(§ 11-602(4), Administrative Code.)
(a) (1) The term "investment capital" means the taxpayer's investments in stocks, bonds and other securities issued by a corporation (except as provided in paragraph (4) of this subdivision) or by the United States, any state, territory or possession of the United States, the District of Columbia, or any foreign country, or any political subdivision or governmental instrumentality of any of the forgoing (see subdivisions (c) - (h) of this section).
(2) (i) If in a taxable year a taxpayer has investment capital but no business capital, cash on hand and cash deposit must be treated on all reports for the taxable year as investment capital.
(ii) If in a taxable year a taxpayer has both business and investment capital, the taxpayer may elect to treat cash on hand and cash on deposit, as defined in paragraph (3) of this subdivision, as investment capital (see 19 RCNY § 11-36(d) for election to treat cash as business capital). Once an election is made for a taxable year, it shall be irrevocable for that taxable year. The election must be made on the original return for the taxable year; any purported election made on an amended return is invalid. A separate election must be made for each taxable year. A taxpayer may not elect to treat part of its cash as investment capital and part as business capital. No election to treat cash as investment capital may be made where the taxpayer has no investment capital exclusive of cash. Any taxpayer who may elect under this subparagraph (ii) and has filed a return for the taxable year but who has not properly made such an election will be presumed to have made an irrevocable election to treat cash on hand and on deposit as business capital.
(3) Any debt instrument, including a certificate of deposit, described in paragraph (2) or (3) of subdivision (c) of this section and not described in paragraph (4) of this subdivision (a) that is payable by its terms on demand or within six months and one day from the date on which the debt was incurred, is deemed to be cash on hand or on deposit. Any such debt instrument that is payable by its terms more than six months and one day from the date on which the debt was incurred is deemed to be cash on hand or on deposit on any day that is not more than six months and one day prior to its date of maturity. Cash also includes shares in a money market mutual fund. A money market mutual fund is a no-load, open-end investment company registered under the Federal Investment Company Act of 1940 that attempts to maintain a constant net asset value per share and holds itself out to be a money market fund.
Example: On February 1, 1990, Corporation A, a calendar year taxpayer, purchased a certificate of deposit with a maturity date of January 31, 1991, which was a qualifying corporate debt instrument as that term is in subdivision (d) of this section. On July 1, 1990, Corporation A purchased a four-month qualifying corporate debt instrument on the day it was issued and renewed it, with the identical terms, on November 1, 1990. Corporation A bought a qualifying corporate debt instrument on August 1, 1990, the day it was issued, with a maturity date of February 2, 1991. On September 1, 1990, the corporation bought a nine-month qualifying corporate debt instrument which had been issued on January 1, 1990 and was due on October 1, 1990. The renewal of the four-month debt instrument purchased on July 1, 1990 is treated as the creation of a second, separate debt instrument, each of the two instruments being due within six months and one day of the date on which the debt was incurred. For the taxable year ending December 31, 1990, the two four-month debt instruments and the debt instrument due on February 2, 1991 is deemed to be cash because it is due on February 2, 1991 is deemed to be cash because it is due within six months and one day from the date on which it was issued. The nine-month debt instrument is deemed to be cash because each day on which the taxpayer owned it was a day not more than six months and one day prior to its maturity date. The one-year certificate of deposit is deemed to be cash on July 30, 1990 (the first day not more than six months and one day before its maturity date of January 31, 1990) and each day thereafter.
(4) Investment capital does not include:
(i) stock issued by the taxpayer;
(ii) stocks, bonds or other securities constituting subsidiary capital;
(iii) securities issued by an individual, partnership, trust or other non-governmental entity that is not a corporation within the definition contained in Administrative Code § 11-602.1 (e.g., Federal National Mortgage Association and Government National Mortgage Association pass-through certificates);
(iv) regular interests and residual interests in a real estate mortgage investment conduit (REMIC), as defined in section 860D of the Internal Revenue Code;
(v) assets reflected in the taxpayer's books and records in connection with futures contracts and forward contracts except as provided in subdivision (g) of this section; or
(vi) stocks, bonds and other securities held by the taxpayer for sale to customers in the regular course of its business.
(b) The amount of investment capital is determined as set forth in subdivision (b) of 19 RCNY § 11-38.
(c) For purposes of paragraph (1) of subdivision (a) of this section, the phrase "stocks, bonds and other securities" means:
(1) stocks and similar corporate equity instruments, such as business trust certificates; (2) debt instruments issued by the United States, any state, territory or possession of the United States, the District of Columbia, or any foreign country, or any political subdivision or governmental instrumentality of any of the foregoing;
(3) qualifying corporate debt instruments (see subdivision (d) of this section); (4) options on any item described in paragraph (1), (2), or (3) of this subdivision and not described in paragraph (4) of subdivision (a) of this section, or on a stock or bond index, or on a futures contract on such an index, unless the options are purchased primarily to diminish the taxpayer's risk of loss from holding one or more positions in assets that constitute business or subsidiary capital; and
(5) stock rights and stock warrants not in the possession of the issuer thereof. Provided, however, debt instruments described in paragraph (2) or (3) of this subdivision that are deemed to be cash pursuant to paragraph (3) of subdivision (a) of this section do not constitute stocks, bonds or other securities.
(d) Qualifying corporate debt instruments.
(1) The term "qualifying corporate debt instruments" means all debt instruments issued by a corporation other than the following:
(i) instruments issued by the taxpayer;
(ii) instruments that constitute subsidiary capital in the hands of the taxpayer; (iii) instruments acquired by the taxpayer for services rendered, or for the sale, rental or other transfer of property, where the obligor is the recipient of the services or property; however, where a taxpayer sells or otherwise transfers property that is investment capital in the hands of such taxpayer (e.g., stock) and receives in return a corporate obligation issued by the recipient of such property, such corporate obligation, if it is not otherwise excluded from the category of investment capital, would constitute investment capital in the hands of the taxpayer;
(iv) instruments acquired for funds if (i) the obligor is the recipient of such funds, (ii) the taxpayer is principally engaged in the business of lending funds, and (iii) the obligation is acquired in the regular course of the taxpayer's business of lending funds;
(v) accepted drafts (such as banker's acceptances and trade acceptances) where the taxpayer is the drawer of the draft; (vi) instruments issued by a corporation that is a member of an affiliated group that includes the taxpayer; and
(vii) accounts receivable, including those held by a factor.
(2) Terms used in this subdivision shall have the meanings prescribed as follows:
(i) Affiliated group. The term "affiliated group" means a corporation or corporations and the common parent of such corporation or corporations. The "common parent" of a corporation or corporations means an individual, corporation, partnership, trust or estate that owns or controls, either directly or indirectly, at least 80 percent of the voting stock of such corporations or of each of such corporations. An affiliated group also includes all other corporations at least 80 percent of the voting stock of which is owned or controlled, either directly or indirectly, by one or more of the corporations included in the affiliated group, or by the common parent and one or more of the corporations included in the affiliated group.
(ii) Principally engaged in the business of lending funds. A taxpayer is "principally engaged in the business of lending funds" for purposes of this subdivision if, during the taxable year, more than 50 percent of its receipts consist of interest from loans or net gain from the sale or redemption of notes or other evidences of indebtedness arising from loans made by the taxpayer. For purposes of the preceding sentence, receipts do not include return of principal or non-recurring, extraordinary items.
(e) For purposes of this section, the phrase "stocks, bonds and other securities" includes instruments held in book entry form.
(f) Repurchase agreements.
(1) "Repurchase agreement" is a term used to describe a transaction in which one party (the seller/borrower), in formal terms, sells securities to a second party (the purchaser/lender) and simultaneously contracts to repurchase the same or identical securities. Depending upon the nature of the agreement, in some instances the purchaser/lender in fact will have purchased the securities, whereas in other instances the transfer of funds to the seller/borrower in fact will constitute a loan collateralized by the securities. If the purchaser/lender is a taxpayer, it is necessary to determine whether the result of such a transaction is the holding by the purchaser/lender of investment capital. If, as a result of the repurchase agreement, the purchaser/lender owns the securities and the securities are encompassed within the definition of investment capital contained in subdivision (a) of this section, such securities will constitute investment capital in the hands of the purchaser/lender. If the purchaser/lender has not acquired ownership of the securities, then it is a lender of funds and has acquired a debt instrument issued by the seller/borrower collateralized by the securities. Unless such debt instrument constitutes cash pursuant to paragraph (3) of subdivision (a) of this section, where such debt instrument is encompassed within the definition of investment capital contained in subdivision (a) and (c) of this section, such instrument will constitute investment capital in the hands of the purchaser/lender. Otherwise, it will constitute either business capital or subsidiary capital.
(2) In a repurchase transaction, the question of whether the purchaser/lender is the owner of the securities, rather than the owner of a debt instrument issued by the seller/borrower, turns on whether such purchaser/lender has acquired the economic benefits and burden of ownership of the securities. The purchaser/lender is the owner of the securities if it (A) has the right freely to dispose of or pledge the securities to a third party and (B) has acquired the opportunity for profit and bears the risk of loss deriving from changes in the market value of the securities. All of these factors must be present simultaneously in order for a transfer of ownership to be recognized. The absence of any of these factors will render the transaction a loan. In such event, the purchaser/lender would be viewed as having acquired a debt instrument of the seller/borrower, collateralized by the securities. Where there is ambiguity as to the existence of any of the factors, recourse may be had to an examination of various other features of the transaction. Features that are consistent with a characterization of the transaction as a loan, but that are not dispositive in and of themselves are:
(i) an obligation on the part of the purchaser/lender, where it sells the securities upon the failure of the seller/borrower to "repurchase" the securities, to turn over to the seller/borrower the proceeds in excess of the amount due to the purchaser/lender from the seller/borrower, and a right on the part of the purchaser/lender to hold the seller/borrower liable for any deficiency arising from such sale;
(ii) an obligation on the part of the seller/borrower to pay interest at a stipulated rate; (iii) a disparity at the time of the initial transaction between the fair market value of the securities and the amount paid or advanced by the purchaser/lender;
(iv) a right on the part of the purchaser/lender to require additional collateral if the market value of the securities declines (e.g., a mark to market provision); and
(v) failure to treat the transaction as a sale or exchange for Federal income tax purposes; e.g., with respect to the reporting of gain or loss on each of the two purported sales, or the exclusion by the seller/borrower under Internal Revenue Code section 103(a) of interest, if any, earned on the securities during the period between the initial "sale" and the "repurchase."
(g) Investment capital shall include assets reflected in the taxpayer's books and records in connection with futures or forward contracts if such contracts substantially diminish the taxpayer's risk of loss from holding one or more positions in assets that constitute investment capital or if such contracts substantially diminish the taxpayer's risk of loss from holding one or more positions in assets that constitute investment capital or if such contracts substantially diminish the taxpayer's risk of loss from making short sales of assets that constitute investment capital. If the taxpayer holds more positions in futures or forward contracts than are reasonably necessary to substantially diminish its risk of such losses, assets attributable to the excess positions in futures or forward contracts are not included in investment capital.
(h) The following example illustrates some of the provisions of this section.
Example: Corporation A is a manufacturing corporation and a taxpayer. It owns 10,000 shares of stock in Corporation B (a manufacturing firm that has 5,000,000 shares of stock issued and outstanding), a $1,000,000 Government National Mortgage Association (GNMA) pass-through certificate, a $1,000,000 Federal National Mortgage Association (FNMA) pass-through certificate and a $100,000 FNMA debenture. Corporation A's investment capital consists of the shares of stock in Corporation B, and the FNMA debenture. The FNMA debenture constitute investment capital because it is a qualifying corporate debt investment issued by a corporation. Although the FNMA and GNMA certificates are guaranteed by FNMA and GNMA, respectively, they do not constitute investment capital because they are issued by a trust and thus are not "corporate or governmental."