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(§ 11-605(4), Administrative Code.)
Where corporations are taxed on a combined basis, the tax will be measured by the combined entire net income or combined capital of all the corporations included in the combined report. (See: 19 RCNY § 11-32, infra.) As to when combined reports will be permitted or required, see 19 RCNY § 11-91, infra. For cross reference to other sections relating to combined reports, see 19 RCNY § 11-93, infra.
(§ 11-605(5), Administrative Code.)
(a) In case it shall appear to the Commissioner of Finance that any agreement, understanding or arrangement exists between the taxpayer and any other corporation or any person or firm, whereby the activity, business, income or capital of the taxpayer within the City is improperly or inaccurately reflected, the Commissioner of Finance is authorized in his discretion to adjust items of income, deductions and capital, and to eliminate assets in computing any allocation percentage provided any income directly traceable thereto is also excluded from entire net income, so as equitably to determine the tax.
(b) Where (1) any taxpayer conducts its activity or business under any agreement, arrangement or understanding in such manner as either directly or indirectly to benefit its members or stockholders, or any of them, or any person or persons directly or indirectly interested in such activity or business, by entering into any transaction at more or less than a fair price which, but for such agreement, arrangement or understanding, might have been paid or received therefor, or
(2) any taxpayer, a substantial portion of whose capital stock is owned either directly or indirectly by another corporation, enters into any transaction with such other corporation on such terms as to create an improper loss or net income, the Commissioner of Finance may include in the entire net income of the taxpayer the fair profits which, but for such agreement, arrangement or understanding, the taxpayer might have derived from such transaction.
(a) The primary tax is measured by entire net income, or the portion thereof allocated to New York City, if such calculation results in a higher amount than that computed on any of the other three alternative bases. The rate of the tax measured by entire net income is five and one-half percent for taxable years beginning before January 1, 1971, and six and seven-tenths percent for taxable years beginning on or after such date.
(b) Entire net income is divided into business income and investment income. The portion of the entire net income allocated to New York City is determined by multiplying business income by a business allocation percentage, multiplying investment income by an investment allocation percentage, and adding together the results so obtained. (See: 19 RCNY §§ 11-61 et seq.)
(§ 11-602(8), Administrative Code.)
(a) Entire Net Income means total net income from all sources, and is the same as the taxable income which the taxpayer is required to report to the United States Treasury Department for purposes of the Federal income tax imposed by chapter 1 of the Internal Revenue Code or which the taxpayer would have been required to report if it had not made an election under subchapter S of chapter 1 of the Internal Revenue Code, with the exceptions hereinafter set forth, and subject to any modification required by paragraphs (d) and (e) of subdivision 3 of § 11-604 of the Administrative Code. However, neither the taxable income actually reported nor the taxable income actually determined for Federal income tax purposes is necessarily the same as the taxable income required to be reported for Federal income tax purposes under the provisions of the Internal Revenue Code. Ordinarily, the determination of the Commissioner of Internal Revenue is followed, but it is not binding on the Commissioner of Finance.
(b) Federal Taxable Income is the starting point in the computation of entire net income. This means taxable income as defined in section 63 of the Internal Revenue Code, not any special type of taxable income such as "investment company taxable income" however, the taxable income of a real estate investment trust is its "real estate investment trust taxable income" as defined in paragraph 2 of subdivision (b) of § 857 (as modified by § 858) of the Internal Revenue Code, plus the amount taxable under paragraph 3 of subdivision (b) of § 857 of such code. After determining Federal taxable income, it must be adjusted as follows:
(1) Add to Federal taxable income:
(i) all interest income which has not been included in computing Federal taxable income, such as interest on state and municipal bonds and certain obligations of the United States and its instrumentalities, less interest incurred to carry such investment, to the extent such interest has not been deducted in computing Federal taxable income;
(ii) all Federal taxes on or measured by income or profits which were deducted in computing Federal taxable income;
(iii) net operating losses of other years which were deducted in computing Federal taxable income;
(iv) all New York State franchise taxes imposed under Article 9 or 9-A of the Tax Law which were deducted in computing Federal taxable income;
(v) all New York City general corporation taxes imposed under Subchapter 2 of Chapter 6 of Title 11 of the Administrative Code;
(vi) the amount deducted in computing Federal taxable income for interest on indebtedness (whether or not evidenced by written instrument) directly or indirectly owed to an individual stockholder or members of his immediate family (brothers and sisters of the whole or half blood, spouse, ancestors and descendants) who, in the aggregate, own beneficially more than five percent of the taxpayer's issued capital stock, or to a corporate stockholder including its subsidiaries which owns beneficially more than five percent of the taxpayer's issued capital stock, minus 10 percent of the amount so deducted or $1,000, whichever is larger. However, this provision does not apply to
(A) interest paid or accrued on bonds or other evidences of indebtedness issued, with stock, pursuant to a bona fide plan of reorganization to persons who, prior to such reorganization, were bona fide creditors of the taxpayer or any predecessor corporation, but were not stockholders thereof, or
(B) interest paid by a taxpayer all of the entire net income of which is allocated by the investment allocation percentage (see: 19 RCNY § 11-68(a) and (b), infra).
(vii) all losses from subsidiary capital which were deducted in computing Federal taxable income; and
(viii) in the case of a taxpayer organized outside the United States, all income from sources outside the United States less all allowable deductions attributable thereto, which were not taken into account in computing Federal taxable income.
(ix) the amount deducted in computing Federal taxable income for interest directly or indirectly attributable, and any other amount directly attributable as a carrying charge or otherwise, to subsidiary capital or to income, gains or losses from subsidiary capital, except to the extent not required in the exercise of discretion by the Commissioner of Finance.
(2) Deduct from taxable income:
(i) all dividends, interest and gains from subsidiary capital (which does not include any recovery in respect of any war loss) which were taken into account in computing Federal taxable income, but not any other income from subsidiaries;
(ii) fifty percent of all dividends from corporations other than subsidiaries, which were included in computing Federal taxable income;
(iii) income, war-profits, and excess profits taxes imposed by foreign countries or possessions of the United States, allocable to income included in entire net income, any part of which was allowed as a credit against the Federal income tax under the applicable provisions of the Internal Revenue Code;
(iv) all amounts received for the operation of school buses from school districts and from non-profit corporations and associations, organized and operated exclusively for religious, charitable or educational purposes, less any deductions allowed in computing Federal taxable income which are directly or indirectly attributable to such receipts;
(v) a net operating loss deduction (See: 19 RCNY § 11-28, infra, for method of computation).
(c) For purposes of this subdivision, receipts for the operation of school buses means receipts for the transportation of pupils, teachers and other persons acting in a supervisory capacity, to and from school or school activities in omnibuses subject to the requirements of subdivision 20 of § 375 of the Vehicle and Traffic Law. Deductions attributable to school bus receipts may be determined from the corporate books, if in the opinion of the Commissioner of Finance, the books properly disclose the deductions attributable to school bus receipts. Otherwise, the deductions attributable to school bus receipts may be determined by applying to total allowable deductions the percentage which school bus receipts bear to total receipts from transportation by omnibus, or by any other method approved by the Commissioner of Finance.
(d) Recoveries with respect to war losses are required to be included in entire net income, to the extent included in Federal taxable income, irrespective of whether the war losses were theretofore deducted in computing entire net income under Subchapter 2 of Chapter 6 of Title 11, unless the corporation elected under the provisions of the Internal Revenue Code to exclude such recoveries from Federal taxable income in the year of recovery resulting in a computation or recomputation of any tax imposed by the United States. (See: 19 RCNY § 11-84, infra.)
(e) At the election of the taxpayer, a deduction from entire net income will be allowed for expenditures for the construction, reconstruction, erection or improvement of industrial waste treatment facilities and air pollution control facilities, computed as provided in paragraph (g) of subdivision 8 of § 11-602 of the Administrative Code.
(f) With respect to gain derived from the sale or other disposition of any property acquired prior to January 1, 1966 which had a Federal adjusted basis on such date (or on the date of its sale or other disposition prior to January 1, 1966) lower than its fair market value on January 1, 1966 or the date of its sale or other disposition prior thereto, except property described in subsections 1 and 4 of § 1221 of the Internal Revenue Code, there shall be deducted from entire net income, the difference between
(1) the amount of the taxpayer's Federal taxable income, and
(2) the amount of the taxpayer's Federal taxable income (if smaller than the amount described in (1) above) computed as if the Federal adjusted basis of each such property (on the sale or other disposition of which gain was derived) on the date of the sale or other disposition had been equal to either
(i) its fair market value on January 1, 1966 or the date of its sale or other disposition prior to January 1, 1966, plus or minus all adjustments to basis made with respect to such property for Federal income tax purposes for periods on and after January 1, 1966 or
(ii) the amount realized from its sale or disposition, whichever is lower; provided, however, that the total modification provided by this paragraph may not exceed the amount of the taxpayer's net gain from the sale or other disposition of all property.
(g) The entire net income of a real estate investment trust shall be computed without regard to the modification required by clause (2) of paragraph (a) and by paragraph (f) of subdivision 8 of § 11-602 of the Administrative Code.
(h) Each corporation included in a Federal consolidated group must compute its Federal taxable income for purposes of § 11-602 of the Administrative Code as if such corporation had computed its Federal taxable income on a separate basis for Federal income tax purposes. Provided, however, in the case of a target corporation, as defined in section 338(d)(2) of the Internal Revenue Code, that is a member of a selling consolidated group, as defined in section 338(h)(10)(B) of the Internal Revenue Code, with respect to which an election under section 338(h)(10) has been made, such election shall be recognized for purposes of Subchapter 2 of Chapter 6 of Title 11 of the Administrative Code. For purposes of determining entire net income, the Federal taxable income of such target corporation shall include any gain or loss on the deemed asset sale by such target corporation recognized by virtue of such election. For purposes of determining entire net income, the Federal taxable income of a member of the selling consolidated group, as so defined, that is subject to tax under such subchapter shall not include any gain or loss on the sale or exchange of stock of such target corporation not recognized by virtue of such election.
(i) For purposes of determining entire net income of an affiliated target corporation, as defined in Treasury Regulation section 1.338(h)(10)-1(b)(3) that is a member of a selling affiliated group that does not file a federal consolidated return, and for which an election under section 338(h)(10) of the Internal Revenue Code has been made, the Federal taxable income of such affiliated target corporation shall include any gain or loss on the deemed asset sale by such affiliated target corporation recognized by virtue of such election. For purposes of determining entire net income of the selling affiliate of such affiliated target corporation, Federal taxable income shall not include any gain or loss on the sale or exchange of stock of such affiliated target corporation not recognized by virtue of such election.
(j) Because the starting point for determining the entire net income of an S corporation is the taxable income that the corporation would have been required to report for Federal tax purposes had no S election been made, any election pursuant to section 338(h)(10) of the Internal Revenue Code made with respect to a target corporation that is an S corporation for Federal tax purposes will be deemed to be an invalid election and will not be recognized for purposes of Subchapter 2 of Chapter 6 of Title 11 of the Administrative Code. If pursuant to this subdivision, a section 338(h)(10) election of an S corporation is not recognized, the corresponding election pursuant to section 338(g) of the Internal Revenue Code will be deemed invalid and will not be recognized for purposes of such subchapter. See Treas. Reg. § 1.338(h)(10)-1(c)(4). As a consequence of the nonrecognition of the section 338(g) election pursuant to this subdivision, the basis of the assets of the target corporation will be determined without regard to any adjustments made pursuant to section 338(b).
(§ 11-602(8)(f), Administrative Code.)
(a) A deduction similar to that allowed under § 172 of the Internal Revenue Code may be allowable in computing entire net income for the purposes of Subchapter 2 of Chapter 6 of Title 11. For New York City tax purposes, as for Federal tax purposes, except as provided in subdivision (b) of this section, a net operating loss may be carried back to each of the three taxable years preceding the year in which the loss was sustained, and may be carried forward to each of the five following taxable years. The New York City net operating loss deduction is presumably the same as that allowed for Federal tax purposes, subject to three limitations explained hereunder.
(b) One of these limitations is that no deduction is allowable for a loss sustained during any taxable year in which the taxpayer was not subject to tax under Subchapter 2 of Chapter 6 of Title 11.
Example 1: A corporation is incorporated in Pennsylvania in January, 1967. During the taxable year 1967, it sustains an operating loss of $10,000. In January, 1968, it begins to do business in New York City. For the taxable year 1968, it has entire net income of $10,000. No deduction is allowed for any part of the loss sustained in 1967, since the corporation was not subject to New York City General Corporation Tax in 1967.
(c) Another limitation on the New York City net operating loss deduction is that any net operating loss which may be carried back or forward for Federal tax purposes must be adjusted to reflect the additions and subtractions required by 19 RCNY § 11-27 above.
Example 2: For the calendar year 1969, a taxpayer has Federal gross income of $400,000, including $100,000 dividends from nonsubsidiary corporations, and it has deductible operating expenses of $400,000, including $5,000 New York franchise tax and $5,000 New York City General Corporation Tax. Its Federal net operating loss is $85,000 and its New York City net operating loss is $40,000, computed as follows:
Federal | ||
Gross income | $400,000 | |
Less operating expense | $400,000 | |
Taxable income before special deductions | 0 | |
Less special dividends – received deduction | $85,000 | |
Net operating loss | ($85,000) | |
New York City | ||
Federal taxable income (loss) | ($85,000) | |
Add amount of Federal deductions for | ||
New York franchise tax | $5,000 | |
City General Corporation Tax | $5,000 | |
Dividends received | $85,000 | $95,000 |
$10,000 | ||
Subtract | ||
50 percent of dividends received | $50,000 | |
New York City net operating loss | ($40,000) | |
Example 3: If the dividends in example 2 were from subsidiaries, the New York City net operating loss would be $90,000, computed as follows:
Federal taxable income (loss) | ($85,000) | |
Add amount of Federal deductions for | ||
New York franchise tax | $5,000 | |
City General Corporation Tax | $5,000 | |
Dividends received | $85,000 | $95,000 |
$10,000 | ||
Subtract | ||
Dividends from subsidiaries | $100,000 | |
New York City net operating loss | ($90,000) | |
(d) The third limitation on the New York City net operating loss deduction is that in any year it may not exceed the deduction allowable for that year for Federal tax purposes under § 172 of the Internal Revenue Code.
Example 4: If the taxpayer in example 3 in 1966 and 1967 had Federal gross income of $500,000, including $100,000 of dividends from subsidiary corporations and expenses of $350,000 including New York franchise taxes of $5,000 and New York City General Corporation Tax of $5,000, its Federal and City net operating loss deductions will be $65,000 in 1966 and $20,000 in 1967, computed as follows:
Federal
1966 | ||
Gross income | $500,000 | |
Expense | $350,000 | |
$150,000 | ||
Less dividends received | $85,000 | |
$65,000 | ||
Net operating loss deduction (out of total Federal loss for 1969 of $85,000) | $65,000 | |
Taxable income | 0 | |
1967 | ||
Gross income | $500,000 | |
Expenses | $350,000 | |
$150,000 | ||
Less dividends received | $85,000 | |
$65,000 | ||
1969 operating loss carry-back | $85,000 | |
Less amount deducted in 1966 | $65,000 | |
Net operating loss deduction | $20,000 | |
Taxable income | $45,000 | |
New York City
1966 | ||
Federal taxable income | 0 | |
Add | ||
New York franchise tax | $5,000 | |
City General Corporation Tax | $5,000 | |
Deduction for dividends | $85,000 | |
Federal net operating loss deduction | $65,000 | $160,000 |
$160,000 | ||
Less 100 percent of dividends | $100,000 | |
$60,000 | ||
Net operating loss deduction (out of total New York City loss for 1969 of $90,000) | $65,000 | |
Entire net income (loss) | ($5,000) | |
1967 | ||
Federal taxable income | $45,000 | |
Add | ||
New York franchise tax | $5,000 | |
City General Corporation Tax | $5,000 | |
Deduction for dividends | $85,000 | |
Federal net operating loss deductions | $20,000 | $115,000 |
$160,000 | ||
Less 100 percent of dividends | $100,000 | |
$60,000 | ||
Net operating loss deduction (the unused balance of the New York City loss of $90,000 for 1969 – see example 3, supra – would be $25,000, but the New York City deduction may not exceed the Federal deduction | $20,000 | |
Entire net income | $40,000 | |
Since allowance of the net operating loss deduction in 1966 results in a net loss for the carry-back year, the taxpayer will be subject to tax for that year on one of the alternative bases mentioned in 19 RCNY § 11-23, supra. It should be noted that the $5,000 loss shown above may be subtracted in determining the base of the alternative tax measured by entire net income plus compensation paid to officers and stockholders (See: 19 RCNY § 11-34, infra). It may not, however, be carried back or forward to any other year as a net operating loss deduction. Although deductions totaling only $85,000 are allowed for 1966 and 1967 on account of the $95,000 loss sustained in 1969, the $10,000 balance cannot be carried forward to any year subsequent to 1967. Because, for Federal tax purposes, the entire amount of the 1969 loss has been used up in the 1966 and 1967 deductions, no Federal deductions will be allowable in any other year, and the New York City deduction for any year can never exceed the Federal deduction.
Example 5: In 1969 a corporation has a Federal net operating loss of $10,000 and a New York City net operating loss of $8,000. The corporation is allowed a Federal deduction of $10,000 for said loss in 1966. In 1966 its New York City General Corporation Tax was computed on the mill tax basis (see: 19 RCNY § 11-35, infra). There was, thus, no income base for the 1966 City General Corporation Tax against which the 1969 New York City operating loss can be applied. Nor can any New York City deduction on account of this loss be allowed in 1967 or any other year since (a) the Federal deduction on account of the loss was wholly allowed for 1966, (b) it was allowed in no part for any other year, and (c) the New York City deduction can never exceed the Federal deduction.
(e) The fact that a net operating loss is carried back or forward as a deduction in some other year does not prevent its use in computing, for the year in which the loss was sustained, the tax measured by entire net income plus compensation paid to officers and stockholders (see: 19 RCNY § 11-34, infra).
Example 6: In 1969 a corporation paid salaries of $30,000 to its officers and stockholders and sustained a New York City net operating loss of $10,000 for which it is allowed a deduction of the same amount against its entire net income for 1966. Such net operating loss would nevertheless be taken into consideration in computing the third alternative tax for 1969, as follows:
Salaries minus $15,00 | $15,000 |
Net operating loss | $10,000 |
$5,000 | |
30 percent of such balance | $1,500 |
Tax at 5 1/2 percent | $82.50 |
(f) (1) In the case of a corporation which reports for New York City General Corporation Tax purposes on a combined basis with one or more related corporations, either in the year in which a net operating loss is sustained or in the year in which a deduction is claimed on account of such loss, the allowance of such deduction is subject to the same limitations which would apply for purposes of the Federal income tax if such corporation had filed for such year a consolidated Federal income tax return with the same related corporations. These limitations apply to allowance of the New York City net operating loss deduction regardless of whether in fact such corporation, for Federal income tax purposes, filed an individual or a consolidated return.
(2) In general, any carry-back or carry-over from a year in which a combined report was filed (for New York City General Corporation Tax purposes) must be based upon the combined net operating loss of the group of corporations filing such report. The portion of such combined loss attributable to any member of the group which files a separate report for a preceding or succeeding taxable year will be an amount bearing the same relation to the combined loss as the net operating loss of such corporation bears to the total net operating losses of all members of the group having such losses, to the extent that they were taken into account in computing the combined net operating loss.
Example 7: In 1966, X Corp. filed a separate New York City General Corporation Tax report showing entire net income of $20,000 and also filed a separate Federal income tax return showing Federal taxable income of the same amount. In 1969, it filed a separate Federal return showing a net operating loss of $10,000 but joined with Y Corp. and Z Corp. in filing a combined New York City General Corporation Tax report showing the following:
X Corp. – net operating loss | ($10,000) |
Y Corp. – net operating loss | ($20,000) |
Z Corp. – entire net income | $15,000 |
Combined net operating loss | ($15,000) |
For New York City General Corporation Tax purposes, the deduction allowable to X Corp. against its 1966 income must be based upon the combined net operating loss shown above, and the portion of the combined loss attributable to X Corp. is one-third thereof or $5,000. This is because the net operating loss of X Corp. was one-third of the total net operating losses of all members of the combined group having such losses (X Corp., $10,000 and Y Corp., $20,000).
(§ 11-602(8)(e), Administrative Code.) The entire net income of any bridge commission created by the act of Congress to construct a bridge across an international boundary is its gross income less the expense of maintaining and operating its properties, the annual interest on its bonds and other obligations, and the annual charge for the retirement of such bonds or obligations at maturity.
(§ 11-602(8)(d), Administrative Code.) In general, the method of accounting used in computing taxable income for Federal income tax purposes is used in computing entire net income. However, whenever the Commissioner of Finance deems it necessary in order properly to reflect entire net income of the taxpayer, he may determine the year or period in which any item of income or deduction shall be included, without regard to the method of accounting used by the taxpayer.
Example: A taxpayer has a building, installation or construction contract covering a period in excess of one year. The taxpayer keeps his books so as to reflect the total income derived from the contract in the taxable year in which the contract is finally completed, and reports its Federal taxable income accordingly. The Commissioner of Finance may require that income from the contract be apportioned over the entire contract period, on the basis of percentage of completion in each year, or some other appropriate basis.
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