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Corporations having a filing obligation in New York that have non-unitary stock held for investment purposes must meet the new identification requirements to qualify as investment capital

Immediate Action May Be Required Prior to October 1 to Identify New York State Investment Capital

Corporations Having a Filing Obligation in New York and Partnerships with Investment Assets and Corporate Partners Having a Filing Obligation in New York May Be Impacted

As a reminder, prior to October 1, 2015 all corporations having a filing obligation in New York that have non-unitary stock held for investment purposes directly or indirectly must meet the new identification requirements to qualify as investment capital for purposes of the New York State Article 9-A Tax (corporate tax) and New York City Corporate Tax of 2015. This is referred to as the “transitional requirement” for pre-existing stock to qualify as investment capital on a going forward basis. In general, investment capital is exempt from tax in New York.
 
On and after October 1, 2015, the identification of the stock held for investment purposes must take place before the close of the day on which stock is acquired to qualify as investment capital.

Each corporation in a combined group must follow the identification procedures and maintain its own investment capital account.
 
These identification requirements impact investment partnerships with existing (direct and indirect) and future corporate partners as well as corporations that have a New York filing obligation. For this purpose, investment partnerships include hedge funds, private equity funds, family partnerships, funds of funds and other partnerships that make investments.

As for partnerships with existing and future corporate partners that have a New York filing obligation, the partnership would need to meet the investment capital requirements (most importantly the identification requirements) so that the corporation’s share of long-term capital gains from the partnership qualifies as exempt income for New York purposes.

For corporations and partnerships that are not dealers subject to Internal Revenue Code (“IRC’) Section 1236, in order to properly identify the non-unitary stock as held for investment:

  • The stock must be recorded in an account maintained for investment capital purposes only. The account must be separate from any account maintained for stock held for sale to customers. (The investment capital account may be an account maintained in the taxpayer’s books of account for recordkeeping purposes only or it may be a separate depository account maintained by a clearing company as nominee for the corporation.)
  • The investment capital account must disclose the name of the stock, the CUSIP number of the stock (or CINS number for international securities), the date of purchase, the number of shares purchased and the purchase price. If the stock is later sold, the account must disclose the date of sale, the number of shares sold and the sales price. The account must also readily identify the length of time the stock was owned by the corporation.

If a corporation is a partner in a partnership and the corporation uses the aggregate method to compute its tax, then it may treat its proportionate share of the stock owned by the partnership as investment capital only if the investment capital requirements (most importantly the identification requirements) are met at the partnership level. Thus, for partnerships that are not dealers subject to IRC Section 1236, stock acquired before October 1, 2015 that otherwise meets the requirements to be investment capital satisfies the investment capital identification requirement if the partnership makes the requisite identification before October 1. If a partnership has no direct or indirect corporate partners that have a filing obligation in New York, no action may be required. If no action is taken by the partnership and a new partner that is a corporate partner with a New York filing obligation joins, the identification requirement would need to be met at that point and would be applicable only to stock acquired thereafter.
 
The legislative amendments enacted in New York State’s 2015-16 budget resulted  in “significant” changes to the investment capital definition. As indicated in the New York State Department of Taxation and Finance issued guidance (TSB-M-15(4)C, (5)I), only investments in stocks of non-unitary corporations that meet the following five-part test will qualify as investment capital:

  1. Satisfy the definition of a “capital asset” under IRC Section 1221 at all times the taxpayer owned the stock during the taxable year;
  2. Are held for investment for more than one year;
  3. If disposed of, generate (or would generate) long-term capital gains or losses under the IRC; 
  4. For stocks acquired on or after January 1, 2015, have never been held for sale to customers in the regular course of business at any time after the close of the day on which the stock is acquired; and
  5. Before the close of the day on which the stock was acquired, must be clearly identified in the taxpayer’s books and records as stock held for investment in the same manner as required under IRC Section 1236(a)(1) for the stock of a dealer in securities to be eligible for capital gain treatment. (For stock acquired prior to October 1, 2015,  that was not subject to IRC Section 1236(a), such identification must occur before October 1, 2015.)
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