Sec. 6-2.7. Examples

Unless otherwise provided, assume the following facts for all examples:

Corporation A owns all of the stock of corporations B, C, D, E, F, G, H, L, M, N, O, P, Q, and R. All of the corporations are calendar year taxpayers for federal income tax purposes. Corporations B and C are taxable under article 9-A of the Tax law and the other corporations would be subject to tax under article 9-A if they had nexus with New York. All of the corporations use (or would use) the business allocation percentage computed pursuant to section 210.3(a)(10) of the Tax Law. None of the corporations is a corporation organized under the laws of a country other than the United States.

Example 1:

90 percent of B's receipts are from D. Therefore, there are substantial intercorporate transactions between B and D. B and D are a tentative combined group and must file a combined report.

Example 2:

B's receipts are: 22 percent from A, 20 percent from C, 30 percent from D, 10 percent from E and the rest are from unrelated entities. 40 percent of C's expenses are to B. No other substantial intercorporate transactions occur between the corporations. Since there is no tentative combined group among the related corporations, corporations B and C file on a separate basis.

Example 3:

90 percent of B's receipts are from D and 100 percent of D's receipts are from E. D is an alien corporation. There are substantial intercorporate transactions between B and D, and D and E. B, D and E are a tentative combined group. However, since D is a corporation organized under the Laws of a country other than the United States, it cannot be included in a combined report (see sections 6-2.3[c][10] and 6-2.5[b] of this Subpart). Therefore, B and E file a combined report.

Example 4:

A is the only taxpayer and 50 percent of A's receipts are from B, with another 4 percent from E. 30 percent of E's expenditures are to A and 20 percent to D. C has no transactions with anyone in the group. 50 percent of D's receipts are from A. 50 percent of F's receipts are from A. 100 percent of H's receipts are from F. 100 percent of R's receipts are from H. 20 percent of B's receipts are from L, 20 percent from M, and 20 percent from N. 100 percent of L's receipts are from M. 100 percent of M's receipts are from N. 40 percent of O's receipts are from R and 30 percent are from D. 60 percent of P's receipts are from O. 80 percent of L's expenditures are to Q. All of these corporations are in the step 1 group of related corporations described in section 6-2.3(c)(1) of this Subpart because they meet the stock ownership test.

The step 2 tentative combined group as described in section 6-2.3(c)(2) of this Subpart consists of A, B, D, and F. As a result of step 3 (see section 6-2.3[c][3] of this Subpart), H is added to the tentative combined group. As a result of step 4 (see section 6-2.3[c][4] of this Subpart), R is added to the tentative combined group.

As described in step 5 (see section 6-2.3[c][5] of this Subpart), L, M, N and Q is an unattached related group and O and P is an unattached related group.

Corporations O and P are added to the tentative group pursuant to step 6 (see section 6-2.3[c][6] of this Subpart) because 70 percent of O's receipts are from R and D. The step 6 tentative combined group is A, B, D, F, H, R, O and P.

The corporations in the unattached unrelated group of L, M, N and Q are all added to the tentative combined group pursuant to step 7 (see section 6-2.3[c][7] of this Subpart) because B has substantial intercorporate transactions with the unattached related group of L, M, N and Q. The step 7 tentative combined group is A, B, D, F, H, R, O, P, L, M, N and Q.

Pursuant to step 8 (see section 6-2.3[c][8] of this Subpart), E is added to the step 7 tentative combined group because 30 percent of its expenditures are from A and 20 percent are from D. The step 9 (see section 6-2.3[c][9 of this Subpart) tentative combined group is the same as the step 8 tentative combined group. Since no corporations will be excluded from the step 9 tentative combined group pursuant to step 10 (see sections 6-2.3[c][10] and 6-2.5 of this Subpart), the group of corporations that must file a combined report are A, B, D, F, H, R, O, P, L, M, N, Q and E.

Example 5:

Same facts as Example 4 except that A, B, D, and F have filed on a combined basis for several years. In the current year, A realizes that it would reduce its New York State tax liability if it included C in the combined report. A creates K by contributing $10,000 of cash to it in exchange for all of K's stock. (In the alternative, A lends $10,000 to K, an existing dormant corporation). K enters into a contract with C to provide it with all of its office supplies (pens, paper, paper clips, etc.). K buys all of its office supplies from A and then sells them at a slight mark-up to C. In addition, K has a very small amount of interest income from a bank account.

The creation of K (or, in the alternative, making K an active corporation) and the transactions of A with K and K with C are not substantial intercorporate transactions because they lack economic substance.

Example 6:

A is a bakery in NY and E is a bakery in Florida. Each year, A sells E a few pieces of equipment but the transactions are not substantial from either A's or E's point of view. In a particular year, A realizes it would reduce its New York State tax liability if it included E in a combined report with it. A creates K by contributing $10,000 to it in exchange for all of K's stock. A sells the equipment to K and K sells the equipment to E.

The creation of K and the transactions of A with K and K with E are not substantial intercorporate transactions because they lack economic substance.

Example 7:

A's only activity is to receive dividends from its wholly owned subsidiaries. B sells stocks, C sells municipal bonds and D sells corporate bonds. B, C and D each have their own employees. However, the employees of one corporation are authorized to and do sell extensively the securities sold by the other corporations. 80 percent of the receipts of B, 70 percent of the receipts of C and 60 percent of the receipts of D are generated by sales made by the common pool of employees of B, C, and D. All three corporations carry on their activities at or using common facilities. Because there are substantial intercorporate transactions using common facilities and employees among B, C and D, they are a combined group and must file a combined report. A is not included in the combined group because it has no substantial intercorporate transactions with a related corporation.