Subsidiary (§ 11-602(2), Administrative Code.)
(1) The term "subsidiary" means a corporation over 50 percent of the voting stock of which is owned by the taxpayer. The term "voting stock" means shares of stock of a corporation, issued and outstanding, that entitle the holders thereof to vote for the election of the corporation's directors or trustees. The determination of whether or not particular shares of a corporation's stock entitle the holders thereof to vote for the election of directors or trustees of the corporation depends on the actual legal situation with respect to voting rights, as it exists from time to time.
Example: A taxpayer owns all the common stock of a corporation, which in ordinary circumstances is the only class of stock entitled to vote for the election of directors. The corporation also has outstanding an issue of preferred stock the holders of which, in certain circumstances, are entitled to vote for the election of directors either together with or exclusive of the holders of the common stock. The preferred stock will be treated as voting stock if, and so long as, its holders are entitled to vote. The common stock will not be treated as voting stock if, and so long as, its holders are not entitled to vote.
(2) The test of ownership is actual beneficial ownership, rather than mere record title as shown by the stock books of the issuing corporation. Actual beneficial ownership of stock does not mean indirect ownership or control of a corporation through a corporate structure consisting of several tiers and/or chains of corporations. A corporation will not be considered a subsidiary of a taxpayer merely because over 50 percent of the shares of its voting stock is registered in the name of the taxpayer, unless the taxpayer is the actual beneficial owner of such stock. However, a corporation will not be considered a subsidiary of a taxpayer if more than 50 percent of the shares of its voting stock is not registered in the taxpayer's name, unless the taxpayer submits proof that it is the actual beneficial owner of such stock.
Example 1: Corporation A is engaged in a stock brokerage business. Corporation A holds record title in street name to 60 percent of the voting stock of corporation X, a publicly traded corporation. Corporation A holds record title to this stock on behalf of 100 corporate customers, none of which owns more than one percent of the stock of Corporation X. These 100 corporations are the actual beneficial owners of the stock of Corporation X held in street name by Corporation A. Even though Corporation A is the record title holder of more than 50 percent of the voting stock of Corporation X, Corporation X is not a subsidiary of Corporation A because Corporation A is not the actual beneficial owner of the stock.
Example 2: Corporation C is the record title holder of 100 percent of the voting stock of Corporation D. Corporation C has the right to sell or pledge such stock. Corporation C receives all dividends paid by Corporation D. Corporation C enjoys the economic benefits, and bears the risk of economic loss, from the sale of such stock. Corporation C is the actual beneficial owner of Corporation D's voting stock. Corporation D is a subsidiary of Corporation C. Corporation B is the owner of 100 percent of the voting stock of Corporation C. Corporation B is not the actual beneficial owner of Corporation D's voting stock merely by virtue of the fact that, through its ownership of the voting stock of Corporation C, Corporation B has practical control of the activities of Corporation D. Corporation D is not a subsidiary of Corporation B.
(3) A corporation may be a subsidiary if the taxpayer is the actual beneficial owner of more than 50 percent of the shares of such corporation's voting stock, even though the taxpayer has conferred the right to vote such stock on others, by means of a proxy, voting trust agreement or otherwise.
(4) In any case where the record holder of shares of voting stock of a corporation is not the actual beneficial owner thereof, or where the right to vote such stock is not possessed by the record holder or by the actual beneficial owner thereof, a full and complete statement of all relevant facts must be submitted.
(5) A corporation will be treated as a subsidiary of a taxpayer only for that part of the taxable year during which the taxpayer is the owner of more than 50 percent of the shares of stock of such corporation which, during that period, entitle the holders to vote for the election of directors or trustees.
Subsidiary Capital. (§ 11-602(3) Administrative Code.)
(1) The term subsidiary capital means the total of
(i) investments of the taxpayer in stock of its subsidiaries,
(ii) the amount of indebtedness owed to the taxpayer by its subsidiaries, exclusive of accounts receivable acquired in the ordinary course of trade or business for services rendered or for sales of property held primarily for sale to customers, whether or not evidenced by written instruments, interest on which is not claimed by the subsidiary and allowed as a deduction for purposes of any tax imposed by Subchapter 2 or Subchapter 3 of Chapter 6 of Title 11 of the Administrative Code, and
(iii) in certain cases, as explained below, cash on hand and on deposit, obligations of the United States and its instrumentalities, and obligations of New York State, its political subdivisions and instrumentalities, to the extent permitted by § 11-604(6) of the Administrative Code.
(2) Subsidiary capital does not include stocks, bonds or other securities of a subsidiary held by the taxpayer for sale to customers in the regular course of business.
(3) Indebtedness on which any interest is deducted by the subsidiary in computing any tax imposed on the subsidiary under Title 11, Chapter 6, Subchapter 2 or Subchapter 3 of the Administrative Code may not be included in the taxpayer's subsidiary capital. Such indebtedness is includible in investment capital if it meets the definition of investment capital as set forth in 19 RCNY § 11-37; otherwise, it constitutes business capital.
Example: The taxpayer, parent, loaned its subsidiary $100,000. In computing entire net income for the taxable year 1990 for New York City General Corporation Tax purposes under Title 11, Chapter 6, Subchapter 2 of the Administrative Code, the subsidiary did not claim any part of the interest as a deduction. The subsidiary did claim such interest, or some part of it, as a deduction for taxable year 1991. The indebtedness is includible in the taxpayer's subsidiary capital on its report for taxable year 1990. However, for taxable year 1991 such indebtedness is includible in the taxpayer's investment capital if it meets the definition of investment capital as set forth in 19 RCNY § 11-37. Otherwise it is business capital.
(4) Any taxpayer not taxed on the basis of a combined report, the subsidiary capital of which (computed without regard to this sentence) is more than 85 percent of its total capital, exclusive of cash on hand and on deposit, obligations of the United States and its instrumentalities, and obligations of New York State, its political subdivisions and its instrumentalities, may, at its election, treat as subsidiary capital a proportion of such cash and obligations not in excess of the proportion of its subsidiary capital (so computed) to its total capital (so computed). The balance of such cash may be included in either investment capital or in business capital, at the election of the taxpayer (19 RCNY § 11-37 "Investment Capital" and 19 RCNY § 11-36 "Business Capital" supra). The balance of such obligations of the United States and its instrumentalities, and obligations of New York State, its political subdivisions and its instrumentalities is includible in investment capital unless held for sale to customers in regular course of business, in which event it is includible in business capital.
(5) Unless the Commissioner of Finance specifically authorizes to the contrary, each item of subsidiary capital shall be reduced by the deduction of any liabilities of the taxpayer, payable by their terms on demand or not more than one year from the date incurred, other than loans or advances outstanding for more than a year as of any date during the year covered by the report, which are attributable to that item of subsidiary capital. Such reduction will be made, for example, in cases where such liabilities have been incurred in connection with the acquisition or holding of stock or securities of a subsidiary, or the making of a loan to a subsidiary.