If a REIT forms a wholly owned subsidiary corporation that's a 'qualified REIT subsidiary' under IRC section 856(i) to hold a New York real estate partnership interest, does that subsidiary still owe New York Article 9-A tax on its own income, or does everything flow up to the parent REIT?

Plain-English summary

Corporate Property Investors, a Massachusetts business trust that has elected REIT status under IRC section 856 since its 1971 formation, planned to organize a wholly owned Delaware corporate subsidiary ("Sub") to hold a partnership interest in an entity acquiring a New York office building. Sub would qualify as a "qualified REIT subsidiary" under IRC section 856(i) -- a federal designation under which the subsidiary is treated as having no separate corporate existence at all: all of its assets, liabilities, income, deductions, and credits are federally attributed directly to the parent REIT.

New York doesn't automatically follow that federal disregard. Because Sub is itself a foreign corporation holding an interest in a partnership doing business in New York, Regulations section 1-3.2(a)(5) independently makes Sub subject to Article 9-A tax as a corporate partner of that partnership -- New York's franchise tax nexus rules apply to Sub in its own right, regardless of its federal qualified-REIT-subsidiary status.

But the practical tax bill ends up minimal. Petitioner, as a REIT subject to federal tax under IRC section 857, computes New York entire net income starting from its federal "real estate investment trust taxable income" under Tax Law section 209.5. Because Sub's income, deductions, and credits are ALL folded into Petitioner's REIT taxable income at the federal level (that's exactly what the qualified-REIT-subsidiary election does), that same combined income is also what flows into Petitioner's own New York tax base. The upshot: even though Sub is technically a separate Article 9-A taxpayer required to file its own return, it has no separate taxable income left to report -- so the actual tax imposed on Sub is simply the fixed dollar minimum tax under section 210.1(d).

What this means for you

REITs structuring New York real estate holdings through qualified REIT subsidiaries

Don't assume a qualified REIT subsidiary escapes New York filing obligations just because it's federally disregarded -- the subsidiary remains an independent Article 9-A taxpayer if it holds a New York partnership interest, and must file its own return. But because its income is captured in the parent's own New York tax base, the subsidiary's actual liability is typically just the fixed dollar minimum, avoiding double taxation of the same income.

Accountants and tax professionals

This is a useful pattern for any federally-disregarded-entity structure (not just REIT subsidiaries) operating in New York: New York's corporate-level nexus rules can still independently attach to an entity even when federal law treats it as invisible, but the practical tax exposure often comes down to the fixed dollar minimum once you confirm the income is already captured elsewhere in the combined New York tax base.

Common questions

Q: Does a qualified REIT subsidiary need to file its own New York corporate franchise tax return?
A: Yes -- New York's Article 9-A nexus rules (here, the corporate-partner rule for partnerships doing business in New York) apply independently of the federal qualified-REIT-subsidiary disregard.

Q: Will the subsidiary end up paying full New York corporate tax on top of the parent REIT's tax?
A: Not typically -- since the subsidiary's income is already included in the parent's federal REIT taxable income (which flows into the parent's New York entire net income), the subsidiary itself usually owes only the fixed dollar minimum tax.

Q: Does this treatment apply to any corporate subsidiary of a REIT, or specifically to qualified REIT subsidiaries?
A: This ruling addresses specifically a qualified REIT subsidiary under IRC section 856(i) -- a distinct federal election with its own income-attribution rules; other REIT subsidiary structures would need separate analysis.

Citations and references

Statutes and regulations:

• Tax Law section 209.1 (Article 9-A franchise tax)
• Tax Law section 209.5 (REIT entire net income computed from federal REIT taxable income)
• Tax Law section 210.1(d) (fixed dollar minimum tax)
• Business Corporation Franchise Tax Regulations section 1-3.2(a)(5) (foreign corporate partner nexus through a New York partnership)
• Internal Revenue Code section 856(i) (qualified REIT subsidiary disregarded-entity treatment); section 857, 858 (REIT taxable income)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a90_14c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-90(14)C
Corporation Tax
July 5, 1990

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C900312A

On March 12, 1990, a Petition for Advisory Opinion was received from Corporate Property
Investors, 305 East 57th Street, New York, New York 10017.
The issue raised by Petitioner, Corporate Property Investors, is whether a qualified real estate
investment trust subsidiary, within the meaning of section 856(i) of the Internal Revenue Code, will
be treated as a separate corporation for purposes of Article 9-A of the Tax Law.
Petitioner was organized as a Massachusetts business trust in 1971 and from its inception has
elected to be treated as a real estate investment trust (hereinafter "REIT") under section 856 of the
Internal Revenue Code (hereinafter "IRC") Petitioner has, at all times, been subject to federal
taxation under section 857 of the IRC.
Petitioner will organize a wholly owned Delaware corporate subsidiary (hereinafter "Sub")
to hold an interest in a partnership that will acquire an office building in New York. Sub will be a
"qualified REIT subsidiary" within the meaning of section 856(i) of the IRC.
Section 856(i)(1) of the IRC provides that a corporation that is a qualified REIT subsidiary
is not treated as a separate corporation and all its assets, liabilities and items of income, deduction
and credit are treated as assets, liabilities and such items (as the case may be) of the parent REIT.
A qualified REIT subsidiary is treated as having no separate corporate existence for federal
income tax purposes, and accordingly has no separate items of assets; liabilities, income, deduction
or credit. Rather, the parent REIT is treated as holding all the assets and bearing all the liabilities
of the qualified REIT subsidiary, and all items of income, deduction and credit attributable to the
qualified REIT subsidiary are taken into account in calculating the real estate investment trust
taxable income and federal income tax liability of the parent REIT.
Section 209.1 of Article 9-A of the Tax Law imposes the business corporation franchise tax
on every foreign corporation, unless specifically exempt, for the privilege of doing business, or of
employing capital, or of owning or leasing property in New York State in a corporate or organized
capacity, or of maintaining an office in New York State.
Section 1-3.2(a)(5) of the Business Corporation Franchise Tax Regulations (hereinafter
"Regulations") provides that: [i]n general, if a partnership is doing business, employing capital,
owning or leasing property or maintaining an office in New York State, then all of its corporate
partners are subject to the tax imposed by article 9-A of the Tax Law. The term 'partnership' means
a partnership, joint venture or other similar unincorporated entity."
TP-9 (9/88)

-2­
TSB-A-90(14)C
Corporation Tax
July 5, 1990

Herein, Sub is a foreign corporation organized to hold an interest in a partnership that will
acquire an office building in New York. Therefore, pursuant to section 209.1 of the Tax Law and
section 1-3.2(a)(5) of the Regulations, Sub is a corporation that is subject to tax under Article 9-A
of the Tax Law.
Section 209.5 of the Tax Law provides that for any taxable year of a REIT, as defined in
section 856 of the IRC, in which such trust is subject to federal income taxation under section 857
of the IRC, such trust is subject to a tax computed under section 210.1(a), (c) or (d), whichever is
greatest. In the case of such a REIT, the term "entire net income" means "real estate investment trust
taxable income" as defined in section 857(b)(2) of the IRC (as modified by section 858 of the IRC
plus the amount taxable under section 857(b)(3) of the IRC, subject to the modification required by
section 208.9 of the Tax Law (other than the modification required by 208.9(a)(2)) including the
modifications required by section 210.3(d) and (e) of the Tax Law.
Herein, Petitioner is a REIT subject to federal income taxation under section857 of the IRC.
Sub is a "qualified REIT subsidiary" under section 856(i) of the IRC. Therefore, for federal income
tax purposes, Sub is not treated as a separate corporation. In addition, the "real estate investment
trust taxable income" of Petitioner, pursuant to section 857 of the IRC as modified by section 858
of the IRC, will include all items of income, deduction and credit of Sub.
Accordingly, even though Sub is a corporation subject to tax under Article 9-A, all of Sub's
assets, liabilities, income, deductions and credits will be treated as assets, liabilities and such items
(as the case may be) of Petitioner and will be reflected in the "real estate investment trust taxable
income" of Petitioner. Therefore, the tax imposed on Sub will be the fixed dollar minimum as
determined pursuant to section 210.1(d) of the Tax Law.

DATED: July 5, 1990

s\PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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