A recent New York State Department of Taxation and Finance Advisory Opinion [TSB-A-02(10)C] has stated that, for New York corporate franchise (income) tax purposes, a taxpayer eligible to treat its cash on hand and on deposit as investment capital may use a zero investment allocation percentage in allocating the investment income attributable to such items of cash, other than interest received on bank accounts.

The Opinion

The subject of the advisory opinion (corporation XYZ) owns money market mutual funds and various U.S. Treasury Notes and Bills, and is not a dealer in securities. The U.S. Treasury Notes and Bills are purchased as part of XYZ’s laddered cash management program, and their maturity dates generally range from three months to four years from purchase. In addition, XYZ has money on deposit in various interest-bearing bank accounts that are payable upon demand.

At any given point in time, XYZ’s portfolio consists of both short-term investments (items payable on demand or within six months and one day of maturity) and non–short-term investments (items more than six months and one day from maturity). The short-term investments include interest-bearing bank accounts, money market mutual funds, and U.S. Treasury Notes and Bills. The non–short-term investments include U.S. Treasury Notes that are not within six months and one day of maturity (“above the line” investment capital). These above-the-line U.S. Treasury Notes generally constitute at least 40% of XYZ’s investment capital. (For this purpose, investments in mutual funds, U.S. Treasury Bills and Notes, and various bank deposits are counted as investment capital.)

XYZ elects to treat its items of “cash” as investment capital. Since its only items of above-the-line investment capital are U.S. obligations with a zero issuer’s allocation percentage, XYZ’s investment allocation percentage for the current year is zero.

Determining the Allocation

“Cash on hand and cash on deposit” as used in New York State Tax Law section 208.7(a) is not defined in Article 9-A of the Tax Law or in the Article 9-A Regulations. Nevertheless, Article 9-A Regulations section 3-3.2(a)(1), in defining investment capital, provides that any debt instrument, including a certificate of deposit, that is described in Article 9-A Regulations section 3-3.2(c)(2) or (3), that is not described in section 3-3.2(a)(2), and that is payable by its terms on demand or within six months and one day from the date on which the debt was incurred, is deemed to be cash on hand or on deposit. Any debt instrument which is payable by its terms more than six months and one day from the date on which the debt was incurred is deemed to be cash on hand or on deposit on any day not within six months and one day of maturity.

In this case, XYZ has investments throughout the year in U.S. Treasury Notes not maturing within six months and one day that constitute investment capital pursuant to Article 9-A Regulations section 3-3.2(c)(2). XYZ also has investments in interest-bearing bank accounts, money market mutual funds, and U.S. Treasury Notes and Bills maturing within six months and one day, thereby constituting cash on hand and cash on deposit under Tax Law section 208.7(a) and Article 9-A Regulations section 3-3.2(a)(1). Since XYZ has items of investment capital—namely, the U.S. Treasury Notes not maturing within six months and one day—XYZ is allowed, pursuant to Article 9-A Regulations section 3-3.2(a)(1), to elect to treat the investments constituting cash as investment capital.

Income from XYZ’s investment capital (the U.S. Treasury Notes not maturing within six months and one day) and, since XYZ has elected, all of XYZ’s items of cash on hand and on deposit (the investments in interest-bearing bank accounts, money market mutual funds, and U.S. Treasury Notes and Bills maturing within six months and one day) constitute investment income pursuant to Tax Law section 208.6.

Under Tax Law section 210.3(b), XYZ’s investment income is multiplied by its investment allocation percentage. Since XYZ’s investment allocation percentage is zero, however, section 210.3(b)(3) provides that the portion of XYZ’s investment income that represents interest income received on bank accounts must be multiplied by XYZ’s business allocation percentage. XYZ’s investment income attributable to items of cash on hand and on deposit, other than interest received on bank accounts, must be multiplied by XYZ’s zero investment allocation percentage.

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©2003 CPA Journal. Legal Notices