Sec. 18-3.8. Indirect expenses of the IBF, including head office expenses

Tax Law, § 1453(f)(3)

(a) Expenses of the taxpayer, including head office expenses, which can not be specifically identified with the gross income, gains, losses, deductions, assets, liabilities or other activities of the IBF or a place of business of the taxpayer, are indirect expenses and must be allocated on an indirect basis. Indirect expenses, including head office expenses, may include such items as interest, bad debts, compensation of officers, salaries, wages, travel expenses, pension plans, rents, taxes, depreciation, insurance, advertising, accounting, legal, charitable contributions, financing, operation supervision, technical, research, training, physical facilities, servicing, etc. For computation of the interest expense of the IBF and bad debt deduction of the IBF, see sections 18-3.6 and 18-3.7 of this Subpart, respectively.

(b) Expenses that cannot be specifically identified with the IBF or any particular place of business of the taxpayer but are indirectly related to the gross income, gains, losses, deductions, assets, liabilities or other activities of the IBF, must be allocated by the method that properly reflects the allocation of such expenses to the IBF. Generally, the amount of indirect expenses allocable to the IBF is determined by multiplying such expenses by a fraction computed by either the gross asset method as described in paragraph (1) of this subdivision, or the gross income method as described in paragraph (2).

(1) Gross asset method.

In the gross asset method, the numerator of the fraction is the average of all gross assets (except interoffice gross assets and goodwill) of the IBF of the taxpayer, and the denominator is the average of all gross assets (except interoffice gross assets and goodwill) of the taxpayer. Where the numerator determined in the preceding sentence is zero, the numerator and denominator must be computed by including gross assets from interoffice transactions. In the case of a taxpayer which is a foreign corporation, all gross assets means such taxpayer's assets located in the United States and its other assets used in connection with its trade or business in the United States. The average of all gross assets must be computed on a quarterly basis or, at the option of the taxpayer, on a more frequent basis such as monthly, weekly or daily. Loans and deposits are to be included on an average daily balance basis. When the taxpayer's usual accounting practice does not permit a quarterly or more frequent computation of the average of all gross assets, a semiannual or annual computation will be allowed when it appears to the Tax Commission that no distortion of the average of all gross assets will result. Different periods of averaging may be used for different classes of assets. If, because of variations in the amount or value of any class of assets, it appears to the Tax Commission that averaging on an annual, semiannual or quarterly basis does not properly reflect the average of all gross assets, the Tax Commission may require averaging on a more frequent basis. The method used to determine the average of all gross assets must be consistent and may not be changed on any subsequent return without the prior written consent of the Tax Commission. Gross assets are valued as described in subdivision (c) of section 18-5.2 of this Part.

(2) Gross income method.

In the gross income method, the numerator of the fraction is the gross income (excluding gross income from interoffice transactions) of the IBF of the taxpayer includible in the computation of entire net income for the taxable year, and the denominator is the gross income (excluding gross income from interoffice transactions) of the taxpayer includible in the computation of entire net income for the taxable year. Where the numerator determined in the preceding sentence is zero, the numerator and denominator must be computed by including gross income from interoffice transactions.

(3) Other method.

Any other method that the taxpayer establishes to the Tax Commission as a more appropriate method.

(c) Expenses that can be identified with the IBF and one or more places of business of the taxpayer, but not all places of business of the taxpayer, must be allocated by the method that properly reflects the allocation of such expenses to the IBF. The amount of such expenses allocable to the IBF is determined by multiplying such expenses by a fraction computed as described in subdivision (b) of this section. However, in computing such fraction, the denominator is limited to the IBF and those places of business identified with such expenses.

(d) A taxpayer must use the same method in allocating all indirect expenses. The method a taxpayer uses in computing the allocation of indirect expenses as described in subdivision (b) of this section may not be changed in subsequent years without the written consent of the Tax Commission. If the Tax Commission determines that the method used in allocating expenses, including head office expenses, does not properly reflect the expenses of the IBF, the Tax Commission may require the taxpayer to allocate expenses by a different method.