1. (a) In determining whether substantial intercorporate transactions among the related corporations exist, the facts and circumstances of all activities and transactions will be considered regardless of the transfer price for such intercorporate transactions. It is not necessary that there be substantial intercorporate transactions between any one corporation and every other related corporation. However, it is necessary that there be substantial intercorporate transactions between the taxpayer and a related corporation or collectively a group of such related corporations.

   1. (1) In determining whether there are substantial intercorporate transactions, the commissioner will consider and evaluate all activities and transactions of the taxpayer and its related corporations, including but not limited to:

      1. (i) manufacturing or acquiring goods or property or performing services for related corporations;
      2. (ii) selling goods acquired from related corporations;
      3. (iii) financing sales of related corporations;
      4. (iv) performing related customer services using common facilities and employees for related corporations;
      5. (v) incurring expenses that benefit, directly or indirectly, one or more related corporations; and
      6. (vi) transferring assets, including assets such as accounts receivable, patents, or trademarks from one or more related corporations.

   2. (2) For purposes of determining whether substantial intercorporate transactions exist, dividends are not considered in the measure of intercorporate receipts, total receipts, intercorporate expenditures, or total expenditures described in subparagraph (3)(i) of this subdivision. Interest paid and received on loans between related corporations is considered in determining if there are substantial intercorporate transactions, including interest on loans that constitute subsidiary capital pursuant to section 3-6.3 of this Title and section 208.4 of the Tax Law. Taxes paid or reimbursed will not be considered in determining if there are substantial intercorporate transactions. Similar transactions must be treated in a consistent manner from taxable year to taxable year. Service functions will not be considered when they are incidental to the business of the corporation providing such service and expenditures for service functions are not considered expenditures benefiting a related corporation or a group of related corporations described in subclause (3)(i)(a)(3) of this subdivision. Service functions include, but are not limited to, accounting, legal, payroll processing, and personnel services. Where a corporation makes expenditures that benefit a related corporation or a group of related corporations and allocates these costs to the related corporation or a group of related corporations, the intercorporate cost allocations are not considered receipts or expenditures described in subparagraph (3)(i) of this subdivision; the expenditures benefiting the related corporation or group of related corporations are included in such expenditures described in subclause (3)(i)(a)(3) of this subdivision.

      1. (i) Receipts and expenditures tests.

         1. (a) Subject to clause (b) of this subparagraph, the substantial intercorporate transactions requirement based on a corporation’s receipts or expenditures is met where:

            1. (1) during the taxable year, 50 percent or more of a corporation's receipts includable in the computation of entire net income (excluding nonrecurring receipts) are from a related corporation or a group of related corporations;
            2. (2) during the taxable year, 50 percent or more of a corporation's expenditures includable in the computation of entire net income, including expenditures for inventory but excluding nonrecurring expenditures, are to a related corporation or a group of related corporations; or
            3. (3) during the taxable year (i) 50 percent of more of a corporation’s expenditures includable in the computation of entire net income (excluding nonrecurring expenditures) directly or indirectly benefit a related corporation or a group of related corporations, or (ii) a corporation’s expenditures includable in the computation of entire net income (excluding nonrecurring expenditures) directly or indirectly benefiting a related corporation or a group of related corporations are equal to 50 percent or more of the sum of such expenditures and the expenditures (excluding nonrecurring expenditures) of the beneficiary corporation or corporations.
         2. (b) If, in a particular taxable year, a corporation's intercorporate receipts or expenditures described in subclause (a)(1), (2), or (3) of this subparagraph, are between 45 percent and 55 percent of the total of the corporation’s receipts or expenditures, as the case may be, then the test will be satisfied only if the corporation's receipts or expenditures, as the case may be, from one or more related corporations during the taxable year and the prior two taxable years in aggregate equals or exceeds 50 percent of its total receipts or expenditures, as the case may be, during the taxable year and the prior two taxable years in aggregate. If the corporation or one or more of the related corporations involved in the intercorporate transactions did not exist for all of the two prior taxable years, then the 50 percent measure for each corporation will be computed using the number of months that it existed.

      2. (ii) The substantial intercorporate transactions requirement based on a corporation’s asset transfers is met where a corporation transfers assets (including through incorporation) to a related corporation and 20 percent or more of the transferee's gross income, including any dividends received, in the taxable year of the transfer or in taxable years subsequent to the year the asset or assets were transferred, is derived directly from the transferred assets. This applies to assets transferred on or after January 1, 2007. For purposes of this test, the following apply:

         1. (a) Generally, only assets to the extent that they are transferred in exchange for stock or paid in capital are considered qualifying assets. Transfers of assets other than in exchange for stock or paid in capital, including transfers of assets through a nonmonetary property dividend, are not considered unless the principal purpose of the transfer is the avoidance or evasion of the franchise tax imposed on the taxpayer or the combined group by New York State;
         2. (b) transfers of cash to a related corporation in exchange for stock or paid in capital are not considered;
         3. (c) the term gross income means gross income as defined in section 61(a) of the Internal Revenue Code;
         4. (d) gross income is derived directly from an asset if the asset or the use of the asset by the transferee produces gross income. Gross income from transferred assets that generate income only when used in combination with other assets is not gross income derived directly from the assets. The gain from a sale of any transferred asset is considered gross income derived directly from the asset. Assets that may directly produce gross income include, but are not limited to, real property, accounts receivable, and intangibles such as patents, copyrights, trademarks, and partnership interests;
         5. (e) gross income from the sale of items produced from transferred production equipment would not, by itself, be considered gross income derived directly from the transferred assets. However, gross income from the sale of items produced from transferred assets constituting substantially all of the production process, including associated intangibles, such as might occur in the transfer of an operating division, would constitute gross income derived directly from the transferred assets;
         6. (f) gross income received by the transferee as a result of the reinvestment of income attributable to the transferred asset is not gross income derived directly from the transferred asset;
         7. (g) the test must be applied for each year of an asset’s normal depreciation recovery period under section 167 or 168(c) of the Internal Revenue Code or amortization period under section 197(a) of the Internal Revenue Code, without regard to any reduction or disallowance of the depreciation or amortization period contained in the Internal Revenue Code. In the case of an asset that is not required to be depreciated or amortized for Federal income tax purposes, such as accounts receivable, the test must be applied for each year the asset is reflected on the books and records of the transferee under generally accepted accounting principles;
         8. (h) if the asset transferred is an interest in another entity including a partnership, an entity treated as a partnership or a disregarded entity, the income distributed or deemed distributed to the transferee by such entity is gross income derived directly from the transferred asset;
         9. (i) where more than one asset is transferred, the gross income from all qualifying assets is used in determining whether the test is met;
         10. (j) the determination of whether a transaction or series of transactions constitutes an asset transfer is based on the facts and circumstances of the transaction. The form of a transaction will not be respected if the transaction lacks economic substance or if the taxpayer intended a series of actions to be part of a single integrated transaction, or where it has as a principal purpose the avoidance or evasion of the franchise tax imposed on the taxpayer, or the combined group, by New York State; and

         11. (k) the following examples illustrate when gross income is or is not derived directly from a transferred asset: Example 1: Example 2: Example 3:

             Example 1:

             If a corporation transfers a patent that is used by the transferee in a production process, income from the sale of the item produced by that process is not gross income derived directly from the patent. However, if the transferee sells the patent, the gain on the sale of the patent is gross income derived directly from the patent.

             Example 2:

             A corporation transfers production equipment to another corporation. The income from selling products made by the production equipment is not considered to be gross income derived directly from the equipment. If the transferee sells the production equipment, any gain on such sale is considered gross income derived directly from the transferred asset. In addition, gross income from the sale of items produced from transferred assets constituting substantially all of the production process, including associated intangibles, such as might occur in the transfer of an operating division, would constitute gross income derived directly from the transferred assets.

             Example 3:

             Rental income derived from a transferred asset is considered gross income derived directly from a transferred asset. However, if the rental income is deposited in a bank account, interest earned on the bank account is not gross income derived directly from the asset.

      3. (iii) In determining whether the substantial intercorporate transactions requirement has been met, the department will consider the materiality of the transactions and whether the transactions have economic substance, including the extent to which the motivation of the taxpayer in undertaking the transactions was to affect the membership of the combined group.

      (3)

   (b)

2. (c) The following steps should be used to determine whether a combined report is required and, if so, which corporations are included in that combined report:

   1. (1) Every taxpayer must identify all of the corporations to which it is related. Where one or more of the related corporations are taxpayers, identify all of the corporations related to these taxpayers. Do this until all related corporations have been identified. If a taxpayer has no related corporations, it must file on a separate basis. This constitutes the step 1 group of related corporations.
   2. (2) Identify all of the related corporations that have substantial intercorporate transactions with a taxpayer identified in step 1. These related corporations and the taxpayer with which they have substantial intercorporate transactions constitute the step 2 tentative combined group.
   3. (3) Add to the step 2 tentative combined group every related corporation that has substantial intercorporate transactions with any corporation identified in step 2. This constitutes the step 3 tentative combined group.
   4. (4) Add to the step 3 tentative combined group every related corporation that has substantial intercorporate transactions with any corporation identified in step 3. Repeat this process until it adds no more corporations to the group. This constitutes the step 4 tentative combined group.
   5. (5) Identify each related corporation not in the step 4 tentative combined group that has substantial intercorporate transactions with another related corporation not in the step 4 tentative combined group. Compare all such groups and combine into one group those with common members (unattached related group). There may be more than one unattached related group.
   6. (6) If there are substantial intercorporate transactions between any one corporation in an unattached related group and the step 4 tentative combined group, then all corporations in that unattached related group are included in the combined group. Do this for each unattached related group. As unattached related groups are included in the combined group, do this analysis between the expanded group and each unattached related group. The resulting group is the step 6 tentative combined group.
   7. (7) If there are substantial intercorporate transactions between any one corporation in the step 6 tentative combined group and an unattached related group, then all corporations in the unattached related group are included in the combined group. Do this for each unattached related group. As unattached related groups are included in the combined group, do this analysis between the expanded group and each unattached related group. The resulting group is the step 7 tentative combined group.
   8. (8) Add to the step 7 tentative combined group each related corporation that has substantial intercorporate transactions with the step 7 tentative combined group.
   9. (9) Repeat the processes set forth in steps 4, 6, 7, and 8 until no more corporations can be added to the tentative combined group.
   10. (10) Eliminate from the tentative combined group those corporations that are formed under the laws of another country (alien corporations), that are taxable under another franchise tax imposed by the Tax Law (or would be taxable under another franchise tax if subject to tax), and corporations that compute their business allocation percentage using a statutory method that is different from the taxpayer's (e.g., aviation corporations and trucking corporations compute their business allocation percentage using a different business allocation percentage than manufacturing corporations), New York S corporations defined in section 208(1-A) of the Tax Law, and foreign corporations not subject to tax that have an election in effect under subchapter S of chapter one of the Internal Revenue Code. Also eliminate any captive REIT or captive RIC as defined in subdivisions 9 and 10 of section 2 of the Tax Law, respectively, that is required to be included in a combined return under section 1462(f) or 1515(f) of the Tax Law. If two or more corporations are eliminated, it is possible that they will constitute a combined group if they have substantial intercorporate transactions. For example, one group could consist of trucking corporations and another group could consist of manufacturing corporations. However, section 211.4(a)(5) of the Tax Law provides that alien corporations are not to be included in a combined group (also see section 6-2.5 of this Subpart – Corporations not required or permitted to file a combined report).

3. (d) If the capital stock requirement described in section 6-2.2 of this Subpart has been met, but substantial intercorporate transactions are absent, a combined report may be required or permitted if the commissioner deems such a report necessary because of inter-company transactions or some agreement, understanding, arrangement, or transaction in order to properly reflect the tax liability under article 9-A.

   1. (1) For purposes of this Subpart, in determining whether a corporation is part of a unitary business, the commissioner will consider whether the activities in which the corporation engages are related to the activities of the other corporations in the group, such as:

      1. (i) manufacturing or acquiring goods or property or performing services for other corporations in the group; or
      2. (ii) selling goods acquired from other corporations in the group; or
      3. (iii) financing sales of other corporations in the group.

   2. (2) In determining whether a corporation is part of a unitary business, the commissioner will also consider whether the corporation is engaged in the same or related lines of business as the other corporations in the group, such as:

      1. (i) manufacturing or selling similar products; or
      2. (ii) performing similar services; or
      3. (iii) performing services for the same customers.

   3. (3) Examples: Example 1: Example 2:

      Example 1:

      A manufacturing corporation organizes an 80 percent or more owned subsidiary and transfers all of its selling activities to the subsidiary. The subsidiary sells only the parent's products for which it receives a commission. The subsidiary has a place of business of its own and its own employees. The corporations are conducting a unitary business.

      Example 2:

      The taxpayer, a manufacturing corporation, forms a holding company. The holding company owns all of the manufacturing company's stock. The only activity of the parent-holding company is to receive dividends from the manufacturing corporation. The corporations are not conducting a unitary business.

   (e)

Tax Law, § 211(4) and (5)