Sec. 3-6.3. Definition of subsidiary capital

Tax Law, § 208(4), (8-A)

(a) The term subsidiary capital means the total of:

(1) the investment of the taxpayer in shares of stock of its subsidiaries; and

(2) the amount of indebtedness owed to the taxpayer by its subsidiaries, whether or not evidenced by written instrument, on which interest is not claimed and deducted by the subsidiary for purposes of any tax imposed by articles 9-A, 32 or 33 of the Tax Law. Subsidiary capital does not include accounts receivable acquired in the ordinary course of trade or business for services rendered or for sales of property which is primarily held for sale to customers.

(b) Unless the Commissioner specifically authorizes to the contrary, each item of subsidiary capital must be reduced by any liabilities of the taxpayer (parent) which are directly or indirectly attributable to that item of subsidiary capital. The reduction will be made, for example, in cases where the liabilities have been incurred in connection with the acquisition or holding of stock or securities of a subsidiary, or in the making of a loan to a subsidiary.

(c) Subsidiary capital does not include stocks, bonds or other securities of a subsidiary held by the taxpayer for sale to customers in the regular course of the taxpayer's business. Investments in stocks, bonds or other securities of a DISC or any indebtedness from a DISC shall not be treated as subsidiary capital. The assets described in this subdivision are considered business assets.

(d) Indebtedness on which any interest is deducted by the subsidiary in computing any New York State franchise tax imposed on the subsidiary under either article 9-A, 32 or 33 of the Tax Law may not be included in the taxpayer's subsidiary capital. Such indebtedness is includible in investment capital if it meets the definition of investment capital as set forth in section 3-3.2 of this Part. Otherwise, it constitutes business capital.

Example:

The taxpayer (parent) loaned its subsidiary $100,000. In computing entire net income for the taxable year 1990 for New York State franchise tax purposes under either article 9-A, 32 or 33 of the Tax Law, the subsidiary did not claim any part of the interest as a deduction. The subsidiary did claim such interest, or some part of it, as a deduction for taxable year 1991. The indebtedness is includible in the taxpayer's subsidiary capital on its report for taxable year 1990. However, for taxable year 1991 such indebtedness is includible in the taxpayer's investment capital if it meets the definition of investment capital as set forth in section 3-3.2 of this Part. Otherwise it is business capital.

(e)

(1) In the case of a taxpayer that:

(i) directly owns (within the meaning of section 3-6.2[b] of this Subpart) more than 50 percent of the shares of stock of a corporation entitling the holders thereof to vote for the election of the corporation's directors or trustees; and

(ii) is a partner in a partnership with respect to which the taxpayer uses the aggregate method pursuant to section 3-13.3 of this Part;

subsidiary capital includes the taxpayer's proportionate part (see section 3-13.2[a] of this Part) of any stock or indebtedness described in subdivision (a) of this section of such corporation that is owned by such partnership.

Example:

Corporation C is 90 percent partner in partnership P. Corporation D has 100 shares of stock issued and outstanding entitling the holders thereof to vote for the election of the corporation's directors. C owns 60 shares of D and P owns the remaining 40 shares. Since C directly owns more than 50 percent of the shares of D it would include 96 shares of D in its subsidiary capital; its 60 shares plus its proportionate part, 36 shares (90% × 40), of P's shares.

(2) In the case of a taxpayer that:

(i) does not directly own more than 50 percent of the shares of stock of a corporation entitling the holders thereof to vote for the election of the corporation's directors or trustees; and

(ii) is a partner in a partnership with respect to which the taxpayer uses the aggregate method pursuant to section 3-13.3 of this Part;

subsidiary capital does not include taxpayer's proportionate part (see section 3-13.2[a] of this Part) of any stock or indebtedness of such corporation owned by such partnership. Such stock or indebtedness is includible in investment capital if it meets the definition of investment capital as set forth in section 3-3.2 of this Part. Otherwise, it constitutes business capital.