New York Codes, Rules and Regulations
Title 20 - DEPARTMENT OF TAXATION AND FINANCE
Chapter I - Franchise and Certain Business Taxes
Subchapter C - Franchise Taxes On Insurance Corporations
Part 32 - COMBINED RETURNS
Section 32.5 - Substantial intercorporate transactions based on asset transfers
Current through Register Vol. 46, No. 12, March 20, 2024
The substantial intercorporate transactions requirement based on a corporation's asset transfers is met where a corporation transfers assets (including through incorporation) to a related corporation and 20 percent or more of the transferee's gross income, including any dividends received, in the taxable year of the transfer, or in taxable years subsequent to the year the asset or assets were transferred, is derived directly from the transferred assets. This applies to assets transferred on or after January 1, 2007. For purposes of this test, the following apply:
(a) Generally, only assets to the extent that they are transferred in exchange for stock or paid in capital are considered "qualifying assets." Transfers of assets other than in exchange for stock or paid in capital, including transfers of assets through a nonmonetary property dividend, are not considered unless the principal purpose of the transfer is the avoidance or evasion of the franchise tax imposed on the taxpayer or the combined group by New York State.
(b) Transfers of cash to a related corporation in exchange for stock or paid in capital are not considered.
(c) For purposes of determining whether the substantial intercorporate transactions requirement based on a corporation's asset transfers is met, the term gross income means life insurance gross income or gross income as defined by section 803 or 832 of the Internal Revenue Code, whichever is applicable.
(d) Gross income is derived directly from an asset if the asset or the use of the asset by the transferee produces gross income. Gross income from transferred assets that generate income only when used in combination with other assets is not gross income derived directly from the assets. The gain from a sale of any transferred asset is considered gross income derived directly from the asset. Assets that may directly produce gross income include, but are not limited to, real property, accounts receivable, and intangibles such as patents, copyrights, trademarks, and partnership interests.
(e) Gross income from the sale of items produced from transferred production equipment would not, by itself, be considered gross income derived directly from the transferred assets. However, gross income from the sale of items produced from the transferred assets constituting substantially all of the productions process, including associated intangibles, such as might occur in the transfer of an operating division, would constitute gross income derived directly from the transferred assets.
(f) Gross income received by the transferee as a result of the reinvestment of income attributable to the transferred asset is not gross income derived directly from the transferred asset.
(g) The test must be applied for each year of an asset's normal depreciation recovery period under sections 167 or 168(c) of the Internal Revenue Code or amortization period under section 197(a) of the Internal Revenue Code. In the case of an asset that is not required to be depreciated or amortized for Federal income tax purposes, such as accounts receivable, the test must be applied for each year the asset is reflected on the books and records of the transferee under generally accepted accounting principles.
(h) If the asset transferred is an interest in another entity including a partnership, an entity treated as a partnership or a disregarded entity, the income distributed or deemed distributed to the transferee by such entity is gross income derived directly from the transferred asset.
(i) Where more than one asset is transferred, the gross income from all qualifying assets is used in determining whether the test is met.
(j) The determination of whether a transaction or series of transactions constitutes an asset transfer is based on the facts and circumstances of the transaction. The form of a transaction will not be respected if the transaction lacks economic substance or if the taxpayer intended a series of actions to be part of a single integrated transaction, or where it had as a principal purpose the avoidance or evasion of the franchise tax imposed on the taxpayer, or the combined group, by New York State.
(k) The following example illustrates when gross income is or is not derived directly from a transferred asset: Rental income derived from a transferred asset is considered gross income derived directly from a transferred asset. However, if the rental income is deposited in a bank account, interest earned on the bank account is not gross income derived directly from the asset.
