Taxpayers and practitioners who are unaware of the changes made by recent legislation concerning corporate acquisitions might mistakenly conclude that a parent company can exclude from entire net income all current and prior dividends received from a corporation in which its owns or owned greater than 50% of the corporation's voting stock.
Generally, for purposes of computing New York State entire net income under Article 9-A, New York Tax Law Sec. 208.9(a)(1) excludes income, gains, and losses from subsidiary capital. Instead, the parent pays a tax on its average subsidiary capital which is in addition to its regular tax. New York Tax Law Sec. 208.3 defines a subsidiary as a "corporation of which over 50% of the number of shares of stock entitling the holders thereof to vote for the election of the directors or trustees is owned by the taxpayer." Subsidiary capital is defined by Sec. 208.4(a) as investments in stock of subsidiaries and any indebtedness from subsidiaries, exclusive of ordinary trade receivables, on which interest is not deducted by the subsidiary under article 9-A, 32 or 33 of New York Tax Law Chapter 60. In addition, subsidiary capital must be reduced by liabilities of the parent that are directly and indirectly related to such subsidiary capital. However, recent legislation in this area has changed these rules for certain corporate acquisitions.
1989 TAX LEGISLATION--SUBSIDIARY CAPITAL
Legislation passed in 1989 was intended to limit certain tax benefits associated with various business restructuring. For example, New York Tax Law Sec. 208.4(b) excludes the definition of subsidiary capital certain stock investments if, within 18 months from the acquisition, the parent disposes of the stock of the target and such disposition results in a reduction of the parent's ownership from greater than 50% of the target's voting stock to less than 50%. If such a change in ownership occurs, the stock of the target does not constitute subsidiary capital of the parent for any part of the taxable year in which such disposition occurs.
In addition, New York Tax Law Sec. 208.4(c) prohibits subsidiary capital treatment if within 18 months of a subsidiary acquisition, the target corporation sells or otherwise disposes of more than 50% of the assets (other than cash or assets held for sale in the ordinary course of the target's trade or business) it held on the date it was acquired. For purposes of this calculation, the target's real property and marketable securities are valued at fair market value and its personal property, other than marketable securities, is valued at book value in accordance with generally accepted accounting principles. …