New York Codes, Rules and Regulations
Title 20 - DEPARTMENT OF TAXATION AND FINANCE
Chapter I - Franchise and Certain Business Taxes
Subchapter A - Business Corporation Franchise Tax
Part 4 - APPORTIONMENT
Subpart 4-2 - SPECIFIC APPORTIONMENT RULES
Section 4-2.4 - Net income from qualified financial instruments for corporations other than non-captive REITs and non-captive RICs

Current through Register Vol. 47, No. 12, March 26, 2025

(Tax Law, section 210-A(5)(a))

The following rules apply to corporations that are not subject to section 9-4.3 of this Subchapter.

(a)

(1) A qualified financial instrument means any financial instrument that meets the following criteria:
(i) the instrument is described in one of the specified clauses of section 210-A(5)(a)(2) clause: (A) -loans, (B) - Federal, state and municipal debt, (C) - asset backed securities and other government agency debt, (D) - corporate bonds, (G) - stock or partnership interest, (H) - other financial instruments, or (I) - commodities; and

(ii) the instrument has been marked to market in the taxable year.

(2)
(i) If a corporation has marked to market any instrument described in clause (A), (B), (C), (D), or (I) of section 210-A(5)(a)(2), then any other financial instrument described in the same clause that has not been marked to market also is a qualified financial instrument in the taxable year. Each of these clauses is one type of financial instrument.

(ii) The determination of qualified financial instrument is done separately for stocks and partnership interests described in section 210-A(5)(a)(2)(G). Stocks are one type of financial instrument and partnership interests are another type of financial instrument. If a corporation has marked to market a stock, then any other stock that has not been marked to market also is a qualified financial instrument in the taxable year. If a corporation has marked to market a partnership interest, then any other partnership interest that has not been marked to market also is a qualified financial instrument in the taxable year.

(iii) If a corporation has marked to market a specific financial instrument described in section 210-A(5)(a)(2)(H), then only a financial instrument of the same type also is a qualified financial instrument in the taxable year. Therefore, some types of financial instruments described in section 210-A(5)(a)(2)(H) may be qualified financial instruments while other types of financial instruments subject to such clause may be nonqualified financial instruments.

(3) Notwithstanding the provisions of paragraphs (1) and (2) of this subdivision, the following financial instruments always will be nonqualified financial instruments:
(i) loans secured by real property;

(ii) loans not secured by real property, if the only loans the corporation has marked to market are loans secured by real property;

(iii) stock that is investment capital;

(iv) stock that is not marked to market and generates other exempt income, with respect to that other exempt income;

(v) partnership interests that do not meet the definition of security in IRC section 475(c); and

(vi) instruments the receipts from which are subject to section 210-A(5)(b)(2) and (6).

(4) If a corporation is included in a combined report, the determination of whether a financial instrument is a qualified financial instrument is made as though all corporations included in the combined report are a single corporation. Thus, if one corporation in the combined group marks to market a specific type of financial instrument, then all such financial instruments of that type reported by every member of the combined group are considered qualified financial instruments.

(5) If a corporation is a partner in a partnership and is computing its tax with respect to its interest in the partnership using the aggregate method as described in section 9-2.3 of this Subchapter, and the partnership marks to market a type of financial instrument, the corporation is deemed to have marked to market that type of financial instrument for purposes of determining if that type of financial instrument is a qualified financial instrument.

(b) Except as provided in subdivision (c) of this section, the amount of receipts, net income (not less than zero) and net gains (not less than zero) from qualified financial instruments included in New York receipts or everywhere receipts is determined using the sourcing method contained in section 210-A(5)(a)(2) and as further described in this Subpart.

(c)

(1) A taxpayer, or the designated agent in the case of a combined report, may elect the fixed percentage method to include 8% of net income from qualified financial instruments in New York receipts and 100% of all net income from qualified financial instruments in everywhere receipts (whether or not such net income would otherwise be included in the New York receipts or everywhere receipts pursuant to the provisions of section 210-A(5)(a)(2). Net income from qualified financial instruments is the sum of:
(i) net gains (not less than zero) from each type of qualified financial instrument that would be subject to the same sourcing method in section 210-A(5)(a)(2) and this Subchapter if not for the fixed percentage method;

(ii) marked to market net gains (not less than zero) from each type of qualified financial instrument that would be subject to the same sourcing method in section 210-A(5)(a)(2) and this Subchapter if not for the fixed percentage method election;

(iii) net income (not less than zero) from each type of qualified financial instrument that would be subject to the same sourcing method in section 210-A(5)(a)(2) and this Subchapter if not for the fixed percentage method; and

(iv) receipts from each type of qualified financial instrument.

(2) The fixed percentage method election must be made annually and may only be made on an original, timely filed report, determined with regard to extensions of time for filing. Any fixed percentage method election made on a report that is filed late will be invalid and ineffective.

(3)
(i) Once the fixed percentage method election has been made in the manner required in paragraph (2) of this subdivision for a taxable year, it is binding on the taxpayer and the Department for that taxable year and cannot be revoked or overridden for that taxable year.

(ii) In the case of a combined report, the fixed percentage method election must be made by the designated agent. It is binding on all members of a combined group and the Department for that taxable year and cannot be revoked or overridden for that taxable year.

(4) If the fixed percentage election has been made, other exempt income, as defined in section 208(6-a) and section 3-4.6 of this Subchapter, generated by a stock that is marked to market will be re-classified as business income and will be included in New York and everywhere receipts as provided in this subdivision.

(5) A partnership cannot make the fixed percentage method election.

(d) In the case of a combined report, net income from qualified financial instruments included in the combined group's New York receipts and everywhere receipts is the sum of:

(i) net gains (not less than zero) from each type of qualified financial instrument that would be subject to the same sourcing method in section 210-A(5)(a)(2) and this Subchapter if not for the fixed percentage method for all members of the combined group;

(ii) marked to market net gains (not less than zero) from each type of qualified financial instrument that would be subject to the same sourcing method in section 210-A(5)(a)(2) and this Subchapter if not for the fixed percentage method election for all members of the combined group;

(iii) net income (not less than zero) from each type of qualified financial instrument that would be subject to the same sourcing method in section 210-A(5)(a)(2) and this Subchapter if not for the fixed percentage method for all members of the combined group; and

(iv) receipts from each type of qualified financial instrument for all members of the combined group.

(e) Examples.

For purposes of the following examples, it is assumed that the corporations do not have investment capital or other exempt income generated by stock that is not marked to market.

Example 1: Corporation X, a dealer in securities, elects to use the fixed percentage method in the manner required by subdivision (c) of this section to determine the amount of its net income (not less than zero) from qualified financial instruments to include in its New York receipts or everywhere receipts. It owns and marks to market an unsecured loan. However, Corporation X was not required, under IRC section 475, to mark to market the loan, because the loan was acquired by Corporation X in the ordinary course of its business and is not being held for sale by Corporation X. Since the loan comes within this exception to the general rule that requires dealers in Securities to use the mark to market accounting method for such securities, the loan will be deemed to not to have been marked to market for purposes of Corporation X's election to use the fixed percentage method. The loan will be deemed not to have been marked to market even if Corporation X fails to identify the loan as meeting the exception to the general rule. Also, since the loan is deemed to not have been marked to market, as that term is defined in these regulations, no other loan that has not been marked to market by Corporation X will be a qualified financial instrument in the taxable year. These unsecured loans are nonqualified financial instruments. The amount of any receipts and net gains from these assets that are included in New York or everywhere receipts is determined using the sourcing rule in section 210-A(5)(a)(2)(A) and section 4-2.5 of this Subpart.

Example 2: Corporation X owns and marks to market unsecured loan A, corporate bond B, and stock C. In addition, it owns unsecured loan D, unsecured loan E, corporate bond F, corporate bond G, stock H, loan I secured by real property, and loan J secured by real property, but does not mark to market these instruments. Corporation X elects to use the fixed percentage method in the manner required by subdivision (c) of this section to determine the amount of net income (not less than zero) from qualified financial instruments included in New York receipts or everywhere receipts.

The following instruments are considered qualified financial instruments: unsecured loans A, D and E; corporate bonds B, F, and G; and stocks C and H. The amount of net income (not less than zero) from qualified financial instruments included in New York receipts or everywhere receipts is determined using the rules for the fixed percentage method. Loans I and J secured by real property are nonqualified financial instruments. Therefore, the amount of receipts and net gains (not less than zero) from these instruments included in Corporation X's New York receipts or everywhere receipts is determined using the sourcing method in section 210-A(5)(a)(2) and this Subpart.

Example 3: Corporations Y and Z are properly included in a combined report.

Corporation Y owns and marks to market loans secured by real property, corporate bonds, and interests in publicly traded partnerships. Corporation Z owns unsecured personal loans, stocks, and corporate bonds, but does not mark to market these financial instruments. Corporation Y, the designated agent, elects to use the fixed percentage method in the manner required by subdivision (c) of this section to determine the amount of the combined group's net income (not less than zero) from qualified financial instruments to include in the combined group's New York receipts or everywhere receipts. The following instruments are qualified financial instruments in the combined report of Corporations Y and Z: Corporation Y's corporate bonds and interests in publicly traded partnerships and Corporation Z's corporate bonds. The amount of receipts, net gains (not less than zero), and net income (not less than zero) from these instruments included in the combined group's New York receipts or everywhere receipts is determined using the rules for the fixed percentage method. Corporation Y's loans secured by real property are always considered nonqualified financial instruments. In addition, Corporation Z's unsecured loans are nonqualified financial instruments because the only loans that are marked to market by either corporation are loans secured by real property and Corporation Z's stocks are nonqualified financial instruments because neither corporation marked to market stocks. Therefore, the amount of such receipts and net gains (not less than zero) from Corporation Y's loans secured by real property and Corporation Z's unsecured loans included in the combined group's New York receipts or everywhere receipts is determined using the sourcing method outlined in section 210-A(5)(a)(2) and this Subpart.

Example 4: Corporation X elects to use the fixed percentage method in the manner required by paragraph (2) of subdivision (c) of this section to determine the amount of its net income (not less than zero) from qualified financial instruments to include in its New York receipts or everywhere receipts.

It has $1,000 in dividends from Stock A, ($200) loss from the sale of Stock B, $750 gain from the sale of corporate bond C that was sold through a licensed exchange, $25,000 gain from the sale of corporate bond D that was not sold through a registered securities broker or dealer or through a licensed exchange, $10,000 of marked to market gains from stock, and ($2,500) marked to market losses from stock. Corporation X marks to market its stocks and bonds. Therefore, stocks and bonds constitute qualified financial instruments.

Corporation X has $34,250 of net income (not less than zero) from qualified financial instruments included in everywhere receipts broken down as follows:

* $1,000 of dividends from stock;

* $0 of gains from sales of stock (as the loss is limited to zero);

* $750 of gains from sales of bonds sold through a licensed exchange or registered securities broker or dealer;

* $25,000 of gains from sales of bonds not sold through a licensed exchange or registered securities broker or dealer; and

* $7,500 of marked to market net gains from stock ($10,000 minus $2,500).

Corporation X includes $2,740 (8% multiplied by $34,250) from qualified financial instruments in its New York receipts. Since Corporation X only has net income (not less than zero) from qualified financial instruments, the result is a BAF of 0.080000.

Example 5: Corporations R and S are properly included in a combined report, with Corporation R identified as the designated agent. Corporation R elects to use the fixed percentage method in the manner required by subdivision (c) of this section to determine the amount of the combined group's net income (not less than zero) from qualified financial instruments to include in New York receipts and everywhere receipts.

Corporation R owns and marks to market stock A, stock B, bond D issued by State D, and unsecured loan H. Corporation S owns stock C, treasury bill E, bond F issued by New York State, and unsecured loan G, but does not mark to market these instruments. Although Corporation S does not mark to market its stock, government issued debt, and unsecured loan, these instruments still are qualified financial instruments because the determination is done as though all the corporations properly included in the combined report are a single corporation.

In addition, corporation R owns loan I secured by real property in State Y and Corporation S owns loan J secured by real property in New York and an interest in widely held partnership K. Since Corporation S does not mark to market its interest in widely held partnership K and Corporation R does not own and mark to market any interests in publicly traded or widely held partnerships, the interest in partnership K is a nonqualified financial instrument.

The income, gains, or losses from qualified financial instruments for Corporations R and S is broken down as follows:

* $200 of dividends from stock A;

* $750 of dividends from stock B;

* ($300) loss from the sale of stock C;

* ($500) loss from the sale of State D bond;

* $700 gain from the sale of State Q bond;

* $150 of interest from treasury bill E;

* $100 gain from the sale of New York State bond F;

* $600 of interest from unsecured loan G;

* $1,000 gain from the sale of unsecured loan H; and

* $400 of marked to market net gains from stock.

The combined group includes $3,400 of net income (not less than zero) from such qualified financial instruments in everywhere receipts broken down as follows:

* $950 of dividends from stock;

* $0 of gains from sales of stock (as the loss is limited to zero);

* $200 of gains from sales of other state bonds (100% of the net gain is included when the fixed percentage election is made, as opposed to 50% of the net gain under the sourcing method in section 210-A[B]);

* $150 of interest from treasury bills;

* $100 of gains from sales of New York State bonds;

* $600 of interest from unsecured loans;

* $1,000 of gain from unsecured loans; and

* $400 of marked to market net gains from stock.

The combined group includes $272 ($3,400 multiplied by 8 percent) of net income from qualified financial instruments in the combined group's New York receipts.

The amount of income, gains, and losses from nonqualified financial instruments for Corporations R and S is:

* $300 gain from the sale of loan I secured by real property in State Y ($0 is included in the combined group's New York receipts and $300 is included in the combined group's everywhere receipts as the real property is not located in New York State);

* $250 gain from the sale of loan J secured by real property in New York ($250 is included in both the combined group's New York receipts and everywhere receipts as the real property is located in New York State);

* $400 gain from the sale of widely held partnership K domiciled in New York ($0 is included in both the combined group's New York receipts and everywhere receipts as these gains are excluded from the BAF); and

* $200 of marked to market net gains from loans secured by real property ($91 is included in the combined group's New York receipts, determined by multiplying the $200 of marked to market net gains by the ratio of net gains from actual sales of loans secured by real property located in New York to net gains from actual sales of all loans secured by real property. $200 is included in the combined group's everywhere receipts).

The combined group includes $341 of income and net gains from nonqualified financial instruments in its New York receipts and $750 of income and net gains from nonqualified financial instruments in its everywhere receipts.

The combined group has a total of $613 of New York receipts ($272 from qualified financial instruments and $341 from nonqualified financial instruments) and $4,150 of everywhere receipts ($3,400 from qualified financial instruments and $750 from nonqualified financial instruments). The result is the combined group's BAF is 0.147711.

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