PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following action:
Action taken:
Amendment of Parts 3, 6 and 21; and addition of Part 33 to Title 20 NYCRR.
Statutory authority:
Tax Law, sections 171, subd. First, 1096(a), 1468 and 1519
Subject:
Combined Reports.
Purpose:
To update rules and codify Department interpretation regarding combined reports.
Substance of final rule:
This rule amends the Business Corporation Franchise Tax Regulations, as published in Subchapter A of Chapter I of Title 20 NYCRR, the Franchise Tax on Banking Corporations Regulations, as published in Subchapter B of Chapter I of such Title, and the Franchise Taxes on Insurance Corporations Regulations, as published in Subchapter C of Chapter I of such Title, relating to combined reports.
Section 1 amends section 3-2.2 of the regulations to eliminate language contained in such section relating to Foreign Sales Corporations (FSCs) because the corresponding IRC provisions relating to FSCs have been repealed.
Sections 2 and 3 amend sections 3-11.1 and 3-12.1 of the regulations relating to Real Estate Investment Trusts (REITs) and Regulated Investment Companies (RICs), respectively, to refer taxpayers to section 211.4 of the Tax Law for rules relating to the inclusion of such entities in a combined report.
Sections 4 and 5 amend sections 3-13.2 and 3-13.5 of the regulations, respectively, to correct cross-references to section 6-2.2(b) relating to the definition of unitary business that was moved to section 6-2.3(e) by section 12 of this proposal.
Section 6 makes technical amendments to the index of Subpart 6-2 of the regulations.
Sections 7 and 8 amend section 6-2.1 of the regulations to eliminate the discretionary language relating to when a combined report is permitted or required. This language has been replaced with rules as to when a combined report is required or permitted due to the presence or absence of substantial intercorporate transactions among related corporations.
Section 9 amends section 6-2.2 of the regulations to delete the language relating to the unitary business requirement. The unitary business language has been moved to section 6-2.3 relating to the substantial intercorporate transactions requirement as it is more appropriately suited there. Technical and clarifying amendments have also been made to the language relating to the capital stock requirement. Language has also been added to the capital stock requirement to provide that for purposes of measuring the 80 percent stock ownership/control requirement, such ownership will be determined based on the total voting power rather than the total number of shares of the stock owned. In addition, it provides a definition of the term "related corporations".
Sections 10, 11, and 12 rename section 6-2.3 of the regulations and make numerous other amendments to the section. Many of the amendments are derived from technical memorandum TSB-M-08(2)C. The existing discretionary language relating to when a combined report is permitted or required and the language and examples relating to the presumption of distortion have been eliminated. This language has been replaced with language that requires a combined report where there are substantial intercorporate transactions. The new language provides a list of activities and transactions that are considered in determining whether substantial intercorporate transactions exist. It further provides rules as to how the requirement may be met applying certain percentage tests. It also provides a series of steps for taxpayers to follow in determining whether a combined report is required, and if so, which corporations are included in the report. In addition, language has been added to provide that a combined report may be required or permitted where substantial intercorporate transactions are absent, but such a report is necessary in order to properly reflect the tax liability under Article 9-A. Lastly, it adds language previously contained in section 6-2.2 of the regulations relating to the determination of whether a corporation is part of a unitary business.
Section 13 renames section 6-2.4 of the regulations and makes various technical and clarifying amendments to the section.
Section 14 amends section 6-2.5 of the regulations to delete language which provides that a foreign corporation not subject to tax will not be required to be included in a combined report unless inclusion is necessary to properly reflect the tax liability of one or more taxpayers in the group because of substantial intercorporate transactions or some agreement, understanding, arrangement or transaction whereby the activity, business, income or capital of any taxpayer is improperly or inaccurately reflected. It also makes it clear that corporations organized under the laws of a country other than the United States may not be included in a combined report. It eliminates language that requires a FSC to be included in a combined report because the IRC provisions relating to FSCs have been repealed. Examples that illustrate when a FSC is required to file a combined report have also been eliminated. It also makes it clear that a corporation subject to or that would be subject to, if subject to tax, another New York State Franchise tax may not be included in a combined report under Article 9-A. In addition, it adds language to conform to the statute, that aviation corporations and railroad and trucking corporations that allocate pursuant to Tax Law sections 210.3(a)(7)(A) and 210.3(a)(8), respectively, may not be included in a combined report with any other corporation unless such corporation allocates in the same manner. Various technical and clarifying amendments have also been made.
Section 15 renames section 6-2.6 of the regulations and adds language to refer REITs and RICs to section 211.4 of the Tax Law for information relating to the inclusion of such entities in a combined report.
Section 16 renumbers section 6-2.7 of the regulations to 6-2.8 and adds a new section 6-2.7 that provides examples illustrating where a combined report is required or permitted.
Section 17 makes technical and clarifying amendments to section 6-2.8 of the regulations, as renumbered by section 16.
Section 18 amends section 6-3.2 of the regulations to delete language requiring that all corporations in the combined group use the same accounting period. New language has been added providing that where a corporation's taxable year differs from that of the taxpayer parent, that the applicable taxable year to be included in the combined report is the taxable year that ends within the taxable year of the taxpayer parent. Technical and clarifying amendments have also been made.
Sections 19 and 20 make amendments to sections 21-2.1 and 21-3.2 of the Article 32 regulations to correspond with the Article 9-A amendments described in section 18 of this summary.
Section 21 adds a new Part 33 to the Article 33 regulations to provide that the provisions of Subpart 6-2 of Article 9-A regulations are applicable to combined returns filed under section 1515(f) of the Tax Law except where otherwise provided by the Tax Law or Part 33. Specific language is provided to codify certain exceptions.
Section 22 provides that the rule will be effective on the date the Notice of Adoption is published in the State Register and apply to taxable years beginning on or after January 1, 2013.
Final rule as compared with last published rule:
Nonsubstantive changes were made in section 6-2.3.
Text of rule and any required statements and analyses may be obtained from:
John W. Bartlett, Tax Regulations Specialist 4, Department of Taxation and Finance, Taxpayer Guidance Division, Building 9, W.A. Harriman Campus, Albany, NY 12227, (518) 457-2254, email: tax.regulations@tax.ny.gov
Revised Regulatory Impact Statement
1. Statutory authority: Tax Law, sections 171, subdivision First; 1096(a), 1468 and 1519. Section 171, subdivision First, provides for the Commissioner to make reasonable rules and regulations, which are consistent with the law, that may be necessary for the exercise of the Commissioner's powers and the performance of the Commissioner's duties under the Tax Law. Section 1096(a) of Article 27 authorizes the Commissioner to make such rules and regulations as are necessary to enforce the New York State Franchise Tax on Business Corporations imposed by Article 9-A of the Tax Law. Section 1468 of Article 32 cites the provisions of Article 27 as being applicable and having the same force and effect on the Franchise Tax on Banking Corporations imposed by Article 32 of the Tax Law. Section 1519 of Article 33 cites the provisions of Article 27 as being applicable and having the same force and effect on the Franchise Taxes on Insurance Corporations.
2. Legislative objectives: The rule is being proposed pursuant to such authority and in accordance with the legislative objectives that the Commissioner administer the provisions of the Tax Law by providing guidance with respect to legislative amendments made by Chapter 60 of the Laws of 2007 to section 211.4 of the Tax Law. The amendments changed the circumstances under which a taxpayer corporation is required or permitted to file a combined report with other related corporations. The rule also reflects technical corrections to the Chapter 60 amendments made by Chapter 57 of the Laws of 2008, relating to the filing of combined reports by Real Estate Investment Trusts (REITs) and Regulated Investment Companies (RICs).
3. Needs and benefits: The rule makes amendments to Subpart 6-2 of the regulations titled, Combined Reports. A taxpayer is now required to file a combined report with its related corporations if there are substantial intercorporate transactions among the related corporations, regardless of the transfer price of such intercorporate transactions. Related corporations are corporations that meet the existing ownership and control requirements of section 211.4 of the Tax Law and section 6-2.2 of the regulations (generally an 80 percent direct or indirect stock ownership test). In addition, a combined report may be required or permitted where substantial intercorporate transactions are absent if a combined report is necessary in order to properly reflect the tax liability under Article 9-A of the Tax Law. Under prior law and regulations, a group of related corporations could only, in the discretion of the Commissioner, be permitted or required to file a combined report if reporting on a separate basis distorted the activities, business, income, or capital in New York State of the related corporations. The activities, business, income, or capital were presumed to be distorted if there were substantial intercorporate transactions among the corporations. The Department issued a technical memorandum (TSB-M-08(2)C) that outlined and interpreted the provisions and provided guidance with respect to determining what corporations are required to be included in a combined report. The rule largely codifies the information contained in the TSB-M. The codification will benefit taxpayers and practitioners by providing guidance as to when a combined report is required or permitted and, if so, what corporations are to be included in the report.
A draft of the rule was circulated to outside organizations for comment. Comments were received from the Tax Section of the New York State Bar Association (Bar) and the Business Council of New York State (Business Council). Both the Bar and the Business Council were concerned with the removal of the unitary business principle as a prerequisite for combination. In response, language was added to acknowledge that the unitary business principle continues to apply. Both organizations also provided comments regarding the asset transfer test for substantial intercorporate transactions, some of which warranted revising the rule. As a result, language was added to make it clear that the test applies to assets transferred after January 1, 2007. Language was also added to provide that gross income directly derived from an asset includes partnership interests and that where the asset transferred is an interest in a partnership or an entity treated as a partnership, the income distributed to the transferee by such entity is gross income directly derived from the transferred asset. The Bar also suggested that the rule regarding the multi-year test for substantial intercorporate transactions be explicit that the test be used not only to satisfy the substantial intercorporate transactions test, but to prove that the test is not satisfied. A clarifying revision was made in response. Several other minor clarifying revisions were made as a result of the comments received.
As a result of internal discussions regarding the comments, several changes were made to the rule that represent a departure from interpretations set forth in the TSB-M. These changes relate to the substantial intercorporate transactions determination. Specifically, the rule changes the treatment of interest paid and received on loans between related corporations where the loan constitutes subsidiary capital. Under the TSB-M, these loans were not considered in the determination. It also provides that, generally, only assets transferred in exchange for stock or paid in capital are considered for purposes of the asset transfer test. Under the rule, transfers of assets other than for stock or paid in capital, including through a nonmonetary property dividend, would not be considered unless the principal purpose of the transfer is the avoidance or evasion of tax. Previously, only assets transferred in exchange for stock or paid in capital would be considered. In addition, the rule expands the treatment of income from the sale of items produced from transferred production equipment. It now provides that income from the sale of items produced from transferred assets, by itself, would not constitute gross income derived directly from the transferred assets, but a transfer of assets constituting substantially all of the production process, including associated intangibles, such as might occur in the transfer of an operating division, would constitute gross income derived directly from the transferred assets. Several technical and clarifying changes were also made. The rule will benefit taxpayers and practitioners by providing guidance and clarification with respect to these changes in interpretation.
4. Costs:
(a) Costs to regulated persons: The rule does not impose any new reporting, recordkeeping or other compliance costs on regulated persons. The rule benefits regulated persons by providing guidance needed to determine when a combined report is required or permitted and as to which corporations are included. Since the rule largely codifies legislative amendments and the interpretations set forth in TSB-M-08(2)C, the impact on the regulated persons is estimated to be none or minimal. The changes that depart from the interpretations set forth in the TSB-M (see Needs and Benefits) may have an impact on the tax liability of some taxpayers. The impact of these changes on a particular taxpayer, which could be positive or negative, will depend on the specific circumstances of the taxpayer. We estimate that these changes will have minimal revenue impact on taxpayers as a whole.
(b) Costs to the agency and to the State and local governments for the implementation and continuation of this rule: It is estimated that the implementation and continued administration of this rule will not impose any costs upon this agency, New York State, or its local governments.
(c) Information and methodology: These conclusions are based upon an analysis of the rule from the Department's Taxpayer Guidance Division, Office of Counsel, Office of Tax Policy Analysis, Office of Budget and Management Analysis, and Management Analysis and Project Services Bureau. The rule largely codifies legislative amendments that require corporations with substantial intercorporate transactions to file a combined report. The combined report more properly reflects the tax on related corporations.
5. Local government mandates: The rule imposes no mandates upon any county, city, town, village, school district, fire district, or other special district.
6. Paperwork: The rule imposes no reporting requirements, forms, or other paperwork upon the regulated parties beyond those required by existing law and regulations.
7. Duplication: There are no relevant rules or other legal requirements of the Federal or State governments that duplicate, overlap, or conflict with this rule.
8. Alternatives: Since the legislative amendments made by Chapter 60 of the Laws of 2007 and by Chapter 57 of the Laws of 2008 significantly changed the circumstances under which a taxpayer corporation will be required or permitted to file a combined report with other related corporations, updating the existing rules relating to combined reports was the only viable alternative.
In developing the rule, the Department solicited feedback from various industry groups and associations (see Section 7 of the Regulatory Flexibility Analysis for Small Businesses and Local Governments). Several alternatives that were considered resulted from comments received from the Tax Section of the New York State Bar Association (Bar) and the Business Council of New York State (Business Council).
Both the Bar and the Business Council were concerned about the removal of the unitary business requirement as a prerequisite for combination. While the legislative amendments did not specifically express that the related corporations be engaged in a unitary business for combination to be permitted or required, such principle is embedded in federal case law. The Department decided that the concern was valid and included language in the rule to acknowledge the unitary principle.
Another alternative considered arose from a concern expressed by the Bar in the determination of substantial intercorporate transactions. The legislative amendments provide that one of the transactions/activities considered in determining whether substantial intercorporate transactions exist is "incurring expenses that benefit, directly or indirectly, one or more related corporations". Specifically, the Bar suggested that the Department offer more guidance with respect to what types of activities and transactions are considered and how the determination of expenses directly versus expenses indirectly be made. The Department views these determinations as factual and based on the facts and circumstances for each taxpayer. Therefore, it was decided that offering further guidance in this area was not an alternative.
Another suggestion was made by the Bar regarding the multi-year test for substantial intercorporate transactions. The rule provides that in any year where intercorporate receipts or expenditures are between 45% and 55%, that the substantial intercorporate transactions test will be satisfied if, during that taxable year and prior two years, the intercorporate transactions are in aggregate, 50% or more of the total receipts or expenditures for that period. It was suggested that the rule make it explicit that the multi-year test should be used not only to satisfy the substantial intercorporate transactions test, but to prove that the test is not satisfied. The Department considered providing clarity in this area to be a valid alternative. A clarifying revision was made.
Lastly, both the Bar and the Business Council provided comments concerning the asset transfer test for substantial intercorporate transactions. The Department felt some of these comments warranted revising the rule. As a result, language was added to make it clear that the test applies to assets transferred on or after January 1, 2007. Language was also added to provide that gross income directly derived from an asset includes partnerships interests and that where the asset transferred is an interest in a partnership or an entity treated as a partnership, the income distributed to the transferee by such entity is gross income directly derived from the transferred asset.
It should be noted that the main focus of the comments received from the Business Council were basically the same as those submitted regarding technical memorandum TSB-M-08(2)C. The Business Council felt that the methodology used in determining which corporations are included in the group would be difficult for large multinational corporations to follow. They also felt that the methodology exceeded the scope of the authority the legislature granted with respect to which corporations are required to be included in the combined return. The Department continues to disagree and believes that the interpretations contained in the technical memorandum and the draft rule are the proper reflection of the legislative intent of the statutory amendments.
9. Federal standards: The rule does not exceed any minimum standards of the Federal government for the same or similar subject area.
10. Compliance schedule: The amendments will take effect on the date the Notice of Adoption is published in the State Register and apply to taxable years beginning on or after January 1, 2013. No additional time is needed in order for the regulated parties to comply with this rule.
Revised Regulatory Flexibility Analysis, Rural Area Flexibility Analysis and Job Impact Statement
A revised Regulatory Flexibility Analysis for Small Businesses and Local Governments, Rural Area Flexibility Analysis, and Job Impact Exemption are not required to be submitted because the unsubstantial revisions made to the proposed amendments do not affect any of the statements made in these documents.
Under section 211.4 of the Tax Law, as amended by Chapter 60 of the Laws of 2007, a taxpayer is required to file a combined report with its related corporations if there are substantial intercorporate transactions among the related corporations, regardless of the transfer price of the intercorporate transactions. Related corporations are corporations that meet the ownership and control requirements of Tax Law section 211.4 and section 6-2.2 of the regulations (generally an 80 percent direct or indirect stock ownership test). In addition, a combined report may be required or permitted in the absence of substantial intercorporate transactions if a combined report is necessary in order to properly reflect the tax liability. The amendments conform the combined reports regulations to the current law and largely codify interpretations contained in a technical memorandum, TSB-M-08(2)(C), concerning the Department's interpretation of the combined reporting statutory provisions.
As a result of public comments received, several changes have been made to the proposed rule. Language has been added to sections 6-2.3(b)(2) and 6-2.3(b)(3) of the proposed rule to clarify that intercorporate cost allocations of expenditures that benefit related corporations are not considered receipts or expenditures in determining if there are substantial intercorporate transactions. It was also clarified that expenditures for service functions, such as payroll processing and personnel services, are not considered expenditures that benefit related corporations. Additionally, it is provided that the amendments will take effect on the date the Notice of Adoption is published in the State Register and apply to taxable years beginning on or after January 1, 2013.
There are no modifications to the Regulatory Flexibility Analysis for Small Businesses and Local Governments, Rural Area Flexibility Analysis, and the Job Impact Exemption necessary as a result of these changes.
Assessment of Public Comment
Written comments were received regarding proposal TAF-37-12-00005-P from the Securities Industry and Financial Markets Association (SIFMA) and from the law firm, McDermott Will & Emery.
SIFMA noted that it generally endorses the approach of the rule and offers general suggestions to clarify the treatment of the issues.
SIFMA's first comment concerns situations where substantial intercorporate transactions are absent. SIFMA states that section 211.4 of the Tax Law indicates that the general purpose of filing combined reports is to accurately reflect the New York income and capital of groups of related corporations. SIFMA suggests that the rule should include specific language affirming this principle and indicating the rules are the same regardless of whether taxpayers are seeking permission to file combined reports or the Commissioner is seeking to compel them to file combined reports. Under Section 211.4(a)(4) of the Tax Law, in the absence of substantial intercorporate transactions, no combined report will be required unless the Commissioner determines it is necessary to properly reflect the tax. Sections 6-2.1(b) and 6-2.3(d) of the rule indicate that combined reports may also be permitted in these circumstances. The Department feels no further statements are necessary.
SIFMA notes that the rule's reference to voting power rather than simply to the number of the shares in the stock ownership test in section 6-2.2(a)(3) of the rule is "a welcome change". SIFMA suggests, however, that the rule should provide that voting power has reference to the ability to elect the corporation's board of directors, noting that it is common for corporations to provide that certain classes of stock can vote only on particular issues, but not in elections of directors. It was also suggested that the rule should provide that voting power is determined by reference to the ability to elect directors as of a specific time such as the close of the corporation's taxable year. The Department agrees that voting power for the election of the board of directors is generally determinative of control for the purpose of the capital stock requirement and will be considered for the test. The Department recognizes, however, that it is possible that there could be other arrangements whereby the voting power for the election of the board of directors is not so determinative. The Department does not feel any further clarification is necessary.
With respect to the substantial intercorporate transactions test, SIFMA questions the relationship between the provision indicating that the activity of "incurring expenses that benefit, directly or indirectly, one or more related corporations" is considered and the statement that "[i]ntercorporate cost allocations are not considered." SIFMA requests that this relationship be clarified. The Department agrees and has made changes to sections 6-2.3(b)(2) and 6-2.3(b)(3) of the rule to clarify that intercorporate cost allocations of expenditures that benefit related corporations are not considered receipts or expenditures in determining if there are substantial intercorporate transactions. It is also clarified that expenditures for service functions, such as payroll processing and personnel services, are not considered expenditures that benefit related corporations.
SIFMA states that it would be helpful if the rule clarified the meaning of "regardless of the transfer price for such intercorporate transactions" in the determination of substantial intercorporate transactions. It was asked whether the phrase meant that the actual price used for intercorporate transactions would be the determining factor in analyzing whether the intercorporate transactions are substantial. It was suggested that it would be helpful if the regulations provided that the amount of the intercorporate transaction will be based on the actual price charged and cannot be increased or decreased by transfer pricing analysis except in egregious and abusive cases. The Department does not disagree with SIFMA, but does not feel a clarification is necessary or warranted. The test measures receipts and expenditures on a taxpayer's books. If adjustments for transfer pricing affecting receipts and expenditures occur at the federal level, the test would need to be readministered accordingly.
SIFMA suggests that it would be helpful if the rule provided that combined or separate filing status established on audit will continue for future taxable years unless there is a change in circumstances and that the burden of proof should be on the party (whether the Department or taxpayer) seeking to show a change in circumstances. The Department does not believe this would be appropriate. The inclusion or exclusion of a corporation in a combined report is based on the facts and circumstances in each taxable year and is subject to revision or disallowance on audit. This is expressed in section 6-2.4(b) and 6-2.4(c) of the existing regulations.
SIFMA proposes the inclusion of an express statement that ineligible corporations in a combined report (e.g. alien corporations) are taken into account in determining the existence of substantial intercorporate transactions in the ten-step process in section 6-2.3(c) of the proposed rule. The Department believes it is clear the test is performed on all corporations in the tentative combined group prior to the removal of any ineligible corporations in step ten. No clarification is necessary.
SIFMA indicates that it would be helpful if the rule specifically referred to the treatment of stapled corporations (certain alien corporations filing as domestic corporations for federal income tax purposes) and indicated whether these corporations are treated as alien or domestic corporations for combined reporting purposes. The Department points out that Tax Law section 211.4(a)(5) provides that a corporation organized under the laws of a country other than the United States is not required or permitted to make a combined report. No changes were made to the proposed rule.
SIFMA recommends that the rule provide some guidance as to when the Commissioner would permit or require a corporation included in a combined reporting group to change its taxable year. Section 6-3.2(b) of the rule provides that where a corporation has a different taxable year from that of the taxpayer designated as parent, the applicable taxable year of such corporation to be included in the combined group is the taxable year that ends within the taxable year of the designated parent. The intent of this provision is to not preclude a related corporation from making a combined report merely because it has a different accounting period. The Commissioner may allow a corporation to conform to the accounting period of the group regardless of its federal accounting period. The Department believes these are isolated instances and no clarification is necessary.
SIFMA proposes it would be helpful if the Department also applied a limited period for applying the asset transfer test for assets not required to be depreciated or amortized for Federal income tax purposes. The Department points out that the proposed rule provides that in the case of an asset not required to be depreciated or amortized for Federal income tax purposes, the test is applied for each year the asset is reflected on the books and records of the transferee under generally accepted accounting principles. The Department did consider further limiting the period for applying the test, but felt that the asset could generate gross income for as long as it was on the transferee's books and records. Therefore, the Department feels no limitation is warranted.
SIFMA states that the regulations should be generally effective as of January 1, 2007 as the amendments made by Chapter 60 of the Laws of 2007 apply to taxable years beginning on or after that date. However, SIFMA states it would be helpful if the rule were to expressly allow taxpayers to rely on the Department's prior guidance provided in a technical memorandum, TSB-M-08(2)C, until the publication of the rule or a designated effective date. Since some of the amendments in the rule represent a departure from the interpretations taken in the TSB-M, the Department has, based upon this comment, provided that the amendments would apply to taxable years beginning on or after January 1, 2013.
McDermott Will & Emery questions whether federal mark-to-market adjustments included in the computation of entire net income are properly included in the substantial intercorporate transactions test. McDermott Will & Emery suggests that these are not the types of transactions that the test is attempting to measure and therefore should not be included. The Department agrees that these transactions should not be included in the substantial intercorporate transactions test. Mark-to-market adjustments under the Internal Revenue Code result in a gain or loss adjustment accounted for in the computation of federal taxable income. These adjustments are not considered a receipt or expenditure. Since the substantial intercorporate transactions test is based upon a corporation's receipts or expenditures, the Department feels it is clear that the existing language sufficiently addresses the concern. No changes were made to the amendments as a result of this comment.
McDermott Will & Emery questions whether an alien corporation (e.g., an alien banking corporation subject to the Franchise Tax on Banking Corporations imposed by Article 32 of the Tax Law) in a tentative combined group under the Business Corporation Franchise Tax imposed by Article 9-A of the Tax Law should apply the substantial intercorporate transactions test using receipts and expenses from its effectively connected income or its worldwide income. The Department has consistently interpreted the substantial intercorporate transactions test as an Article 9-A test. There is nothing in these amendments that changes that interpretation. The test is based upon entire net income computed on a worldwide basis regardless of a related corporation's NYS franchise tax filing status (e.g. Article 9, Article 32, or Article 33). The Department feels that the existing regulations are clear and no changes to the proposed rule are necessary.
McDermott Will & Emery raised several questions regarding example 7 in section 6-2.7 of the rule regarding a common pool of employees. Example 7 in the rule is derived from example 7 in Section 6-2.3(f) of the existing regulations. It is also included in technical memorandum, TSB-M-08(2)C. The conclusion of the example in the technical memorandum was slightly modified to illustrate the application of the updated substantial intercorporate transactions test. The example in the rule is identical to the example in the technical memorandum. The Department's position is that this example is only meant to illustrate how the test works for a certain set of facts and is not intended to be all inclusive. The Department feels it is not feasible to try and address a multitude of hypothetical questions and fact patterns by regulations. No changes were made to the rule as a result of this comment.
