Are a parent scrap-metal corporation and its New York subsidiary in a 'unitary business' for combined reporting purposes, and must the parent file a consolidated report with its separate DISC subsidiary?

Plain-English summary

Schiavone-Bonomo Corporation, a New Jersey producer of ferrous and non-ferrous scrap metal, asked the Department three related questions about its corporate family for fiscal years ending March 31, 1980-1982: (1) whether it and its wholly owned New York subsidiary, Schiabo-Hudson Corporation ("SH"), are in a "unitary business"; (2) whether a combined Article 9-A report is required covering both; and (3) whether Petitioner must file a consolidated report with its other subsidiary, S-B Sales Corporation, a Domestic International Sales Corporation ("DISC").

Unitary business / combined report. SH produces "shredded scrap" -- a higher-purity, higher-priced ferrous product made from a different raw material (used automobiles) using specialized equipment -- which Petitioner argued was different enough from its own scrap products that the two weren't in related lines of business. The Department disagreed: the unitary concept doesn't require identical products, only related lines of business, and both companies produce ferrous scrap metal. It also found substantial intercorporate transactions: Petitioner's overseas sales staff broker SH's foreign sales at no charge and no profit, combine SH's shipments with its own to save costs, and handle all billing and collections for SH's foreign customers before remitting the proceeds. That satisfied the regulatory test for a unitary business with substantial intercorporate transactions.

But satisfying that test doesn't automatically mean combined reporting is REQUIRED. Under Matter of Coleco Industries, combined reporting exists to prevent distortion of and more accurately portray the true income of closely related businesses -- and whether distortion actually exists is a question of fact specific to each case, "not susceptible of determination in an Advisory Opinion." Since an Advisory Opinion only applies law to a specified set of facts (not resolve open factual disputes), the Department held that whether the Tax Commission may actually require combined reporting for these fiscal years must be decided in the audit context instead.

DISC consolidation. The third subsidiary, S-B Sales Corporation, is a Connecticut "commission DISC" -- it has no employees, property, or New York business activity, and earns only sales commissions from its stockholder. A DISC is "tax-exempt" if more than 5% of its total receipts are commissions rather than sales/rental income. Unlike the unitary-business question, DISC consolidation isn't a discretionary, fact-dependent determination: the regulations flatly require any Article 9-A corporation that owns stock in a tax-exempt DISC to file a consolidated report with it. So Petitioner MUST consolidate with S-B Sales Corporation for the years at issue, regardless of how the unitary-business/combined-report question is eventually resolved.

What this means for you

Corporate groups with related-but-not-identical subsidiaries

Producing a somewhat different product, using different raw materials or processes, doesn't defeat "unitary business" status if the lines of business are still related and there are substantial intercorporate transactions (shared sales/billing services, cost-saving arrangements, etc.) -- even if those services are provided at no charge and no profit.

Corporate groups deciding whether combined reporting will actually be REQUIRED

Even after a unitary-business finding, whether the Tax Commission will actually require (or permit) a combined report turns on whether separate reporting would distort each company's true income -- a fact-specific question the Department will only resolve in an audit, not in an Advisory Opinion.

Corporations that own a DISC subsidiary

Don't expect any discretionary distortion analysis here -- consolidation with a tax-exempt DISC subsidiary is a flat regulatory requirement (Business Corporation Franchise Tax Regulations § 3-9.3(b)) that applies regardless of whether the parent-DISC relationship would otherwise look "unitary."

Common questions

Q: If two related corporations are found to be in a "unitary business," does that mean they must file combined New York returns?
A: Not automatically. A unitary-business finding satisfies one regulatory requirement, but whether the Tax Commission may actually require (or permit) combined reporting also depends on whether separate reporting would distort each company's true income -- a factual question resolved in an audit, not an Advisory Opinion.

Q: Do intercompany services have to be for a fee to count toward "substantial intercorporate transactions"?
A: No -- in this ruling, Petitioner's no-charge, no-profit brokering, shipping, and billing/collection services for its subsidiary still counted as substantial intercorporate transactions.

Q: Is consolidating with a DISC subsidiary optional?
A: No. If a New York Article 9-A taxpayer owns stock in a tax-exempt DISC (one that gets more than 5% of its receipts from commissions rather than sales/rentals), consolidation is mandatory under the regulations.

Q: Can another corporate group rely on this Opinion?
A: No. It binds the Department only as to this petitioner's specific facts and cannot be relied upon by other taxpayers, even in a similar corporate structure.

Citations and references

Statutes, regulations, and cases:

• Tax Law § 211.4 (combined reports)
• Business Corporation Franchise Tax Regulations § 6-2.3(a), § 6-2.3(b) (unitary business factors)
• Business Corporation Franchise Tax Regulations § 3-9.3(a), § 3-9.3(b) (tax-exempt DISC consolidation)
• Matter of Coleco Inds. v. State Tax Comm., 92 A.D.2d 1008, affd 59 N.Y.2d 994
• Tax Law § 171(24); 20 NYCRR 901.1(a) (Advisory Opinion scope)

Date note: The document header and sign-off line both read "September 23, 1985" -- no discrepancy here.

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_17c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85 (17)C
Corporation Tax
September 23, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C830505B

On May 5, 1983, a Petition for Advisory Opinion was received from Schiavone-Bonomo
Corporation, Foot of Jersey Avenue, Jersey City, New Jersey 07302.
The Petition also involves two other related corporations, Schiabo-Hudson Corporation, Port
of Albany, Albany, New York 12202 and S-B Sales Corporation, 640 Canal Street, Stamford,
Connecticut 06902.
The issues pertain to New York State's Business Corporation Franchise Tax, Article 9-A of
the Tax Law, and are as follows:

1. whether Petitioner and Schiabo-Hudson Corporation (hereinafter referred to as "SH") are
   in a unitary business;
2. whether a combined report is required for fiscal years ending March 31, 1980, March 31,
   1981 and March 31, 1982; and
3. whether Petitioner must file a consolidated report with S-B Sales Corporation (hereinafter
   referred to as "S-B DISC") for fiscal years ending March 31, 1980, March 31, 1981 and March 31,
   1982.
   The first and second issues raised by Petitioner relate to Petitioner and SH.
   Petitioner, a New Jersey corporation, is a taxpayer under Article 9-A of the Tax Law and is
   engaged in the production of ferrous and non-ferrous scrap.
   SH, a New York corporation, is also a taxpayer under Article 9-A of the Tax Law and is a
   wholly owned subsidiary of Petitioner. SH is engaged in the production of shredded scrap metal
   which is different from the scrap produced by any other division or subsidiary of Petitioner.
   Shredded scrap is a ferrous scrap that is produced by a costly machine and ancillary equipment. The
   resultant product is a highly purified form of the element iron. The processing requirements and end
   specifications of shredded scrap require a raw material (used automobiles) different from other
   ferrous scrap items. The process develops a relatively dense form of scrap that has a very high level
   of purity (the contaminants are removed by a number of post-shredding processes). Shredded scrap
   thereby permits high yields in steel making furnaces because of the high level of iron to the total
   volume of the recyclable product melted. This high iron product commands a higher price because
   the benefits derived from its characteristics are different from most other grades of ferrous scrap.
   Petitioner contends that ferrous and non-ferrous scrap are not similar products and as such, Petitioner
   and SH are not engaged in the same or related lines of business.

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

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

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Corporation Tax
September 23, 1985

All of the officers of SH are officers of Petitioner, however, not all of the officers of
Petitioner are officers of SH.
SH sells its product in both domestic and foreign markets. SH sells its product domestically
directly to its own customers and also through brokers who act as a conduit for invoicing and the
collection of funds. SH sells the vast majority of its goods overseas. However, as a marketing and
administrative technique, SH sells under Petitioner's name. Petitioner acts as a broker for the export
transactions of SH as well as the export transactions of unrelated companies. This broker relationship
is an industry wide practice used when importing material into many European nations because it
is necessary to obtain formal governmental approval for dollars to be remitted from these countries
to the United States. The submission of one invoice rather than an invoice from each individual
shipper greatly facilitates the paperwork necessary in order to obtain governmental approval for each
shipment. The broker relationship also saves shipping costs which is a very significant cost factor.
As a broker, Petitioner can arrange for vessels which are bound for foreign markets to contain the
finished products of Petitioner, SH and unrelated producers thereby effecting a significant cost
savings.
Due to the broker relationship, for marketing and administrative purposes, billings and
collections with regard to SH's foreign customers are handled out of Petitioner's office. Upon
collection, the proceeds are forwarded to SH. Petitioner does not make any profit on the various
services it performs for SH. At no time do SH and Petitioner buy goods from one another, finance
each other's sales or purchase goods for one another.
Petitioner contends that it and SH:
1.

deal with different types of source product/raw material,

2.

do not rely on each other for 100 percent of their respective income, and

3.

are neither functionally inter-dependent nor so inter-related that operations of each
company can not properly be determined for franchise/income tax purposes.

Petitioner also contends that the use in some circumstances of a one-company billing or processing
procedure is due to an industrywide practice of saving of shipping costs; in dealing with customers
abroad, it is due to the mode of operation required. Therefore, Petitioner asserts that it and SH do
not meet the tests of a unitary business.
Section 211.4 of the Tax Law, states, in pertinent part:
"4. 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 and setting forth such information as the tax

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TSB-A-85 (17)C
Corporation Tax
September 23, 1985

commission may require; provided, . . . that no combined report covering any
corporation not a taxpayer shall be required unless the tax commission deems such
a report necessary, because of intercompany transactions or some agreement,
understanding, arrangement or transaction referred to in subdivision five of this
section, in order properly to reflect the tax liability under this article .... "
Section 6-2.3(a) of the Business Corporation Franchise Tax regulations in
effect for the taxable years at issue, states, in pertinent part:
"... the Tax Commission may permit or require a group of corporations to file a
combined report if this method of reporting properly reflects the activities in New
York State of the corporations. If the income or capital of a taxpayer is improperly
or inaccurately reported because of intercorporate agreements, understandings or
arrangements, the Tax Commission may permit or require the corporations to file a
combined report. In deciding whether to permit or require combined reports the
following two (2) 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 Business Corporation Franchise Tax regulations in effect for
the taxable years at issue, states, in pertinent part:
"(b) 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
(3) financing sales of other corporations of the group.
The Tax Commission will consider a corporation to be a part of a unitary
business if it is engaged in the same or related lines of business as the other
corporations in the group, such as:
(4) manufacturing similar products; or
(5) performing similar services; or
(6) performing services for the same customers."

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TSB-A-85 (17)C
Corporation Tax
September 23, 1985

Petitioner and SH are both in the business of producing ferrous scrap metal and are in related
lines of business even though SH produces shredded scrap which requires a raw material different
from other ferrous scrap (used automobiles), has a very high level of purity and commands a higher
price than other grades of ferrous scrap which are produced by Petitioner. The unitary concept does
not require that the exact identical product be produced by both corporations.
Petitioner performs a variety of services for SH on a no charge, no profit basis. Petitioner
serves as a broker in finding customers overseas for SH. Petitioner also arranges to combine its
shipments overseas with those of SH in the same vessel thus effecting substantial savings both for
itself as well as for SH. In addition, for marketing and administrative purposes Petitioner handles
all the billings and collections with regard to SH's foreign customers and then remits the total
collections to SH. Because Petitioner performs such services for the sale of SH's product in foreign
markets, which is the vast majority of SH's total sales, at a no charge no profit basis, there are
substantial intercorporate transactions between Petitioner and SH.
Accordingly, Petitioner and SH have met the requirements of section 6-2.3(a) of the Business
Corporation Franchise Tax regulations; namely, that the corporations are in substance parts of a
unitary business with substantial intercorporate transactions.
However, the purpose of the combined reporting provision contained in section 211.4 of the
Tax Law is to avoid distortion of, and more realistically portray true income of, closely related
businesses. (Matter of Coleco Inds. v. State Tax Comm., 92 AD2d 1008, affd 59 NY2d 994). A
combined report may not be required unless it will avoid distortion of and more realistically portray
true income of closely related businesses. No single factor is decisive in properly reaching a
determination that requiring combined reporting fulfills the statutory purpose (id. at 1009).
Therefore, the existence of distortion must be decided based on the factual situation in each case.
Distortion is a question of fact not susceptible of determination in an Advisory Opinion. 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,
a determination cannot be made in an Advisory Opinion as to whether a combined report shall be
permitted or required. Inasmuch as the question of whether Petitioner and SH will be required to file
a combined report for fiscal years ending March 31, 1980, March 31, 1981 and March 31, 1982
arises within the context of an Audit, the necessary factual determination will be made within such
context, in accordance with the principles outlined above.
The last issue raised by Petitioner relates to Petitioner and S-B DISC.
S-B DISC, a domestic international sales corporation, is a Connecticut corporation and is a
wholly owned subsidiary of Petitioner that has neither employees nor property nor does it do
business within New York State. S-B DISC operates as a commission DISC and as such, has no
purchases from Petitioner.

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Corporation Tax
September 23, 1985

Section 3-9.3(a) of the Business Corporation Franchise Tax regulations, in pertinent part,
defines a tax exempt DISC as being one which during a taxable year received more than five percent
of its total receipts other than from sales or rentals from its stockholders, i.e. commissions.
Section 3-9.3(b) of the Business Corporation Franchise Tax regulations provides that if a
corporation is subject to tax under Article 9-A, and owns stock in a DISC and such DISC is a tax
exempt DISC, the corporation must file a consolidated report with such DISC. Therefore, Petitioner
must file a consolidated report with S-B DISC.
Accordingly, Petitioner and SH are in a unitary business, but the determination as to whether
the State Tax Commission may properly require the filing of reports on a combined basis for fiscal
years ending March 31, 1980, March 31, 1981 and March 31, 1982 cannot be made within the
context of an Advisory Opinion. However, Petitioner must file a consolidated report with S-B DISC
for such fiscal years.

DATED: September 23, 1985

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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