New York State Tax Reform – Investment Capital

By Chaim Kofinas, CPA/PFS – Senior Manager – WithumSmith+Brown

New York has relaxed the securities identification rule for New York corporate partners.  This rule effectively applies to all investment partnerships that have, or may have, a corporate partner taxable in New York.

New York State, the financial capital of the world, has historically eschewed the concept of business and nonbusiness income.  New York State has, instead, opted for its own esoteric regime of investment income.  Under certain circumstances investment income is exempt from tax in New York.  Investment capital and investment income have historically been apportioned to New York State by applying the investment Income Allocation percentage.

The New York State Tax 2015 Corporate Reform legislation signed by Governor Andrew Cuomo includes provisions that totally overhaul the definition of what qualifies as Investment Capital and what can now be separately apportioned as investment income. These changes are significant and have a dramatic effect on the financial services industry.

Effective January 1, 2015 only stocks and bonds qualify as investment assets. Gone from the definition is cash. Further, stocks and bonds only qualify if they meet 5 stringent conditions:

  • Satisfies the definition of a capital asset pursuant to IRC. §1221 while held by the taxpayer;
  • The security must be held for one year;
  • If disposed of, generate a capital gain (i.e., constitute a capital asset in the taxpayers’ hands);
  • For securities purchased on or after January 15, have never been held for sale to customers (i.e., not inventory);
  • Must be identified as investment property on the books and records of the business entity by the close of business of the date of acquisition. This rule dovetails with the identification rule found in IRC §1236(a)(1). For non-dealers in securities, with respect to securities purchased before January 15 the identification needs to be made by October 1, 2015.

This last provision has stirred the most controversy. There are two main problems with the provision.  First, a corporation that had not previously been doing business in New York would not know of the rule and thus would not make a timely identification.  Second, where a corporation subject to tax in NY makes an investment in an investment partnership, the partnership must make the identification.  But, in many cases, the investment partnership may not know the NY identification rule or may not realize it has a NY partner in time to comply with the identification rule.

To ameliorate the harshness of this rule New York State recently issued TSB-M-15(4.1)C, (5.1)l.  In this TSB the state relaxed the identification rule for past purchases but it applies only to non-dealers.  Dealers are still held to the same day identification standard referenced by IRC §1236(a) (1).  For corporations that become taxable to New York after October 1, 2015, they have 90 days to begin identifying all of their securities purchases.  After the 90 days the same day rule, mentioned above, applies.  For corporations that have become taxpayers before January 7, 2016, they have until April 6 to comply with the identification rule.  Again, once the grace period expires, the same day identification requirement kicks in.

Unfortunately, the rule requiring the investment partnership to make the identification remains.  The rule requires the partnership to make the identification in its books and records.  The problem this creates is that out of state partnerships are not subject to New York State taxation and may be unaware of the rules affecting corporate partners.  Further, certain partnerships that have partners transferring interests during the year may not be aware that a new partner is subject to New York State taxation and now subject to these ornery rules.  Investment funds should get familiar with the New York rule and should make same day identifications, always assuming they have at least one New York corporate partner.

As in the prior year the investment income is allocated to New York by multiplying the investment income by the investment allocation percentage. The investment allocation percentage remains the investment in each qualifying security multiplied by the “issuer’s allocation percentage” which represents the in-state activities of the issuer of the securities.

Contact your WithumSmith+Brown tax advisor to help you navigate the new maze of rules and regulation in this area.



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