On January 7, 2016, the New York Department of Taxation and Finance (Department) issued TSB-M-15(4.1)C, (5.1)I to supplement the information in TSB-M-15(4)C, (5)I, regarding investment capital identification requirements for Article 9-A taxpayers by providing additional investment capital identification periods for certain non-dealers. The additional investment identification periods apply to specified circumstances involving non-dealer corporations and non-dealer partnerships (described below) occurring on and after October 1, 2015. The additional periods do not apply to corporations and partnerships that are dealers under IRC Section 1236 (dealers in securities). ¹ EY expects New York City to follow these rules.

Revised reporting requirements effective for tax years beginning on or after January 1, 2015

Legislative changes to the New York State and City corporation income tax laws may affect the reporting and accounting requirements for certain corporations and partnerships, beginning with the 2015 tax year.² The revised taxing statutes do not impose tax on a corporation receiving income from investment capital as well as a corporate partner's income therefrom (subject to certain limitations). Moreover, such investment capital will not be subject to New York's tax on capital. The corporation and partnership, however, must comply with certain requirements before a corporation or a corporate partner will be able to classify eligible income as investment income. Among these requirements is an investment capital identification requirement. A corporation and partnership must follow the required identification procedures to treat their investment capital and the income therefrom as investment income.

Generally, for taxpayers that are non-dealers, stock must be identified before the close of the day on which the stock was purchased in an account maintained for investment capital purposes only. Such account must disclose the name of the stock, CUSIP number of the stock (or CINS number for international securities), date of purchase, number of shares purchased and purchase price. If the stock is later sold, the account also must disclose the date of sale, number of shares sold and sales price. The investment capital account may be maintained in either the taxpayer's books for recordkeeping purposes only or in a separate depository account managed by a clearing company as nominee for the taxpayer. In either case, the account must be set up in a way to readily identify the length of time the stock was owned by the taxpayer.

Additional time may be permitted to identify investment capital

Non-dealer corporations and non-dealer partnerships may be allowed an additional period to identify stock and have it qualify as investment capital. When an additional investment capital identification period applies, the period for a corporation or partnership to identify the stock as investment capital begins on the later of the measurement date or January 7, 2016, and ends on the close of business of the 90th day thereafter (additional identification period end date.) Stock eligible to be identified as investment capital is limited to stock owned by the corporation or partnership by the additional identification period end date. Any stock purchased by non-dealer corporations and partnerships after the additional identification period end date must be identified as stock held for investment before the close of the day on which the stock was acquired in order for the stock to be eligible for investment capital treatment.

Measurement date: non-dealer corporations

A non-dealer corporation's measurement date varies based on its New York activities and receipts. When a corporation first becomes subject to New York's corporation franchise tax on or after October 1, 2015, the measurement date is the date that the corporation begins doing business, employing capital, owning or leasing property, or maintaining an office in New York. A corporation that becomes subject to tax solely because it is deriving receipts within New York will have a measurement date based on the date on which the corporation first has receipts of $1 million or more. Finally, for a unitary group that becomes subject to tax solely because it derives receipts from activity in New York, the measurement date for every corporation included in the unitary group as of the additional identification period end date is the date on which the aggregate unitary group first has receipts within New York of $1 million or more.

If a corporation is not a New York taxpayer, has not been previously included in a combined report, and first meets the capital stock requirement to be included in a combined report with a taxpayer³ on or after October 1, 2015, the measurement date for that corporation is the day it meets the capital stock requirement to first be included in a combined report.

Measurement date: non-dealer partnerships

Per the previously issued TSB on this topic, a non-dealer partnership is required to make the investment capital identification for stock that the partnership owns so that its corporate partners using the aggregate method (i.e., flow-through of partnership items under Regulation Section 3-13.3) may claim that stock as investment capital. Partnerships that qualify for the additional identification period must make the identification of the stock as investment capital during such additional investment capital identification period as described below.⁴

For a partnership that first begins doing business, employing capital, owning or leasing property, or maintaining an office in New York on or after October 1, 2015, the measurement date for the stock owned by the partnership is the date that the partnership begins doing business, employing capital, owning or leasing property, or maintaining an office in the state. For a partnership that solely derives receipts from New York activity, the measurement date is the date on which the partnership first has receipts within the state of $1 million or more.

For a partnership that is not itself doing business, employing capital, owning or leasing property, maintaining an office, or deriving receipts in New York but, on or after October 1, 2015, first has as a partner one or more corporations subject to Article 9-A tax, the measurement date is the date the corporation joins the partnership. Finally, for a partnership that is not itself doing business, employing capital, owning or leasing property, maintaining an office, or deriving receipts in New York, and prior to October 1, 2015, none of its corporate partners were subject to tax in New York, but, on or after October 1, 2015, one or more of its existing corporate partners becomes subject to New York tax, the measurement date is the first date that one of its existing corporate partners becomes subject to tax in New York.

Stock acquired pursuant to options: identification procedures

Any stock purchased pursuant to an option acquired before the additional period end date by a non-dealer corporation or a non-dealer partnership may not be identified as investment capital unless the corporation or partnership clearly identified the option in its records as held for investment before exercise of the option and such stock purchase. For investment capital identification procedures for stock purchased by non-dealers pursuant to options acquired after that additional end date, please refer to the Department's related technical memorandum, TSB-M-15(4)C, (5)I under the related heading.

Implications

Non-dealer corporations and partnerships should consider additional opportunities to identify stock as investment capital to obtain New York tax benefits before more strict investment capital identification deadlines may apply.

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ENDNOTES

¹ For dealers, the presence or absence of the federal identification of a security as held for investment under IRC Section 1236 is determinative for New York state investment capital purposes.

² For more information on the New York State (NYS) corporate franchise tax provisions contained in Article 9-A as amended by New York corporate franchise tax reform, see Tax Alert 2014-655.

³ N.Y. Tax Law Section 210-C(2)(a).

⁴ To the extent that the corporate partnership rules under TSB-M-15(4)C, (5)I conflict with TSB-M-15(4.1)C, (5.1)I, the latter controls.