Capital stock requirement

# (a)

A taxpayer and another corporation meet the capital stock requirement if:

# (1)

the taxpayer owns or controls, either directly or indirectly, more than 50% of the voting power of the capital stock of another corporation; or

# (2)

more than 50% of the voting power of the capital stock of the taxpayer is owned or controlled, either directly or indirectly, by another corporation; or

# (3)

more than 50% of the voting power of the capital stock of the taxpayer and more than 50% of the voting power of the capital stock of one or more other corporations are owned or controlled, either directly or indirectly, by the same interests. Whether or not the same interests test is met will be determined based on the facts and circumstances of each case. The same interests include, but are not limited to, one or more alien, foreign or domestic corporations, partnerships, trusts or individuals.

# (b)

The term “capital stock of a corporation” means the issued and outstanding stock of the corporation.

# (c)

The term “ownership” means actual or beneficial ownership, rather than mere record title as shown by the stock books of the corporation. To be considered the owner, the stockholder must have the right to vote and the right to receive any dividends declared.

# (d)

The term “control” means all cases where one corporation directly or indirectly possesses the power to dictate or influence the management and policies of another corporation through the direct or indirect ownership of more than 50% of the voting power of the capital stock of that corporation. In addition, a corporation controls the voting power of capital stock if it has been given the right to vote that stock by proxy or otherwise. The determination as to whether or not a corporation is controlled by or controls another corporation or is controlled by the same interests will be determined by the facts in each case.

# (e)

The term “voting power of capital stock of a corporation” means the shares of stock, under the applicable law, corporate charter, articles of incorporation, or shareholder agreements, that have the power to elect the board of directors of the corporation. In determining whether the stock owned by a person or entity possesses a certain percentage of the total combined voting power of all classes of stock of a corporation entitled to vote, consideration will be given to all the facts and circumstances of each case. A share of stock generally will be considered as possessing the voting power accorded to that share by the corporate charter, by-laws, or share certificate. If there is any agreement, whether express or implied, that a stockholder will not exercise its right to vote, the formal voting rights possessed by that stock may be disregarded in determining the percentage of the total combined voting power possessed by that stockholder in the corporation. Moreover, if a stockholder agrees to vote its stock in a corporation in the manner specified by another stockholder in the corporation, the voting rights possessed by the stock owned by the first stockholder may be considered to be possessed by the stock owned by the other stockholder. For contingent voting rights, the stock is deemed to possess voting power only when the contingency occurs, and the rights become exercisable.

# (f)

# (1)

The ownership test is applied before the control test. Direct ownership is examined before indirect ownership, and direct control is examined before indirect control. However, the capital stock requirement may be satisfied through direct or indirect ownership, direct or indirect control or through a combination of direct or indirect ownership or control.

# (2)

Examples.
The following examples are intended to illustrate the indicia of ownership and control set forth above.
Generally, the examples are meant to illustrate either ownership or control since both do not need to be met concurrently in order for the capital stock requirement to be met.
Example 1: The taxpayer, X Corporation, owns 40% of the capital stock with voting rights of Y Corporation. The remaining capital stock of Y Corporation with voting rights is owned by three employees of X Corporation. These employees have agreed in writing to sell their stock to X Corporation when they leave the corporation. As part of the agreement, the employees have given X Corporation their voting proxy.
Thus, X Corporation controls more than 50% of the voting power of the capital stock of Y Corporation. X and Y Corporations satisfy the capital stock requirement to be included in a combined report.

Limited Liability Company Y owns 80% of the capital stock with voting rights of Corporation B. Corporation A is considered a managing member of Limited Liability Company Y, since the terms of the operating agreement do not impose limitations on the corporate member’s participation in the management either equivalent to or more stringent than the limitations on the participation in the control of the business of a limited partnership imposed on limited partners under article 8-A of the New York Partnership Law. Since Corporation A is a managing member of Limited Liability Company Y, which in turn has greater than 50% voting power of the capital stock of B, Corporation A has the authority to direct how Limited Liability Company Y uses its voting power in Corporation B. Thus, Corporation A controls indirectly more than 50% of the voting power of the capital stock of Corporation B, and Corporations A and B satisfy the capital stock requirement to be included in the combined report.
Example 6: The taxpayer, Corporation A, is an 80% limited partner of Partnership Y.
Partnership Y owns 40% of the capital stock with voting rights of Corporation B. Corporation A also directly owns 22% of the capital stock with voting rights of Corporation B. Even though Corporation A has an 80% interest in Partnership Y, Corporation A is a limited partner and cannot control how Partnership Y votes its stock in Corporation B. Thus, Corporation A does not control indirectly 40% of the voting power of the capital stock of Corporation B, and so that 40% is not combined with the 22% of the voting power of the capital stock of Corporation B that Corporation A controls directly through its ownership of Corporation B stock to determine if Corporation A controls more than 50% of the voting power of the capital stock of Corporation B. As a result, Corporations A and B do not meet the capital stock requirement and therefore cannot be included in a combined report.
Example 7: The taxpayer, Corporation A, is a 60% general partner of Partnership Y.
Partnership Y owns 40% of the capital stock with voting rights of Corporation B. Corporation A also directly owns 30% of the capital stock with voting rights of Corporation B. By combining its direct and indirect ownership of the stock of Corporation B, Corporation A owns, directly and indirectly, 54% of the voting power of the capital stock of Corporation B (30% plus 60% multiplied by 40%). Because Corporation A directly or indirectly owns more than 50% of the voting power of the capital stock of Corporation B, Corporations A and B satisfy the capital stock requirement to be included in a combined report.
Example 8: The taxpayer, Corporation A, owns 100% of the voting power of the capital stock of Corporation B. Corporation B owns 51% of the voting power of the capital stock of Corporation C. Corporation C owns 40% of the voting power of the capital stock of Corporation D. Individual X owns 100% of the voting power of the capital stock of Corporation A and also owns 20% of the voting power of the capital stock of Corporation D.
Corporations A, B, C and D satisfy the capital stock requirement to be included in a combined report because they are all directly or indirectly controlled by the same interests (Individual X).
Example 9: The taxpayer, Corporation A, owns 60% of the capital stock with voting rights of Corporation C and 60% of the capital stock with voting rights of Corporation D. Corporation B, also a taxpayer, owns 40% of the capital stock with voting rights of Corporation C and 40% of the capital stock with voting rights of Corporation D. Corporations C and D each own 30% of the capital stock with voting rights of Corporation E. Corporation B directly owns the remaining 40% of the capital stock with voting rights of Corporation E. Corporation A directly owns more than 50% of the voting power of Corporations C and D. Corporation A, acting indirectly through its control of Corporations C and D, controls Corporation E. Corporation B directly and indirectly owns 64% of the voting power of the capital stock of Corporation E (B’s 40% ownership of C multiplied by C’s 30% ownership of E plus B’s 40% ownership of D multiplied by D’s 30% ownership of E plus B’s direct ownership of 40% of E). Corporations A, B, C, D and E satisfy the capital stock requirement to be included in a combined report.
Example 10: Individuals A, B, C and D each own 25% of the voting stock of Corporations S and T. Because more than 50% of the ownership of the voting stock of both corporations is owned by the same interests, Corporations S and T satisfy the capital stock requirement to be included in a combined report.