N.Y. Comp. Codes R. & Regs. Tit. 20 §§ 3-6.1
The following are examples intended to address only the determination of whether the capital is business capital or investment capital. The examples do not address the corporation's entire tax computation, such as the apportionment of amounts deemed business income.
Example 1: Fossil Fuel Corporation ("Fossil") is a vertically integrated oil business. Fossil recently sold off 60% of its 100% ownership interest in Northwest Exploration, Inc. ("NWE"), a subsidiary engaged in oil exploration in far northern latitudes. While Fossil no longer owns a majority of NWE's stock, it remains the largest shareholder. In addition, NWE continues to operate as part of Fossil's vertically integrated oil business, benefiting from functional integration, centralized management and economies of scale.
NWE and Fossil are engaged in a unitary business but cannot be included in a combined report because they do not meet the capital stock requirement. Because Fossil and NWE are unitary, Fossil's NWE stock is other unitary corporation stock. Fossil's NWE stock is business capital because other unitary corporation stock is always business capital. In addition, the dividend income Fossil receives from NWE would constitute other unitary corporation dividends and, as such, other exempt income. Any gain on the sale of additional NWE stock by Fossil would be business income.
Example 2: NewsCo is a newspaper publisher incorporated in Delaware and commercially domiciled in Illinois that publishes local newspapers in New York and 10 other states. In 2020, anticipating a serious shortage of newspaper print, NewsCo acquires 30% of the stock of PaperCo, a paper mill company with facilities in North Carolina, Georgia and Oregon. This action is taken in an attempt to mitigate the risk of a shortage of newsprint. Based on its significant ownership share, NewsCo is given two seats on PaperCo's 15-member board of directors. No changes are made in PaperCo's senior management, and the relationship of the two businesses largely remains that of purchaser and supplier. In 2022, when it appears the newsprint shortage is over, NewsCo sells its stock in PaperCo for a gain of $80 million.
NewsCo and PaperCo are not engaged in a unitary business. They are in related but distinct lines of business, and while NewsCo owns 30% of PaperCo's stock and has two seats on the board of directors, no steps were taken toward functional integration or centralized management. However, while the two corporations are not engaged in a unitary business, NewsCo's investment in PaperCo, Inc. serves an operational function for NewsCo's that is, to facilitate NewsCo's access to newsprint during the shortage. Consequently, the PaperCo stock owned by NewsCo is not constitutionally protected investment capital.
If the stock meets all of the criteria in section 3-4.1(a)(1) or (a)(2) of this Part, the stock would be considered either actual or presumed investment capital, respectively. Dividend income received from PaperCo and the $80 million gain from the sale of PaperCo's stock would be income from investment capital.
If the stock did not meet the criteria in section 3-4.1(a)(1) or (a)(2) of this Part, then the stock would be business capital. As a result, any dividend income received from PaperCo would be business income and the $80 million gain from the sale of PaperCo's stock would be business income.
Example 3: Ore Corporation, a mining company incorporated and commercially domiciled in Utah, routinely invests its cash on hand in short-term debt instruments that yield interest income. These investments serve an operational function in Ore corporation's business and therefore are not constitutionally protected investment capital. Consequently, these debt instruments are business capital, and the income they generate is business income.
Example 4: EquipmentCo, a manufacturer of farm equipment incorporated in Delaware and commercially domiciled in Iowa, operates sales and distribution facilities in New York State. EquipmentCo maintains a portfolio of stocks and bonds in the telecommunications sector managed to generate long-term gains. As such, its investments in telecommunications stocks and bonds are not part of EquipmentCo's unitary farm equipment business in New York State and do not serve an operational function in EquipmentCo's business. The dividend and interest income generated by the telecommunication stocks and bonds do not have the constitutionally required connection to EquipmentCo's business in New York State. The stocks and bonds qualify as constitutionally protected investment capital and the income from the stocks and bonds is income from investment capital.
Example 5: MMW, Inc. is engaged in a multistate manufacturing and wholesaling business incorporated and commercially domiciled in New Jersey. In connection with that business, it maintains a special reserve fund available for use in the case of a natural disaster or other extraordinary event. The securities in the reserve fund include both "blue chip" stocks and AAA bonds. The fund serves an operational function for MMW, Inc. " ensuring the unitary business can remain operational in the event of a natural disaster or other extraordinary event. Since the securities in the fund serve an operational function, the securities are not constitutionally protected investment capital. Because actual and presumed investment capital is limited by law to stocks, the bonds are prohibited from being investment capital and any interest income or net gains generated by those bonds is business income. In order for the stocks in the special reserve fund to be considered investment capital, the stocks must satisfy the criteria in section 3-4.1(a)(1) or (a)(2) of this Part. If the stocks are investment capital, the dividends from the stock and the net gains from the sale of the stock would be income from investment capital. If the stocks do not satisfy these criteria, the stocks would be business capital and the dividends and net gains from those stocks would be business income.
Example 6: MNO is incorporated and commercially domiciled in California. It develops software. In 2022, MNO issued a stock offering, netting $300 million. The explicitly stated purpose of the offering was to provide additional capital for the acquisition of companies and products in the same line of business as, or complementary to, MNO's line of business. Consistent with that purpose, MNO kept the funds acquired in segregated accounts. Within those accounts, MNO invested in a broad array of securities, including both stocks and bonds.
Because the explicit stated purpose of the funds and assets in the segregated accounts is clearly tied to the unitary software development business of MNO, the funds and securities serve an operational function for all years the funds and securities are at MNO's disposal. As such, the securities are not constitutionally protected investment capital. Because actual and presumed investment capital is limited by law to stocks, the bonds are prohibited from being investment capital and any income earned from those bonds is business income. If the stocks in the segregated accounts meet all the criteria in section 3-4.1(a)(1) or (a)(2) of this Part, the stocks would be considered actual or presumed investment capital, respectively, and the dividends and net gains from the stocks would be income from investment capital. If the stocks do not satisfy all of those criteria, the stocks would be business capital and the dividends and net gains from those stocks would be business income.
Example 7: Retail Corp, incorporated and commercially domiciled in North Carolina, earns substantial revenue from its retail operations located solely within New York. It invests a large portion of the revenue in fixed income securities that are divided into three categories:
Example 8: Manu Corp. is a manufacturer incorporated and commercially domiciled in California with facilities in New York and other states. In 2018, Manu Corp. purchases, at a deep discount, corporate bonds issued by Grocery, Inc., a large supermarket chain in default on its interest payments and on the verge of bankruptcy. Manu Corp. believes that Grocery, Inc. will be able to emerge from its difficulties as a viable business and that the Grocery, Inc. bonds it holds will sell at a considerably higher price at some future date. Manu Corp. sells the bonds in 2022 for a significant gain. Even though Manu Corp's investment is in corporate bonds, the nature of the investment is more akin to an investment in stock held for long-term appreciation. Manu Corp. will not be receiving interest income from the bonds or using the bonds as collateral. The bonds, therefore, are not serving an operational function. The investment in the bonds is an investment separate and apart from the unitary business of Manu Corp. The net gain on the sale of the bonds does not have the constitutionally required connection to Manu Corp's operations in New York. The bonds are constitutionally protected investment capital and the net gain is income from investment capital.
Example 9: Same facts as example 9, except that the purchaser of the Grocery, Inc. corporate bonds is FISCO, which is incorporated and commercially domiciled in Connecticut and operates a diversified financial services business. In addition to being a dealer in securities, it buys and sells securities for its own account. The purchase of the Grocery, Inc. bonds is within the scope of FISCO's unitary financial services business of buying and selling securities. Therefore, the bonds are not constitutionally protected investment capital. In the hands of FISCO, the Grocery Inc. corporate bonds are business capital and the net gain on the sale of the bonds is business income.
Example 10: VinylCo is incorporated and commercially domiciled in Delaware and is a manufacturer of rubber and vinyl products. In 2022, it purchased a 15% interest in SupplierCo, which supplies VinylCo with synthetic rubber, to obtain status as a preferred customer. In all other respects, VinylCo and SupplierCo operate independently. VinylCo and SupplierCo are not engaged in a unitary business. However, VinylCo's investment in SupplierCo serves an operational function for VinylCo by helping VinylCo to maintain an ongoing supply of synthetic rubber. As such, the stock VinylCo owns in SupplierCo is not constitutionally protected investment capital. If the stock meets all the criteria in section 3-4.1(a)(1) or (a)(2) of this Part, the stock would be considered actual or presumed investment capital, respectively, and the dividends and net gains from the stock would be income from investment capital. If the stock does not satisfy all of these criteria, the stock would be business capital and the dividends and net gains from the stock would be business income.
Example 11: RDS is incorporated and commercially domiciled in Connecticut, and is principally engaged in the operation of a chain of retail department stores within and without New York State. RDS also holds stock in several corporations, including QRS Inc., which designs, develops and markets "off-the-shelf" computer programs. In 2022, RDS sells its stock in QRS Inc. which it purchased in 2014, at a $100 million net gain. Because RDS's investment in the stock of QRS Inc. was not part of RDS's unitary retail business and did not serve an operational function, the stock is constitutionally protected investment capital and the net gain is income from investment capital.
Example 12: Corporation A has entire net income (ENI) of $15,000. Included in that amount is $0 of gross other exempt income and $2,000 of gross investment income before the gross investment income limitation provided for in section 3-4.5(c) of this Part, broken down as follows:
* $1,700 from constitutionally protected investment capital; and
* $300 from actual investment capital.
The gross investment income limitation in section 3-4.5(c) of this Part provides that gross investment income is limited to greater of the income from constitutionally protected investment capital of $1,700 or 8% of ENI of $15,000, or $1,200. As a result, Corporation A has $1,700 of gross investment income in the tax year.
Corporation A elects to use the safe harbor reduction method of this Part when computing investment income and therefore reduces the $1,700 of gross investment income by 40%. The result is $1,020 of investment income claimed in the tax year.
Example 13: Same facts as example 12, except that Corporation A did not elect to use the safe harbor method election and determines it has $400 of interest deductions directly or indirectly attributable to gross investment income and investment capital.
Corporation A must reduce its gross investment income of $1,700 by $400, the total interest deductions directly or indirectly attributable to gross investment income and investment capital. The result is $1,300 of investment income claimed in the tax year.
Example 14: Corporation A has ENI of $100,000 in the 2021 tax year. Included in that amount is $0 of gross other exempt income and $20,000 of gross investment income before the gross investment income limitation in section 3-4.5(c) of this Part, broken down as follows:
* $2,000 from constitutionally protected investment capital;
* $7,000 from actual investment capital; and
* $11,000 from presumed investment capital.
The gross investment income limitation in section 3-4.5(c) of this Part provides that gross investment income is limited to the greater of the $2,000 of the income from constitutionally protected investment capital or 8% of ENI, which is $8,000. As a result, Corporation A has gross investment income of $8,000 in the 2021 tax year.
Corporation A does not elect to use the safe harbor reduction method and determines it has $1,750 of interest deductions directly or indirectly attributable to gross investment income and investment capital.
Corporation A must reduce the $8,000 of gross investment income by $1,750, the total amount of interest deductions directly or indirectly attributable to gross investment income and investment capital. The result is $6,250 of investment income claimed in the 2021 tax year.
After filing the report for the 2021 tax year, Corporation A disposes of its 2021 presumed investment capital before it is held for more than one year. Based on the ordering rules in section 3-4.5(b) of this Part, the $8,000 of gross investment income claimed in the 2021 tax year was comprised of $2,000 from constitutionally protected investment capital and $6,000 from actual investment capital. Corporation A is not subject to the requirements in section 3-4.4 of this Part because the amount of investment income claimed in the 2021 tax year, after applying the gross investment income limitation in section 3-4.5(c) of this Part, did not include income from presumed investment capital that failed to meet the holding period requirement.
Example 15: Corporation D has $50,000 in ENI in the 2021 tax year. Included in that amount is $0 of gross other exempt income and $20,000 of gross investment income before the gross investment income limitation in section 3-4.5(c) of this Part, broken down as follows:
* $3,000 from stock A that is actual investment capital;
* $2,000 from stock B that is presumed investment capital; and
* $15,000 from stock C that is presumed investment capital.
The gross investment limitation in section 3-4.5(c) of this Part provides that gross investment income is limited to the greater of income from constitutionally protected investment capital, which is $0, or 8% of ENI, which is $4,000. As a result, Corporation D has gross investment income of $4,000 in the 2021 tax year.
Corporation D does not elect to use the safe harbor reduction method and determines it has $1,170 of interest deductions directly or indirectly attributable to gross investment income and investment capital. Corporation D must reduce its gross investment income of $4,000 by $1,170, the total amount of interest deductions directly or indirectly attributable to gross investment income and investment capital. The result is $2,830 in investment income claimed in the 2021 tax year.
After filing the report for the 2021 tax year, Corporation D disposes of Stock B after it is held for more than one year and Stock C before it is held for more than one year. Based on the ordering rules in section 3-4.5(b) of this Part, the $4,000 of gross investment income claimed in the 2021 tax year was comprised of $3,000 from Stock A (the actual investment capital) and $1,000 from Stock B (the presumed investment capital held for more than one year). Corporation D is not subject to the requirements in section 3-4.4 of this Part because the amount of investment income claimed in the 2021 tax year, after applying the gross investment income limitation in section 3-4.6(c) of this Part, did not include income from presumed investment capital that failed to meet the holding period requirement.
Example 16: InvestCo is a foreign corporation that owns a minority interest in Asset Manager, a partnership operating solely in New York State that performs a variety of investment activities. InvestCo and Asset Manager are not engaged in a unitary business. Aside from its investment in Asset Manager, InvestCo has no physical presence or activities in New York State.
In 2022, InvestCo sells its interest in Asset Manager for a gain. Because the increase in Asset Manager's value was a result of its activities within New York State and the benefits provided by New York State, InvestCo's interest in Asset Manager is not constitutionally protected investment capital. As such, the interest in Asset Manager is business capital and the gain from disposition of such interest is business income.
N.Y. Comp. Codes R. & Regs. Tit. 20 §§ 3-6.1