Probably the most unusual aspect of the New York State Corporate Franchise Tax1 (Franchise Tax or Article 9-A) and the New York City General Corporation Tax2 (GCT) is the distinction in both taxes between “business capital”3 and “investment capital.”4 Many states (particularly those states that follow the Uniform Division of Income for Tax Purposes Act or UDITPA5) distinguish between income from a corporation’s business6 and non-business income,7 and only apportion business income.8 New York, however, has a unique approach in which all assets (other than investments in subsidiaries) are categorized as investment capital or business capital and the income is apportioned to the state in dramatically different ways.9

The principal benefit of classification as investment capital is that, in computing the portion of corporate investment income taxable by New York, the income from investment capital is allocated by reference to the business activities of the corporations in which the taxpayer has invested, rather than by reference to the activities of the corporation doing the investing. Corporations with a large presence in New York therefore tend to (or at least are motivated to) invest in the stocks and bonds of corporations with very little New York presence. This reduces the New York tax on income and gain from such investments.

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