This article was written by Jack Johnson, Manager, Tax.
Only nine years after the enactment of NYS Corporate Tax Reform in 2014, The Department of Taxation and Finance (DTF) finalized regulations in late December 2023 (the final regulations) related to the tax reform legislation. Despite the nine-year time lapse, the final regulations are intended to be retroactive to 2015.
While NYS Courts have held that tax statutes may be retroactive “for a short period,” it remains to be seen if NYS courts will sustain the nine-year retroactivity of the final regulations. The DTF did state that it “may choose not to apply penalties in cases where taxpayers took a position in their tax filings prior to the adoption of the proposed rule in reliance upon prior article 9-A regulations or prior drafts of the proposed rule.”
The final regulations contain a number of provisions that directly impact NYS financial institutions, including the following:
FRB/FHLB Stock
The final regulations require investments in Federal Reserve Bank and Federal Home Loan Bank stock to be treated as business capital, rather than the more favorable treatment as investment capital. Since FRB and FHLB stock are both treated as capital assets for federal income tax purposes (Arkansas Best Corp. v. Commissioner, 485 U.S. 212 (1988)), and since such stock is established by federal law and has been consistently treated as equity for federal income tax purposes, it remains to be seen whether the final regulations position of treating such stock as business capital will be upheld in NYS courts.
However, the final regulations provide that income from FRB and FHLB stock is apportioned to NYS based on the relative number of branches in NYS vs the US (1/12 for FRB and 1/11 for FHLB). This limited apportionment to NYS may mitigate the pain from treating FRB and FHLB stock as business capital.
QFI Election
Under NYS tax law, auto and consumer loans not secured by real property that are marked to market federally under Internal Revenue Code §475 are treated as Qualified Financial Instruments (QFIs) for which an 8% apportionment election is permissible. The statute further provides that such a loan that is not marked to market federally, but is of the same type as a loan that has been marked to market federally, is also a QFI. For NYS based banks, this QFI election would be very favorable in reducing apportionment on such loans from near 100% to 8%.
However, the final regulations provide that auto and consumer loans that a bank holds for investment are not QFIs, even if such loans are properly identified as mark to market federally and are in fact marked to market for federal income tax purposes.
To the extent that taxpayers believe that the final regulations are inconsistent with the NYS statute, which directly refers to federal mark to market treatment, they may be subject to challenge in NYS courts by those banks with the financial wherewithal to pursue such challenges. Banks not wishing to take a position contrary to the final regulations should monitor NYS court activity and the statute of limitations for possible refund opportunities.
Sales of Assets or Businesses Outside the Normal Course
Prior NYS regulations excluded the receipts from sales of assets or businesses outside the normal course of events from the apportionment calculation. The final regulations require taxpayers to apportion their receipts from most such transactions recognized within the tax year. Where a taxpayer has significant proceeds from the sale of assets or businesses outside the normal course of events, such transactions can now cause large apportionment swings from year to year.
It should be noted that the DTF may require alternative apportionment to properly reflect the taxpayer’s business income, and taxpayers may petition for alternate apportionment. Accordingly, taxpayers will need to carefully consider this significant change in the NYS apportionment rules. Taxpayers with significant sales of assets or businesses outside the normal course in open tax years should consider the impact of the final regulations.
Conclusion
This article is meant to be a summary of some of the more significant issues in the final regulations impacting NYS banks but is not intended as a comprehensive summary of all tax issues raised by the final regulations. If you need further guidance or have any questions on the impact of the final regulations on your institution, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
