Corporate Close-Up: Mistaken Identity—New York Gives Taxpayers the Opportunity to Revoke Incorrect Commonly Owned Group Elections

Since Jan. 1, 2015, New York has permitted commonly owned groups of corporations to elect to file a combined report even when it is not required under law, known as the “commonly owned group election.” However, it appears that for tax years 2015 and 2016, some groups had a case of mistaken identity and failed to include the required related corporations in their combined return. Until June 1, 2018, the New York Department of Taxation and Finance is providing taxpayers that meet three requirements with the chance to withdraw their commonly owned group election, despite the election typically being binding for seven years.

Under New York law, combined reporting is required when taxpayers are connected through the ownership or control of more than 50 percent of the voting power or capital stock of another corporation or corporations in the group and the corporations in the group are engaged in a unitary business. New York gives taxpayers meeting the ownership or control threshold the option to elect for all corporations meeting the threshold to be treated as a commonly controlled group, even if the corporations are not engaged in a unitary business. This election may be made by the commonly owned group’s designated agent on the original, timely filed return of the commonly owned group and is binding for that tax year and the next six taxable years.

A group of corporations electing to be treated as a commonly owned group must include all corporations on their combined report that have the following relationships with any member of the group:

  • “a taxpayer owns or controls, either directly or indirectly, more than 50 percent of the voting power of the capital stock of one or more other corporations; or”

  • “more than 50 percent of the voting power of the capital stock of a taxpayer is owned or controlled, either directly or indirectly, by another corporation; or”

  • “more than 50 percent of the voting power of the capital stock of a taxpayer, and the capital stock of one or more other corporations, is owned or controlled, directly or indirectly, by the same interests (for example, an alien, foreign, or domestic corporation, partnership or individual).”

The corporation does not need to be subject to tax in New York to be included, nor are the included corporations limited to those corporations that are part of an affiliated group for federal purposes.

While reviewing commonly owned group elections for the 2015 and 2016 tax years, it came to the attention of the department that many groups that had elected to file as a commonly owned group failed to include all of the required corporations on their return under the statutory ownership threshold. Rather than including all required corporations, several taxpayers only included those corporations that were part of their federal affiliated group. To remedy this error, the department is permitting corporations who made an incorrect commonly owned group election to revoke that election prematurely if they meet all of the following requirements:

  • “a combined return was filed for a combined group and the designated agent of the combined group made the commonly owned group election for the first time on the combined group's original, timely filed 2015 or 2016 return;”

  • “the corporations included in the combined return identically matched the corporations in the designated agent's federal consolidated return for that tax year; and

  • “the 2015 or 2016 combined return did not include any other corporations that met the Article 9-A combined filing ownership requirements.”

A designated agent may withdraw the election by following the instructions set forth in New York TSB-M-18(C)1 and filing the required document before June 1, 2018. The department will not honor any revocation attempts made after June 1. Once the election has been properly withdrawn, the group is then free to make a new election including all required groups for the next tax year following the last year that they filed a return during the binding period of the improper election (e.g., if the group made the election in 2015 and already filed a 2016 return, the group must revoke the election for both years and then may re-elect for 2017).

Taxpayers who may have mistakenly filed an election without including the required related corporations should start the process of revocation immediately before the clock runs out on June 1.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: What are the pros and cons of New York allowing qualifying taxpayers to change their election?

Get a free trial to Bloomberg Tax: State, a comprehensive research service that provides deep analysis and time-saving practice tools to help practitioners make well-informed decisions.