As part of the 2015 New York State corporate tax reform, significant changes were made to the definition of investment capital under Article 9-A (Corporate Tax) of the New York Tax Law. Income from investment capital (generally, stocks held for more than a year) is subject to preferential treatment in New York State and New York City. In order for stock acquired on or after October 1, 2015, to be considered investment capital for corporations that are required to file New York State and New York City tax returns, the stock must be identified as held for investment in the taxpayer’s records before the close of the day on which the stock was acquired. With respect to stock that was acquired before October 1, 2015, such stock must be identified as held for investment on or before September 30, 2015. These changes are likely to affect clients who either pay corporate income tax in New York State and New York City, or clients with corporate partners who are subject to New York State and New York City tax.
Hedge fund clients may wish to make such identifications for their domestic funds (although it may largely be inapplicable to their investors) or for blocker corporations (although again it may be largely inapplicable). In general, for a domestic fund, the fund just needs to have a designation in its records. While largely inapplicable, there does not appear to be any downside and identification may just be a simple single page statement in the fund’s files.
Investment Capital. According to Section 208.5(a) of the New York Tax Law, “investment capital” means investments in stocks of non-unitary corporations that: (1) satisfy the definition of capital asset under Section 1221 of the Internal Revenue Code of 1986, amended (“IRC”), at all times the taxpayer owned such stock during the tax year; (2) are held by the taxpayer for investment for more than one year; (3) if disposed of, generate (or would generate) long-term capital gains or losses under the IRC; (4) for stocks acquired on or after January 1, 2015, have never been held for sale to customers in the regular course of business after the close of the day on which the stock was acquired; and (5) before the close of the day on which the stock was acquired, must be clearly identified as stock held for investment in the same manner as required under IRC section 1236(a)(1), which is discussed below.
Stock acquired before October 1, 2015, that otherwise meets the requirements for investment capital, must be clearly identified as stock held for investment before October 1, 2015 (i.e., by September 30, 2015), in order to satisfy the investment capital identification requirements.
Identification Procedures. The procedure for an entity that is not a dealer to identify its investment capital is as follows: (1) stock must be recorded in an account maintained for investment capital purposes only; (2) the account must be separate from any account maintained for stock held for sale to customers; (3) the account may be an account maintained in the taxpayer’s books of account for recordkeeping purposes only or it may be a separate depository account maintained by a clearing company as nominee; (4) the investment capital account must disclose the name of the stock, the CUSIP number for the stock (or CINS number for international securities), date of purchase, the number of shares purchased and the purchase price of the stock; and (5) if the stock is sold the investment capital account must disclose the date of the sale, the number of shares sold and the sales price for the stock. The investment capital account must be set up in a manner that readily identifies the length of time the stock was owned.