(3) modification requiring foreign taxes withheld to be added back to entire net income, unlike certain other modifications it did waive for RICs.

Q: Will an Advisory Opinion grant a discretionary adjustment if the taxpayer's main argument fails?
A: No. Whether to grant a discretionary adjustment under § 210.8 is outside the scope of an Advisory Opinion; it can only be addressed in an audit.

Q: Can another regulated investment company rely on this Opinion?
A: No. It binds the Department only as to Niagara Share Corporation's own facts and cannot be relied upon by other taxpayers, even other RICs with similar foreign-investment portfolios.

Citations and references

Statutes and regulations:

• Tax Law § 209.7, § 208.9(a)(2), § 208.9(b)(3), § 208.9(b)(4), § 208.9(f)
• Tax Law § 210.1(a)(1), § 210.1(a)(4), § 210.3(b)(1), § 210.3(d), § 210.3(e), § 210.8
• Business Corporation Franchise Tax Regulations § 4-7.1(b)
• Internal Revenue Code § 851, § 852(b)(2), § 852(b)(3), § 855
• Chapter 500 of the Laws of 1979

Date note: The document header reads "July 8, 1985," while the sign-off line reads "DATED: July 3, 1985" -- a five-day gap, consistent with internal signing before the header/publication date; issued_date uses the header date without correction.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1985.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a85_14c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85 (14) C
Corporation Tax
July 8, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C830509B

On May 9, 1983 a Petition for Advisory Opinion was received from Niagara Share
Corporation, 70 Niagara Street, Buffalo, New York 14202.
At issue is whether, for taxable years ending December 31, 1980 and December 31, 1981,
the computation of the overall investment allocation percentage under Article 9-A of the Tax Law
can be based only on the investments that are the source of the entire net income for a regulated
investment company where the entire net income of such corporation is comprised solely of foreign
taxes withheld on foreign investments with a zero percent issurer's allocation percentage.
Petitioner is a "regulated investment company" as defined in section 851 of the Internal
Revenue Code and taxable under section 852 of the Internal Revenue Code. For New York State
franchise tax purposes Petitioner is a taxpayer under Article 9-A of the Tax Law. Section 209.7 of
the Tax Law, which became effective for taxable years beginning on or after January 1, 1980, defines
entire net income of a regulated investment company. Pursuant to section 209.7 for the taxable years
at issue, the taxpayer's entire net income is comprised of the modification for foreign taxes withheld
on dividends and interest (section 208.9(b)(3)) and the modification for New York State franchise
tax imposed (section 208.9(b)(4)).
Petitioner contends that the underlying legislative intent of section 209.7 of the Tax Law was
to effectively eliminate the New York State franchise tax for regulated investment companies by
essentially adopting the federal definition of "investment company taxable income." Since
investment company taxable income allows a deduction for dividends paid to shareholders, it
appears to Petitioner that New York State entire net income was intended to be close to if not
actually zero.
Petitioner also contends that the modifications for New York State franchise tax purposes
have the effect of "creating" income where no income is retained by the regulated investment
company. Since a regulated investment company cannot distribute more than the company earns,
it is impossible to pass through to the shareholders the foreign taxes withheld. It appears to
Petitioner that this result is at odds with the intent of section 209.7 of the Tax Law which was to gain
greater conformity with the federal tax treatment of assessing tax on only that portion of income
retained by the regulated investment company.
Petitioner argues that since the legislative intent was to effectively eliminate the franchise
tax on regulated investment companies, it would seem reasonable to extend this correlation to the
computation of allocated investment income by using an issurer's allocation percentage of zero
percent for the tax years at issue because entire net income for such years is solely due to foreign
source income with a zero percent issurer's allocation percentage.
RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

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

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TSB-A-85 (14) C
Corporation Tax
July 8, 1985
Accordingly, Petitioner maintains that section 210.3 of the Tax Law, which provides for the
allocation of entire net income within and without New York State, should be interpreted to limit
the investment capital utilized in the computation of the investment allocation percentage to only that
portion of the investment capital which gives rise to entire net income. Petitioner contends that this
interpretation of investment capital would eliminate the potential for inequity that would arise
whereby an investment allocation percentage would be developed from investment capital that is not
a source of the entire net income of the corporation.
Section 209.7 of the Tax Law was added by Chapter 500 of the Laws of 1979. The
legislative intent of this addition is shown in the memorandum in support of such Chapter which
states that the purpose of such legislation was to encourage regulated investment companies and their
management companies to remain within New York State, to invest in New York State business
substantial portions of the capital they manage and to encourage other regulated investment
companies and their management companies to move into the state. Such memorandum also shows
that the intent of the Legislature was to seek to bring about conformity with the federal method for
taxing regulated investment companies in New York State in that income distributed to stockholders
and thus taxable as part of their personal income would not be taxed first as corporate income of the
regulated investment company. This was accomplished in section 209.7 through the definition of
entire net income of a regulated investment company.
The language contained in section 209.7 defines entire net income of a regulated investment
company and states that the tax of such company be computed under section 210.1(a)(1) or (4) of
the Tax Law, that is, the tax measured by allocated entire net income or the minimum tax,
respectively, whichever is greater. Section 209.7 defines "entire net income of a regulated
investment company" to mean the "investment company taxable income" as defined in section
852(b)(2) (as modified by section 855) of the Internal Revenue Code plus any amount taxable under
section 852(b)(3) of the Internal Revenue Code, subject to the modifications required by section
208.9 of the Tax Law, except that the deduction for 50 percent of dividends other than from
subsidiaries and a net operating loss deduction are not allowed. The amount computed under the
preceding sentence is subject to the modification required by section 210.3(d) and (e) of the Tax Law
relating to optional deductions for depreciation and research and development.
The Legislature was aware of the modifications required by section 208.9 of the Tax Law and
specifically provided that the modifications under section 208.9(a)(2) (relating to non-subsidiary
dividends) and section 208.9(f) (relating to a net operating loss deduction) were not applicable for
a regulated investment company. No such exception was included in the law for the modification
contained in section 208.9(b)(3) and (4). Section 208.9(b)(3) provides, in part, that entire net income
shall be determined without the deduction for taxes on or measured by profits or income paid to any
foreign country. Section 208.9(b)4 provides, in part, that entire net income shall be determined
without the deduction for taxes imposed by Article 9-A. Accordingly, the amount of these
modifications must be included in entire net income for a regulated investment company for
purposes of Article 9-A of the Tax Law. Such entire net income may be properly categorized as
investment income.

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TSB-A-85 (14) C
Corporation Tax
July 8, 1985
Section 4-7.1(b) of the Business Corporation Franchise Tax regulations provides that a
taxpayer whose entire net income consists solely of investment income must allocate such
investment income by the investment allocation percentage. The investment allocation percentage
is computed pursuant to section 210.3(b) of the Tax Law. Section 210.3(b)(1) of the Tax Law
provides the first step in determining an investment allocation percentage and states, in part:
"multiplying the amount of its investment capital invested in each stock, bond or
other security (other than governmental securities) during the period covered by its
report by the percentage. . ." (emphasis added)
Accordingly, for taxable years ending December 31, 1980 and December 31, 1981 for New
York State franchise tax purposes Petitioner must, pursuant to section 209.7 of the Tax Law, include
in the computation of entire net income the modification for taxes on or measured by profits or
income paid to any foreign country and for taxes imposed by Article 9-A of the Tax Law. Also,
when computing the investment allocation percentage Petitioner must, pursuant to section
210.3(b)(1) of the Tax Law, determine the amount of its investment capital invested in each stock,
bond or other security (other than governmental securities) rather than determining such amount
solely on its investments in those stocks, bonds or other securities which generated the income on
which the foreign taxes were paid.
Petitioner requests that a discretionary adjustment be granted if an adverse opinion is
rendered. An Advisory Opinion merely sets forth the applicability of pertinent statutory and
regulatory provisions to "a specified set of facts." Tax Law, 171, subd. twenty-fourth; 20 NYCRR
901.1(a). Therefore, it is not within the scope of an Advisory Opinion to determine whether a
discretionary adjustment under section 210.8 of the Tax Law should be granted.

DATED: July 3, 1985

s/ANDREW F. MARCHESE
Chief of Advisory Opinions

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