Unimax Corp. v. Tax Appeals Tribunal

Yesawich, Jr., J.

(dissenting). We respectfully dissent.

The majority finds petitioner’s netting proposal untenable because they believe that this procedure ignores the taxpayer’s stock investment in subsidiary capital by focusing on annual loans to and from subsidiaries only. The majority then goes on to imply that if a corporation is permitted to net loans and advances from all of its subsidiaries, the amount of its investment in subsidiary capital will be directly affected. This analysis, which focuses entirely on the interaction between the two disallowance fraction numerator components,1 misperceives the basis for this proceeding. While it is indeed true that petitioner argued before respondent Tax Appeals Tribunal that it should be permitted to offset its loans and advances to subsidiaries against its cost of stock in its subsidiaries (the zero limitation) (cf., 20 NYCRR 3-6.4), this argument was abandoned in this proceeding. And rightly so, for the zero limitation on the amount of the parent’s indebtedness is consistent with the statutory definition of subsidiary capital and furthers the statutory goal of preventing double recovery. Interest attributable to the parent’s cost of its stock investment in its subsidiaries is statutorily defined as a separate and distinct component from subsidiary indebtedness (Tax Law § 208 [4] [a]) and is similarly not deductible (Tax Law § 208 [9] [b] [6]). Petitioner does not claim otherwise. We have no quarrel with the majority’s position to the extent that it finds that the parent’s cost of stock in its subsidiaries cannot be ignored when determining the taxpayer’s interest expense indirectly attributable to subsidiary capital.

The argument presented in this proceeding, however, is directed entirely to the second figure in the numerator of the disallowance fraction, namely, the parent’s loans to subsidiary. Petitioner urges that it should be permitted to aggregate advances made to all of its subsidiaries against loans made by all of its subsidiaries to it. Although nothing in the Tax Law requires that interest indirectly attributable to each subsidiary be calculated separately, the audit guidelines do not *483permit a parent company to net these loans and advances. Relevantly, the Tax Law explicitly defines subsidiary capital as "investments in the stock of subsidiaries and any indebtedness from subsidiaries” (Tax Law § 208 [4] [a] [emphasis supplied]). That the Legislature utilized the plural form leads one to believe that petitioner’s aggregation approach is what was intended.

Although respondents argue that it is disingenuous to suppose that none of the subsidiaries benefited from petitioner’s outside loans merely because petitioner borrowed more money from its subsidiaries overall, respondents never identify any tax advantage petitioner enjoyed by netting subsidiary loans and advances. Moreover, the majority, without explanation, concludes that netting affects the parent’s cost of stock in its subsidiaries.2 This is simply not so; the two components of the numerator are added together; thus, so long as the second figure (subsidiary loans) cannot be less than zero, the first figure (cost of subsidiary stock) remains unaffected.

Analysis of the majority’s example discloses their misapprehension of petitioner’s argument. After applying the disallowance fraction to their identified fact pattern, they conclude that 20% of the interest expense, which represents the proportion of the parent’s investment in its subsidiaries, would be disallowed. Contrary to the majority’s suggestion, netting loans and advances ensures the exact same result. It is the zero limitation which prevents the parent from deducting any of the money it borrowed from its subsidiaries from its investment in its subsidiaries’ stock.

Significantly, the majority fails to explain why the Department of Taxation and Finance may tax this parent corporation differently from one that, in addition, transfers interest-free money from one of its subsidiaries to another. Calculating each subsidiary’s loans and advances separately disparately affects corporations which have identical subsidiary stock investments and third-party borrowing. For example,3 assume a parent corporation, which owns $1,000 in equity contribution from its shareholders, borrows $1,000 from a bank and *484then lends $1,000 to subsidiary A. Both parties would find the disallowance fraction to be one half: the net $1,000 investment in subsidiary A divided by the parent’s total assets of $2,000. If another subsidiary, B, advances $6,000 of its own equity to the parent (interest free), and the parent immediately lends this amount to subsidiary A (also interest free), according to the Department’s computation the disallowance fraction now would be seven eighths: net investment in subsidiaries $7,000 (the original $1,000 plus the additional $6,000 loaned to subsidiary A) divided by the parent’s total assets of $8,000 (the $2,000 originally owned and borrowed plus the $6,000 advanced by subsidiary B).

Although the maximum possible amount from outside funding the parent could have invested in subsidiary A never changed, application of the Department’s guideline netting prohibition suggests that it did. Petitioner’s approach would ignore the subsidiary transfer, which indisputably generated no interest income for the parent, and tax it identically in both situations. Moreover, if the subsidiaries had simply bypassed the parent corporation altogether and transferred the funds directly between themselves, respondents’ computation of the parent’s includable interest expense would inexplicably change, while under petitioner’s computation it would remain unchanged. In each of these examples, the parent company’s interest income from subsidiary lending and interest payments on outside borrowing remains unchanged (as well as its investment in its subsidiaries); yet, applying the netting prohibition, the parent’s tax obligation unaccountably differs significantly.

To permit the Department to attribute a greater percentage of a parent’s outside borrowing to its subsidiary investment because interest-free intersubsidiary transfers occurred is not only illogical, but, more importantly, it in no way furthers the statutory objective of preventing double tax recovery. Therefore, to the extent that the Department’s deficiency assessments failed to offset all of petitioner’s subsidiary lending with all of its subsidiary borrowing, it should be vacated. In short, petitioner should be permitted to net loans and interest free advances made by and among it and its subsidiaries.

Accordingly, we would modify the determination and remit the matter to the Tax Appeals Tribunal for further proceedings not inconsistent with the views expressed herein.

Casey, J. P., and Levine, J., concur with Mercure, J.; *485Mikoll and Yesawich, Jr., JJ., dissent and vote to modify in an opinion by Yesawich, Jr., J.

Determination confirmed, and petition dismissed, without costs.

. The numerator components are "Cost of stock in subsidiary + loans to subsidiary.”

. Parenthetically, both arguments fail to appreciate the reality that if a parent borrows funds from one or more of its subsidiaries, its need to borrow from outside sources is reduced, but the amount of its investment in its subsidiaries’ stock remains unchanged.

. Because the amount of the parent’s investment in the stock of its subsidiaries has absolutely no effect on the amount of its loans and advances to subsidiaries, we ignore this figure for these examples.