Printable versionSend by emailPDF version
December 12, 2014

2014-Issue 49Combined reporting for New York corporate tax purposes has been anything but well established. Within a 10-year period, New York State taxpayers will have navigated through three discrete combined reporting regimes.

The latest machination of New York State combined reporting is set to take effect in 2015, but the prior and current combined reporting regimes remain relevant for corporate tax departments as audits cycles remain open for many taxpayers.

This edition of Tax Advisor Weekly revisits New York State’s combined reporting regimes and highlights the relevant changes in the State’s latest combination provisions. We also discuss the paradigm shift in New York State combined reporting from an audit perspective and set forth practical considerations for taxpayers undergoing audits.

Combination Through the Years . . . in a New York Minute

New York State combination has always been a complex area that has created grounds for significant tax controversy and litigation.1

For tax years beginning in or before 2006, New York had the authority to require or permit combined reporting if all of the following requirements were met:

1. Common ownership: 80 percent or more stock ownership measured by voting power;

2. Unitary business: group members had to constitute a unitary business; and

3. Distortion: separate filing would result in distortion of income or capital.

Distortion was presumed when there were “substantial intercorporate transactions” between or among group members, but it could be rebutted by demonstrating the transactions were conducted at arm’s length, which often required a transfer pricing analysis. New York provided limited guidance on what “substantial intercorporate transactions” entailed, something that also resulted in controversy.

For tax years beginning in or after 2007 through 2014, statutory amendments resulted in mandatory combined reporting for commonly owned corporations engaged in a unitary business if substantial intercompany transactions existed among the corporations, regardless of the transfer price for such transactions. The requirements of common ownership and the existence of a unitary business remained intact. However, the rebuttable presumption of distortion was replaced with a bright-line test where the existence of substantial intercorporate transactions would require combination. Substantial intercorporate transactions were defined to include:

1. Substantial intercorporate receipts: 50 percent or more of a corporation’s receipts included in the computation of entire net income are from one or more related corporations;

2. Substantial intercorporate expenditures: 50 percent or more of a corporation’s expenditures included in the computation of entire net income are from one or more related corporations; or

3. Substantial intercorporate asset transfers: a transfer of assets to a related corporation where 20 percent or more of the transferee’s gross income is derived directly from the transferred assets.

Additionally, in both the prior and current combined reporting regimes, distortion demonstrated by means other than the substantial intercorporate transactions test can serve as an independent basis for combined reporting. In the first combined reporting decision under the current combined reporting rules, the Tax Appeals Tribunal held that distortion provided a separate basis for combined reporting even in the absence of substantial intercorporate transactions.2 As to what constitutes distortion, there are a number of New York tax cases which provide indicia of distortion, but the analysis tends to be highly fact-specific.3 In a recent case, the Tax Appeals Tribunal indicated that the concepts of a unitary business and distortion are related; “the factors that indicate a unitary business may also result in a finding of distortion of income.”4

For tax years 2015 and after, combined reporting is required when corporations meeting a greater-than-50-percent common ownership test (measured by voting power of capital stock) are engaged in a unitary business. The new law eliminates substantial intercorporate transactions and distortion as considerations. Also, taxpayers may elect to include all commonly owned corporations in the combined report, regardless of whether they are conducting a unitary business, but the election must be made on the original return and may not be revoked for seven taxable years. In addition, the new law revokes Article 32, which applied to banking corporations, which means that general business corporations and banking corporations may be included within the same New York State combined group.

Considerations on Audit . . . I Did It My Way

Under the prior and current rules, New York State could force combination for taxpayers that filed separate returns or decombine taxpayers that filed on a combined basis — with the perceived result of generating the greatest audit revenue.

For tax years beginning in or before 2006, much of the tax controversy between taxpayers and the Department of Taxation and Finance related to rebutting the presumption of distortion. The assertion of common law doctrines such as economic substance or sham transaction analysis could speak to distortion. In response, the taxpayer would have to substantiate a reasonable opportunity for economic profit exclusive of tax benefits and establish the transactions at issue were entered into for a valid, non-tax business purpose.

Aside from economic substance, much of the battles around distortion under the prior regime revolved around whether transactions were at arm’s length. As arm’s length pricing was required to rebut the presumption of distortion, this became an exercise in competing IRC Section 482 studies between the taxpayer and New York State with uncertain results for both parties.

For tax years beginning in or after 2007 through 2014, audit controversies moved from transfer pricing to documenting and substantiating substantial intercorporate transactions. The Department of Taxation and Finance issued a technical services bulletin and regulations that detailed its interpretation of the statutory combined reporting requirements, including a 10-step process to determine whether mandatory combined reporting was required. Many taxpayers found the 10-step process to be convoluted, as it could easily turn into hundreds of steps depending on the number of subsidiaries upon which the test was applied. Related corporations, tentative combined groups, related corporations of tentative combined groups, unattached related groups — these were terms of art that could flummox a determination of whether mandatory combined reporting applied.

As we look ahead to 2015 and after, New York State will become a unitary combined reporting state. The existence of a unitary business in prior and current audit cycles has often been stipulated, but unitary business issues will soon become the focus for combination purposes. New York State has not defined a unitary business through statute or regulations, but case law provides guidance in determining the framework for a unitary business.

New York courts adopted the Mobil three-factor test of functional integration, centralized management and economies of scale.5 However, New York State has not established whether different criteria will be used in determining a unitary business under its new combined reporting regime. Moreover, the State has little to no guidance on more nuanced unitary issues such as instant unity, the termination of unitary group members or the treatment of pure holding companies.

Under the new combined reporting regime, taxpayers could avoid potential controversies by electing to treat their commonly owned group as their combined group, regardless of whether they constitute a unitary business. However, the election is applied on an all-or-nothing basis to the non-unitary companies. Given that the election is binding for seven years, a number of issues such as prospective acquisitions or restructurings and the predictability of the group’s business operations should be taken into account in considering the election.

Alvarez & Marsal Taxand Says:

The New York State Governor’s office described the 2014-2015 budget as representing “the most significant improvements to New York’s business tax system in nearly three decades” in part because it modifies and simplifies the tax code to reflect the reality of a complex economy.

If tax simplification was an impetus behind New York’s corporate tax reform, it remains to be seen whether simplicity will be achieved through the adoption of unitary combined reporting. The changes in the combined reporting mechanics from the prior to the current regime brought its own set of complexities, and other combined reporting jurisdictions, such as California, have years of controversy and litigation to suggest defining a unitary business and applying combined reporting methodologies (e.g., combined apportionment) to a corporate group are not simple tasks.

New York audits relating to the current combined reporting regime could very well last another 10 years. While New York State’s move to a unitary combined reporting regime will remove the headaches related to substantial intercorporate transactions and distortion for the next audit cycle, there is little to suggest that New York audits and litigation for tax years 2015 and after relating to combination will be any less taxing (pun intended). New York State combination continues to morph, but the Department’s emphasis and dedication of resources towards combination issues appear likely to remain constant. Therefore, taxpayers must continue to maintain sufficient facts to support their positions and detailed files to substantiate potential audits and litigation.


Samuel Lee
Senior Director, New York
+1 212 763 1958

Don Roveto, Managing Director, and Olga Armer, Senior Associate, contributed to this issue.

For More Information:

Benjamin Diaz
Managing Director, Miami
+1 305 704 6650

Tony Fuller
Managing Director, San Francisco
+1 415 490 2256

Brian Pedersen
Managing Director, Seattle
+1 206 664 8911

Don Roveto
Managing Director, New York
+1 212 763 9632

Other Related Issues

Managing Surprise Nexus Determinations and State Tax Audit Risk

A New York State of Mind: Mind Your Residency


1. New York City conformed to the State’s prior combined reporting regime until 2009, when it began conforming to the State’s current combined reporting regime. New York City has not conformed to the State’s combined reporting rules set to take effect in 2015.

2. Matter of Knowledge Learning Corp. and Kindercare Learning Centers, Inc., DTA Nos. 823962 & 823963 (N.Y.S. Tax App. Trib., Sept. 18, 2014)

3. Matter of Autotote Limited, TSB-D-90(4)C (N.Y.S. Tax App. Trib., April 12, 1990); Matter of Heidelberg Eastern, Inc., DTA Nos. 806890 & 807829 (N.Y.S. Tax App. Trib., May 5, 1994); Matter of Mohasco Corp., DTA No. 808901 (N.Y.A. Tax App. Trib., November 10, 1994)

4. Matter of IT USA, Inc., DTA Nos. 8232780 & 823781 (N.Y.S. Tax App. Trib., Apr. 16, 2014)

5. In the Matter of the Petition of Sungard Capital Corp. and Subsidiaries, DTA Nos. 823631, 823632, 823680, 824167, and 824256 (N.Y. Div. Tax. App. 2014); In the Matter of British Land Inc. v. Tax Appeals Tribunal, 85 N.Y.2d 139 (N.Y. Ct. App. 1995); Panavision Inc. for Redetermination of a Deficiency or for Refund of Corporation Franchise Tax, No. 816660 (N.Y. Div. Tax App. 2000).


The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisors. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisors before determining if any information contained herein remains applicable to their facts and circumstances.

About Alvarez & Marsal Taxand

Alvarez & Marsal Taxand, an affiliate of Alvarez & Marsal (A&M), a leading global professional services firm, is an independent tax group made up of experienced tax professionals dedicated to providing customized tax advice to clients and investors across a broad range of industries. Its professionals extend A&M's commitment to offering clients a choice in advisors who are free from audit-based conflicts of interest, and bring an unyielding commitment to delivering responsive client service. A&M Taxand has offices in major metropolitan markets throughout the U.S., and serves the U.K. from its base in London.

Alvarez & Marsal Taxand is a founder of Taxand, the world's largest independent tax organization, which provides high quality, integrated tax advice worldwide. Taxand professionals, including almost 400 partners and more than 2,000 advisors in 50 countries, grasp both the fine points of tax and the broader strategic implications, helping you mitigate risk, manage your tax burden and drive the performance of your business.

To learn more, visit or