Taxation of Gains and Losses on Sales of New York Subsidiary Stock

By Clements, Bruce | The CPA Journal, November 2009 | Go to article overview

Taxation of Gains and Losses on Sales of New York Subsidiary Stock


Clements, Bruce, The CPA Journal


When dealing with New York combined group returns, capital gains and losses from subsidiary sales have important tax implications. Recent changes in New York law have created new statutory, regulatory, and judicial considerations for parties involved in these sales.

Under Article 9-A of the Tax Law, New York imposes a franchise tax. on corporations equal to the highest of four bases: allocated entire net income (ENl), allocated capital, allocated minimum taxable income, or a fixed-dollar minimum tax. Income and capital are segregated into business and investment income and capital. In addition to the highest tax among these four items, section 210.1 adds a separate tax on subsidiary capital at nine-tenths of a mill ($.0009) for each dollar of subsidiary capital allocated to New York, based on the fair market value of real properly and marketable securities and the book value of other personal property. Sections 208.3 and 208.4 provide that subsidiary capital includes the stock and indebtedness of corporations of which the parent corporation owns more than 50% of the voting stock.

For purposes of Article 9-A (section 208), capital assets are classified as subsidiary capital, which are "investments in the stock of subsidiaries and any indebtedness from subsidiaries," investment capital, which are "investments in stocks, bonds and other securities, corporate and governmental, not held for sale to customers in the regular course of business, exclusive of subsidiary capital and stock issued by the taxpayer," and business capital, which encompasses "all assets, other than subsidiary capital, investment capital and stock issued by the taxpayer, less liabilities not deducted from subsidiary or investment capital."

Defining Entire Net Income

Section 208.9 provides that "entire net income" is "total net income from all sources, which shall be presumably the same as the entire taxable income (but not alternative minimum taxable income), which the taxpayer is required to report to the United States Treasury Department." ENI is subject to several adjustments, including that in section 208.9(a)( 1 }, which states, "Entire net income shall noi include: (1) income, gains and losses from subsidiary capital.1' Section 208.9(a)(l) thus requires that capital gains realized on the sale of a subsidiary be subtracted in computing entire net income and capital losses added back to income. Section 208.9(b)(6) provides also that entire net income is determined without deduction for "interest directly or indirectly and any other amount directly or indirectly attributable as a carrying charge or otherwise to subsidiary capital or to income, gains or losses from subsidiary capital." Section 21 1.4(b)(2) complicates matters by providing that "in computing . . . combined subsidiary capital intercorporate stockholdings shall be eliminated."

The wording of sections 208.9(a)( I ) and 211.4(b)(2) can produce different statutory interpretations and substantially different results. A broad view of these sections suggests that section 21 1.4(bX2) modifies the definition of subsidiary capital in section 208.9(a)(1), thercfore eliminating the addition of losses and reduction of gains on subsidiary investments from the entire net income equation. Alternatively, as the New York State Department of Taxation and Finance (DTF) has unsuccessfully argued, section 21 1.4(b)(2) was not intended by the legislature as a modification provision and instead applies only to the calculation of subsidiary capital for that portion of the lax base.

The Bausch & Lomb Controversy

In 1996. Bausch & Lomb. Inc. (B&L). sold a subsidiary. Oral Care, at a substantial capital loss (approximately $93 million), deducted die loss on its 1996 return, and carried it back to prior years, applying for a refund (In the Matter of Petition of Bausch & Lomb, Inc., Tax Appeals Tribunal, DTA No. 819883, December 20. 2007). In challenging the statute, B&L argued diat the mie of section 208. …

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