Tax News Update    Email this document    Print this document  

On September 12, 2024, the NYC Department of Finance (Department) issued revised guidance, in the form of a White Paper, on its plans for finalizing the BCT regulations. The Department is in the process of developing regulations to implement the BCT, which will be based on the recent State regulations promulgated in December 2023 (see Tax Alert 2024-0140). Similar to its initial release,¹ the Department's revised guidance discusses various decision points and potential deviations from State regulations after considering feedback and comments received from industry.

This Alert summarizes those deviations and any changes from the prior guidance.

Allocation of flow-through income from partnerships

The Department previously announced an intention to deviate from the aggregate methodology NYS uses to apportion partnership receipts. In particular, the Department suggested it would apply the UBT's income allocation methodology to the distributive shares of income that corporations received from partnerships. That proposal created uncertainty around income classification, income allocation, losses, expense attribution, and nexus, among other things. After considering public comments received on this proposed approach, the Department decided to abandon this method, stating:

"Having reviewed the feedback and considered these questions, challenges and alternatives, the Department will not go forward with the initially considered methodology that uses the UBT sourcing rules to allocate partnership income earned by corporations. Although the City maintains that it does have considerable discretion in establishing the allocation of partnership receipts with respect to the BCT, uniformity across the State and City corporate tax regimes will streamline the process of tax administration and reduce the cost of doing business in the City of New York."

The Department was not specific about how it will approach apportioning or allocating income from partnerships, but the White Paper implies NYC will conform to the NYS corporate franchise tax regulations. This method should result in consistent apportionment methods and tax calculations for NYS and NYC corporate tax purposes, but the specific language used in the City's regulation package will be important.

Clear-and-convincing-evidence standard

The Department previously announced an intention to deviate from the "clear and convincing evidence" standard NYS adopted for overcoming presumptions that apply to income apportionment. Currently, NYS requires that taxpayers prove by "clear and convincing evidence" that an alternate apportionment method is a better reflection of their market in the State than one of the regulations' presumed methods (e.g., the billing address presumption). NYS imposes similar evidentiary standards when determining if a corporation is engaged in a unitary business.

Despite receiving comments from practitioners and policy advocates supporting conformity with NYS standards, the Department's revised guidance states it intends to propose a regulatory framework based on individual facts and circumstances, relying on case law for determining which evidentiary standard applies. The practical implication of this decision remains uncertain, and the specific language (and examples) used in the regulation package will be important.

Allocation of receipts from passive investment customers (PICs)

Under the NYS corporate franchise tax regulations, receipts from a PIC for management, administration, and distribution services may be sourced to New York in proportion to the proportionate value of the PIC owned by investors and beneficial owners located in New York.² This approach has informational requirements that can be difficult for many investment managers to meet. In particular, if the PIC's investor and beneficial locations are unknown, in whole or in part, the NYS regulations appear to require the taxpayer to presume that receipts from the PIC arise from the location where the investment management agreement is managed by the PIC.

In the White Paper, and its prior release, the Department indicated it will not follow this back-up presumption and may instead presume that 8% of receipts from investors and beneficial owners with unidentifiable locations arise from NYC. Despite comments received questioning the percentage to be used and suggesting it was too high, the Department "believes that the 8% figure reflects a fair estimation of the economic activity within the City relative to the nation as a whole and is appropriate to use as [a] fallback allocation method."

Billing-address presumption

NYS currently applies a billing address presumption to receipts from other services and business activities and from digital products/services if those taxpayers meet certain requirements. One of those requirements includes that the taxpayer must have more than 250 customers for that same product or service, or substantially similar products or services. In its prior guidance, the Department suggested that it would deviate from the 250-customer threshold and apply a 1,000-customer threshold.

The Department now states in its White Paper that: "[a]fter considering the commenter's concerns regarding conformity with State Rules and taking into consideration that the State's billing address presumption is based on a Multistate Tax Commission model that is also employed by other States, the Department does not intend to alter the presumption threshold and will instead adopt the same policies set forth in 20 NYCRR [Sections] 4-3.2(d)(1)(ii) and 4-4.2(d)(1)(ii)." Therefore, NYC has indicated that the same 250-customer threshold that applies for NYS purposes will also apply for City purposes.

Real estate mortgage investment conduits

In its prior release, the Department said that it intended to deviate from NYS, which decoupled from IRC Section 860E when it comes to reporting excess inclusion income (EII) on the NYS corporate franchise tax return. In response to comments expressing concern over this deviation, the Department responded, "the [NYC] Administrative Code … contains no statutory modification relating to excess inclusion. The Department intends to maintain conformity with the federal taxable income and retain the excess inclusion when calculating [entire net income], as has been historically done under the General Corporation Tax."

The Department further stated that the feedback received noted concerns about the calculation of net operating losses in a year in which there is EII. The Department acknowledged that "[t]his feedback highlights practical concerns regarding the integration of the excess inclusion minimum into the BCT framework." The Department plans to issue additional guidance on this issue as it drafts the proposed regulations.

Implications

The Department's White Paper is a non-binding summary of technical rules it expects to adopt in its BCT regulations, and implies that, apart from those rules, its proposed regulations will conform to the NYS corporate franchise tax regulations. Until the Department releases the language of its proposed regulations, the exact form of those regulations and the technical application of the statute to some key calculations will remain uncertain and unresolved.

The Department held two informal conference calls in May of 2024 to provide additional details around the regulatory process and allow taxpayers and practitioners to opine on key issues, however, the public has yet to see draft or proposed BCT regulations. Based on informal conversations with the Department, the draft regulations are not expected to be released for review and public comment, but will rather be formally proposed under the City's Administrative Procedures Act (CAPA) after internal review. Once the regulations are entered into the CAPA process, taxpayers will have the opportunity to submit formal comments.