On March 22, 2018, the New York Department of Taxation and Finance (NYS Department) in TSB-M-18(1)C (TSB) announced that certain New York State (NYS) corporate taxpayers have until June 1, 2018 to withdraw the commonly owned group election previously made by their designated agent on a timely 2015 or 2016 Form CT-3-A, General Business Corporation Combined Franchise Tax Return (NYS combined return). Similarly, on March 29, 2018, the New York City (NYC) Department of Finance (NYC Department), in Finance Memorandum 18-3 (Finance Memorandum), announced the same commonly owned group election withdrawal procedures to be followed by June 1, 2018 on a tax year 2015 or 2016 Form NYC-2A, Combined Business Corporation Tax Return (NYC combined return). All of the corporations in the original combined group must follow the required procedures by the deadline in order for the NYS and NYC Departments to allow the designated agent to withdraw the election.

Background

For tax years beginning on or after January 1, 2015, a group of commonly owned or controlled corporations may make the commonly owned group election, in which they can elect to file NYS and NYC combined returns. Such an election is made on NYS Form CT-3-A and NYC Form NYC-2A, and the combined group includes all the corporations that meet the statutory ownership requirements (i.e., generally, more than 50% ownership, whether or not the corporations are conducting a unitary business).¹ The commonly owned group election, which must be made by the combined group's designated agent on a timely filed original return, is irrevocable and binding for seven years. If the election is made, all the corporations that meet the combined group ownership requirements are treated as members of a single combined group for combined reporting purposes, regardless of whether these corporations are included in the same federal consolidated return. Further, when the commonly owned group election is made, corporations that directly or indirectly meet any of the ownership requirements with any taxpayer in the commonly owned group must be included in the combined group.²

According to the TSB and the Finance Memorandum, the NYS and NYC Departments found several instances in which a designated agent made the election but not all corporations meeting the ownership requirements for the combined group were included in the 2015 and 2016 combined returns. Instead, corporations included in the combined group were the same corporations included in the designated agent's federal consolidated return for that tax year. Under the commonly owned group election requirements, all corporations that meet the ownership requirements must be included, regardless of whether the corporations are included in the same federal consolidated return. Given the confusion around which corporations are included in the combined group once the election is made and because the composition of the combined group may differ significantly when all the required corporations are properly included, the NYS and NYC Departments are temporarily permitting the designated agent to withdraw the election under certain limited circumstances described below.

Limited time withdrawal procedure

The NYS and NYC Departments will permit withdrawal of the commonly owned group election only if: (1) the designated agent of a combined group made the commonly owned group election for the first time on the combined group's original, timely filed 2015 or 2016 return; (2) corporations included in the combined return identically matched the corporations in the designated agent's federal consolidated return for that tax year; (3) the 2015 or 2016 combined return did not include any other corporations that met the combined filing ownership requirements; and (4) the withdrawal, following the procedures in the TSB and the Finance Memorandum, is made by June 1, 2018.

The procedures that the designated agent must follow by June 1, 2018 in order to withdraw the commonly owned group election include, but are not limited to: filing an amended NYS Form CT-3-A or amended NYC Form NYC-2A for the first year the commonly owned group election was made but not marking the commonly owned group election box on the amended return, including a statement that the commonly owned group election is being withdrawn based on the TSB or Finance Memorandum, and including only those corporations that meet both the ownership requirement and the unitary business requirement in the combined group on the amended return.

A designated agent that properly withdraws the commonly owned group election on its 2015 combined return, and that has previously filed a 2016 combined return, must also amend the 2016 combined return by June 1, 2018 using the above procedures and include therein only corporations in the group that meet both the ownership and unitary business requirements. The designated agent may not make the commonly owned group election on the 2016 amended return (since the election must be made on a timely filed original return), but could make the election on a timely filed original return for later tax years. If a designated agent properly withdraws the commonly owned group election for tax year 2015 by June 1, 2018, and later makes the election on a timely filed original return for tax year 2016 or later, the election is irrevocable regardless of the entities included in the combined group and is binding for the tax year the election is made and for the following six tax years.

Corporations that were taxpayer members included in the original combined return for 2015 and 2016, but were not included in the designated agent's amended combined returns for those tax years, must: (1) file their own separate or combined corporate franchise/business tax returns for those tax years by June 1, 2018; (2) include a statement that the commonly owned group election is being withdrawn based on the TSB or Finance Memorandum; and (3) provide the name and employer identification number of the designated agent on the original combined return for 2015 and 2016. Non-taxpayer members of an original combined return that were not included in the 2015 or 2016 amended returns that meet the combined filing ownership requirements and are unitary with another taxpayer for those tax years must file combined with that taxpayer for those tax years by June 1, 2018.

Implications

Taxpayers who made a NYS or NYC commonly owned group election on a 2015 or 2016 combined return should review the corporations the designated agent included in the group election to ensure that all corporations meeting the ownership requirements for the combined group were included. If the election was mistakenly made under the circumstances described above, taxpayers have until June 1, 2018, to withdraw the election. If the election is not withdrawn, it will remain binding for a seven-year period (the year in which the election was made and the following six years).

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ENDNOTES

¹ N.Y. Tax Law Section 210-C(3); N.Y.C. Admin. Code Section 11-654.3(3).

² N.Y. Tax Law Section 210-C(2)(c) and N.Y.C. Admin. Code Section 11-654.3(2)(c) list circumstances where a corporation is not required or permitted to be included in the combined return. These prohibitions extend to the commonly owned group election.