N.Y. Tax Law § 292 — Unrelated business taxable income

§ 292. Unrelated business taxable income. (a) The unrelated business\ntaxable income of a taxpayer subject to the tax imposed by section two\nhundred ninety shall be such taxpayer's federal unrelated business\ntaxable income, as defined in the laws of the United States for the\ntaxable year, with the following modifications:\n (1) There shall be added to federal unrelated business taxable income\nthe amount of any tax imposed under this article.\n (2) There shall be subtracted from federal unrelated business taxable\nincome the amount of any refund or credit for overpayment of a tax\nimposed under this article or article twenty-three of this chapter.\n (3) The net operating loss deduction which shall be allowed shall be\nthe same as the net operating loss deduction allowed under paragraph six\nof subsection (b) of section five hundred twelve of the internal revenue\ncode of nineteen hundred fifty-four, except that\n (A) any net operating loss included in determining such deduction\nshall be adjusted to reflect the addition and subtraction from unrelated\nbusiness taxable income required by paragraphs one and two of this\nsubdivision,\n (B) such deduction shall not include any net operating loss sustained\nduring any taxable year beginning prior to January first, nineteen\nhundred seventy, or during any taxable year in which the taxpayer was\nnot subject to the tax imposed by this article, and\n (C) such deduction shall not exceed the deduction for the taxable year\nallowable under paragraph six of subsection (b) of section five hundred\ntwelve of the internal revenue code of nineteen hundred fifty-four.\n (4) There shall be subtracted from federal unrelated business taxable\nincome any amount which is included therein solely by reason of the\napplication of section 501(m)(2)(A) or 512(a)(7) of the internal revenue\ncode.\n (5) Shareholders of S corporations. (A) In the case of a shareholder\nof an S corporation,\n (i) where the election provided for in subsection (a) of section six\nhundred sixty of this chapter is in effect with respect to such\ncorporation, there shall be added to federal unrelated business taxable\nincome an amount equal to the shareholder's pro rata share of the\ncorporation's reductions for taxes described in paragraphs two and three\nof subsection (f) of section thirteen hundred sixty-six of the internal\nrevenue code, and\n (ii) where such election has not been made with respect to such\ncorporation, there shall be subtracted from federal unrelated business\ntaxable income any items of income of the corporation included therein,\nand there shall be added to federal unrelated business taxable income\nany items of loss or deduction included therein, and\n (iii) in the case of a New York S termination year, the amount of any\nsuch items of S corporation income, loss, deduction and reductions for\ntaxes shall be adjusted in the manner provided in paragraph two or three\nof subsection (s) of section six hundred twelve of this chapter.\n (B) In the case of a shareholder of a corporation which was, for any\nof its taxable years beginning after nineteen hundred ninety-seven, a\nfederal S corporation but a New York C corporation:\n (i) There shall be added to federal unrelated business taxable income\nS corporation distributions to the extent not included therein because\nof the application of section thirteen hundred sixty-eight or subsection\n(e) of section thirteen hundred seventy-one of the internal revenue\ncode, which represent income not previously subject to tax under this\narticle because the election provided for in subsection (a) of section\nsix hundred sixty of this chapter had not been made. Any such\ndistribution treated in the manner described in paragraph two of\nsubsection (b) of such section thirteen hundred sixty-eight shall be\ntreated as ordinary income for purposes of this article.\n (ii) Where gain or loss is included in unrelated business taxable\nincome upon the disposition of stock or indebtedness of such\ncorporation,\n (I) there shall be added to unrelated business taxable income the\namount of increase in basis of such stock or indebtedness with respect\nto such New York C years of the corporation, pursuant to subparagraphs\n(A) and (B) of paragraph one of subsection (a) of section thirteen\nhundred sixty-seven of such code, and\n (II) there shall be subtracted from unrelated business taxable income\nthe amount of decrease in such basis with respect to such New York C\nyears of the corporation, pursuant to subparagraphs (B) and (C) of\nparagraph two of subsection (a) of such section thirteen hundred\nsixty-seven, and\n (III) there shall be subtracted from unrelated business taxable income\nthe amount of modifications to unrelated business taxable income with\nrespect to such stock pursuant to clause (i) of subparagraph (B) of this\nparagraph.\n (C) Cross reference. For definitions relating to S corporations, see\nsubdivision one-A of section two hundred eight of this chapter.\n (6) Related members expense add back. (A) Definitions. (i) Related\nmember. "Related member" means a related person as defined in\nsubparagraph (c) of paragraph three of subsection (b) of section four\nhundred sixty-five of the internal revenue code, except that "fifty\npercent" shall be substituted for "ten percent".\n (ii) Effective rate of tax. "Effective rate of tax" means, as to any\nstate or U.S. possession, the maximum statutory rate of tax imposed by\nthe state or possession on or measured by a related member's net income\nmultiplied by the apportionment percentage, if any, applicable to the\nrelated member under the laws of said jurisdiction. For purposes of this\ndefinition, the effective rate of tax as to any state or U.S. possession\nis zero where the related member's net income tax liability in said\njurisdiction is reported on a combined or consolidated return including\nboth the taxpayer and the related member where the reported transactions\nbetween the taxpayer and the related member are eliminated or offset.\nAlso, for purposes of this definition, when computing the effective rate\nof tax for a jurisdiction in which a related member's net income is\neliminated or offset by a credit or similar adjustment that is dependent\nupon the related member either maintaining or managing intangible\nproperty or collecting interest income in that jurisdiction, the maximum\nstatutory rate of tax imposed by said jurisdiction shall be decreased to\nreflect the statutory rate of tax that applies to the related member as\neffectively reduced by such credit or similar adjustment.\n (iii) Royalty payments. Royalty payments are payments directly\nconnected to the acquisition, use, maintenance or management, ownership,\nsale, exchange, or any other disposition of licenses, trademarks,\ncopyrights, trade names, trade dress, service marks, mask works, trade\nsecrets, patents and any other similar types of intangible assets as\ndetermined by the commissioner, and include amounts allowable as\ninterest deductions under section one hundred sixty-three of the\ninternal revenue code to the extent such amounts are directly or\nindirectly for, related to or in connection with the acquisition, use,\nmaintenance or management, ownership, sale, exchange or disposition of\nsuch intangible assets.\n (iv) Valid business purpose. A valid business purpose is one or more\nbusiness purposes other than the avoidance or reduction of taxation\nwhich alone or in combination constitute the primary motivation for some\nbusiness activity or transaction, which activity or transaction changes\nin a meaningful way, apart from tax effects, the economic position of\nthe taxpayer. The economic position of the taxpayer includes an increase\nin the market share of the taxpayer, or the entry by the taxpayer into\nnew business markets.\n (B) Royalty expense add backs. (i) For the purpose of computing New\nYork unrelated business taxable income, a taxpayer must add back royalty\npayments directly or indirectly paid, accrued, or incurred in connection\nwith one or more direct or indirect transactions with one or more\nrelated members during the taxable year to the extent deductible in\ncalculating federal unrelated business taxable income;\n (ii) Exceptions. (I) The adjustment required in this paragraph shall\nnot apply to the portion of the royalty payment that the taxpayer\nestablishes, by clear and convincing evidence of the type and in the\nform specified by the commissioner, meets all of the following\nrequirements: (a) the related member was subject to tax in this state or\nanother state or possession of the United States or a foreign nation or\nsome combination thereof on a tax base that included the royalty payment\npaid, accrued or incurred by the taxpayer; (b) the related member during\nthe same taxable year directly or indirectly paid, accrued or incurred\nsuch portion to a person that is not a related member; and (c) the\ntransaction giving rise to the royalty payment between the taxpayer and\nthe related member was undertaken for a valid business purpose.\n (II) The adjustment required in this paragraph shall not apply if the\ntaxpayer establishes, by clear and convincing evidence of the type and\nin the form specified by the commissioner, that: (a) the related member\nwas subject to tax on or measured by its net income in this state or\nanother state or possession of the United States or some combination\nthereof; (b) the tax base for said tax included the royalty payment\npaid, accrued or incurred by the taxpayer; and (c) the aggregate\neffective rate of tax applied to the related member in those\njurisdictions is no less than eighty percent of the statutory rate of\ntax that applied to the taxpayer under section two hundred ninety of\nthis article for the taxable year.\n (III) The adjustment required in this paragraph shall not apply if the\ntaxpayer establishes, by clear and convincing evidence of the type and\nin the form specified by the commissioner, that: (a) the royalty payment\nwas paid, accrued or incurred to a related member organized under the\nlaws of a country other than the United States; (b) the related member's\nincome from the transaction was subject to a comprehensive income tax\ntreaty between such country and the United States; (c) the related\nmember was subject to tax in a foreign nation on a tax base that\nincluded the royalty payment paid, accrued or incurred by the taxpayer;\n(d) the related member's income from the transaction was taxed in such\ncountry at an effective rate of tax at least equal to that imposed by\nthis state; and (e) the royalty payment was paid, accrued or incurred\npursuant to a transaction that was undertaken for a valid business\npurpose and using terms that reflect an arm's length relationship.\n (IV) The adjustment required in this paragraph shall not apply if the\ntaxpayer and the commissioner agree in writing to the application or use\nof alternative adjustments or computations. The commissioner may, in his\nor her discretion, agree to the application or use of alternative\nadjustments or computations when he or she concludes that in the absence\nof such agreement the income of the taxpayer would not be properly\nreflected.\n (7) The amount of any deduction allowed pursuant to section one\nhundred ninety-nine of the internal revenue code must be added to\nfederal unrelated business taxable income.\n (8) There must be added to federal unrelated business taxable income\nthe amount of any federal deduction for taxes imposed under article\ntwenty-three of this chapter.\n (b) If the period covered by a return under this article is other than\nthe period covered by the return to the United States treasury\ndepartment, unrelated business taxable income shall be determined by\nmultiplying the unrelated business taxable income reported to such\ndepartment (as modified pursuant to the provisions of this article) by\nthe number of calendar months or major parts thereof covered by the\nreturn under this article and dividing by the number of calendar months\nor major part thereof covered by the return to such department. If it\nshall appear that such method of determining unrelated business taxable\nincome does not properly reflect the taxpayer's income during the period\ncovered by the return under this article, the tax commission shall be\nauthorized, in its discretion, to determine such income solely on the\nbasis of the taxpayer's income during the period covered by its return\nunder this article.\n