May a New York-chartered trust company allocate its entire net income within and without New York based on custodial services performed outside the state through agents and sub-custodians, and how are the custody fees sourced?

Plain-English summary

Sumitomo Trust & Banking Co. (USA) -- a New York-chartered trust company whose only office is in New York City -- provides global custodial services to mostly foreign customers. Because the customers and their securities are outside the United States, Sumitomo appoints sub-custodians and agents abroad to perform substantially all of the custodial work. It asked (1) whether it may allocate its entire net income within and without New York under section 1454(b)(1), and (2) how much of its custody fees are allocable to New York in the receipts factor.

The Department held:

• Issue 1 (allocation): A taxpayer may allocate only if it is carrying on business outside New York. Under 20 NYCRR 19-1.1, performing services through agents outside New York can constitute carrying on business there. So if Sumitomo performs services outside New York through agents, it may allocate ENI within and without the state under section 1454(b)(1). But whether an actual agency relationship exists between Sumitomo and the sub-custodians is a factual question the opinion does not resolve.
• Issue 2 (receipts factor): Under section 1454(a)(2)(H) and 20 NYCRR 19-6.7, service receipts are sourced to where the services are performed, split for services performed both in and out of New York by relative value, time, or another reasonable method. A reasonable method here: treat Sumitomo's costs of the services performed by the sub-custodians -- presumed equal to the arm's-length fees it pays them -- as the portion of custody fees attributable to services performed outside New York. The balance of the custody fees is the portion attributable to services performed in New York.

What this means for you

Allocation requires genuinely carrying on business outside New York

A single-office New York trust company can still allocate ENI within and without the state, but only if it is carrying on business outside New York -- here, by performing custodial services abroad through agents. The existence of a real agency relationship is the pivotal fact, and the Department expressly left that to audit.

Sub-custodian fees can measure the out-of-state share

For the receipts factor, the Department blessed a cost-based reasonable method: the arm's-length fees paid to sub-custodians represent the value of services performed outside New York, and the remainder of the custody fee is the New York portion. Services are sourced to where performed, not where billed or paid.

An advisory opinion applies law to stated facts -- it does not find facts

The Department stressed it cannot determine the agency relationship in an advisory opinion (Tax Law section 171, Twenty-fourth). Taxpayers relying on this should be prepared to document the agency arrangement and the arm's-length nature of sub-custodian fees.

Common questions

Q: Can a New York-only trust company allocate income outside New York?
A: Yes, if it is carrying on business outside New York -- for example, performing custodial services abroad through agents -- under section 1454(b)(1).

Q: How are custody fees sourced for the receipts factor?
A: Service receipts are sourced to where performed. A reasonable method treats the arm's-length fees paid to sub-custodians as the out-of-state portion, with the balance allocated to New York.

Q: Did the Department confirm an agency relationship exists?
A: No. Whether Sumitomo and its sub-custodians are in an agency relationship is a factual matter outside the scope of the advisory opinion.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 1454(b)(1) (entire net income allocation percentage; business within and without New York)
- Tax Law section 1454(a)(2)(H) (receipts factor; receipts from services)
- Tax Law section 171, Twenty-fourth (scope of advisory opinions)
- 20 NYCRR 19-1.1 (Article 32 allocation; carrying on business outside New York)
- 20 NYCRR 19-6.7 (receipts factor for services performed)
- Sumitomo Trust & Banking Co. (USA), TSB-A-01(18)C (May 30, 2001)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2001.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a01_18c.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-01(18)C
Corporation Tax
May 30, 2001

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C000721A

On July 21, 2000 a Petition for Advisory Opinion was received from Sumitomo Trust &
Banking Co. (USA), 527 Madison Avenue, New York, New York 10022. The Petition was modified
on September 14, 2000.
The issues raised by Petitioner, Sumitomo Trust & Banking Co. (USA), are:
1. Whether it is entitled to allocate its entire net income within and without New York State
for purposes of section 1454(b)(1) of the Tax Law.
2. Assuming the answer to Issue 1 is yes, to what extent are the Custody Fees it receives
under the Custody Agreements, described below, allocable to New York State for purposes
of computing the receipts factor of the entire net income allocation percentage under section
1454(a)(2) of the Tax Law, where Petitioner retains agents located outside of New York
State to perform substantially all of the custodial services for the customers.
Petitioner submits the following facts, including additional facts submitted September 14,
2000, as the basis for this Advisory Opinion.
Petitioner is a New York State chartered trust company which was formed primarily to
engage in the commercial banking business. Petitioner is a wholly-owned subsidiary of The
Sumitomo Trust & Banking Co., Ltd., a Japanese corporation engaged in the international banking
business (the “Parent”). The Parent’s principal office is located in its country of incorporation. The
Petitioner’s only office is located in New York City. Petitioner does not maintain any offices outside
of New York State.
As part of its operations, Petitioner is engaged in providing custodial services to unrelated
entities and certain affiliated entities (collectively, the “Customers”) with respect to their investments
in various securities. Substantially all of the Customers are entities incorporated outside of the
United States and are referred to Petitioner by employees of the Parent located and working outside
of New York State. The Parent is the principal contact for substantially all communications between
the Customers and Petitioner.
Petitioner enters into a Global Custody Agreement (a “Custody Agreement”) with each of
the Customers pursuant to which the Customer appoints Petitioner as its global custodian with
respect to all of the shares, stocks, debentures, bonds, notes, bills and other investments owned by
the Customer (the “Securities”) and all of the Customer’s cash that is deposited with or received by

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Petitioner from time to time for the Customer’s account. The terms of all of the Custody
Agreements entered into between Petitioner and the Customers are substantially identical in
substance.
Pursuant to a Custody Agreement, Petitioner maintains an account in the name of the
Customer (a “Custodial Account”) to which all money and securities received or delivered for the
account of, or on behalf of, the Customer are credited or debited, as the case may be. Substantially
all of the Securities (other than those of United States issuers) are to be held outside of the United
States. A Custody Agreement expressly authorizes Petitioner (i) “to engage any one or more banks
or other financial organizations as its sub-custodian or sub-custodians for the purpose of holding
(separately or commingled) or servicing any securities” held for the Custodian (a “Sub-Custodian”),
and (ii) to designate a bank or any financial institution “as its agent” for the purpose of opening and
maintaining the Customer’s account, providing currency conversions and forwarding to and
receiving from the Customer any direction, notice, request, consent, institution statement or other
instrument (an “Agent”). Petitioner’s use of a Sub-Custodian or Agent does not affect any of its
direct duties and responsibilities under the Custody Agreement and all references in a Custody
Agreement to Petitioner also includes any Sub-Custodian or Agent.
A Custody Agreement obligates Petitioner to furnish the Customer with (i) a monthly
statement of the financial condition of its Custodial Account, (ii) written advice of transactions
entered into for the Customer’s account from time to time, and (iii) all notices, announcements and
other forms and documents which it receives with respect to the Securities held in the Customer’s
Custodial Account. In consideration for the custodial services provided to the Customer under the
Custody Agreement, Petitioner is entitled to receive specified fees pursuant to a Custody Fee
Schedule (the “Custody Fees”).
Because the Customers and their Securities are located outside of the United States and
Petitioner does not maintain any offices outside of New York City, Petitioner designates one or more
foreign banks or other financial institutions as a Sub-Custodian(s) for each Custodial Account. A
Sub-Custodian is selected through the joint decision of Petitioner and the Parent. In consideration
for the sub-custodial services provided by a Sub-Custodian, Petitioner pays to the Sub-Custodian a
substantial portion of the Custody Fees it receives from the Customer. All of the Sub-Custodians
provide custodial services in the ordinary course of their business and maintain their principal offices
in a foreign country. The personnel of the Sub-Custodian that render the sub-custodial services to
Petitioner are located in offices outside of the United States.
Under a Custody Agreement, Petitioner enters into a sub-custody agreement with the SubCustodian to perform certain specified services relating to the Custody Account on behalf of
Petitioner. However, with certain limited exceptions, the Sub-Custodian is expressly required to
follow the instructions of Petitioner in the performance of these services. The sub-custody
agreement also requires the Sub-Custodian to keep Petitioner informed as to the transactions in

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which it engages and to ascertain Petitioner’s instructions before acting on certain information. At
least one of the sub-custody agreements specifically grants the Sub-Custodian a power of attorney
to act “in the name of and on behalf” of Petitioner.
Employees of Petitioner assigned to its New York City office are responsible for (i) drafting
the Custody Agreement, (ii) monitoring the performance of each Sub-Custodian, (iii) consolidating
the monthly statements provided by each Sub-Custodian with respect to a Custodial Account of a
particular Customer, and (iv) assisting the Customers, when needed from time to time, in connection
with the documentation with respect to any proxies or other corporate actions relating to a
corporation whose securities are subject to the Custody Agreement. Employees of the Parent located
outside of the United States (i) are primarily responsible for communicating with the Customers, and
(ii) review substantially all monthly statements furnished by Petitioner to a Customer. From time
to time Petitioner sends its employees or officers to meetings at the offices of the Sub-Custodians
located outside of New York State to discuss matters relating to the Custody Agreements.
For purposes of computing its entire net income under Article 32 of the Tax Law, Petitioner
includes the Custody Fees it receives from the Customers in its federal gross income and claims a
deduction for the portion of the Custody Fees it pays to the Sub-Custodians.
Discussion
Section 1454(b)(1) of the Tax Law provides that “[i]f a taxpayer’s entire net income is
derived from business carried on both within and without the state, the portion thereof which is
derived from business carried on within the state shall be determined by multiplying its entire net
income by the income allocation percentage ....”
Section 19-1.1(c) of the Article 32 Regulations provides that the phrase business carried on
means "doing business” as defined in section 16-2.7 of the Article 32 Regulations, provided the
income or expenses from such business are required to be included in the computation of the
taxpayer’s alternative entire net income.
Section 16-2.7 of the Article 32 Regulations provides, in pertinent part:
(a) The term doing business is used in a comprehensive sense and includes
all activities which occupy the time or labor of people for profit. Every corporation
organized for profit and carrying out any of the purposes of its organization is
deemed to be doing business for purposes of the tax. In determining whether a
corporation is doing business, it is immaterial whether its activities actually result in
a profit or a loss.

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(b) Whether a corporation is doing business in New York State is determined
by the facts in each case. Consideration is given to such factors as:
(1) the nature, continuity, frequency and regularity of the activities of the
corporation in New York State;
(2) the purposes for which the corporation was organized;
(3) the location of its offices and other places of business;
(4) the employment in New York State of agents, officers and employees; and
(5) the location of the actual seat of management or control of the
corporation.
In Bleakley Platt & Schmidt, Adv Op Comm of T & F, December 13, 1990, TSB-A-90(25)C,
it was held that a foreign bank that had no employees, offices or agents in New York was not subject
to tax under Article 32 if its contacts with the state were limited to security interests in property
located in New York. The bank made loans to New York residents and businesses which were
accepted, processed, approved and serviced at the corporation’s Connecticut office. The fact that
the bank acquired a security interest in property within New York and acquired title to property
located in New York through foreclosure of security interests did not, by itself, cause the bank to be
doing business in New York. Also, the hiring of independent contractors located in New York did
not constitute doing business in New York. However, the bank could be subject to franchise tax if
corporate officers regularly visited New York to negotiate the loans or if an agency relationship
existed between the corporation and a person or entity conducting business in New York.
Furthermore, the closing of loans in New York might constitute doing business in New York. In all
cases, the totality of circumstances determined the bank's taxable status.
For purposes of Article 9-A of the Tax Law, the definition of doing business contained in
section 1-3.2(b) of the Business Corporation Franchise Tax Regulations is identical to the definition
of doing business for purposes of section 16-2.7(a) of the Article 32 Regulations. In GEF Funding
Corp, Adv Op Comm T & F, January 26, 1988, TSB-A-88(2)C, it was held that for purposes of
Article 9-A of the Tax Law, the activities of a corporation do not constitute doing business in
New York State where the corporation is engaging in mortgage loan activities when the loans are
secured by real property located in New York State but the acceptance of applications, processing,
approval and servicing of the loans are conducted at the corporation’s office outside New York State.
However, it was also held that a corporation could be subject to tax if it is determined that an agency
relationship exists between such corporation and a person or entity and the agent is conducting the
corporation's business in New York State.

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To ascertain the existence of an agency relationship, the relationship of the parties must be
examined. “An agency is a fiduciary relationship which results from a manifestation of consent by
one person to another that the other shall act on his behalf and subject to his control, and the consent
by the other to act.” Custom Management Corp v NY St Tax Commn, 148 AD2d 919, 920, citing
Meese v Miller, 79 AD2d 237, 241. (emphasis added) Generally, the existence of an agency
relationship is a question of fact not susceptible of determination in an Advisory Opinion. However,
a Power of Attorney is a written authorization to an agent to perform specified acts in behalf of its
principal, which acts, when performed, shall have a binding effect upon the principal. It is an
instrument by which the authority of one person to act in the place and stead of another as attorney
in fact is set forth. It is a contract of agency, that is, an authorization by a principal for the
accomplishment on its behalf of a particular purpose or the performance of a particular act. (2A NY
Jur 2d Agency §64)
In The Daiwa Bank, Limited, Adv Op Comm T&F, February 2, 1998, TSB-A-98(1)C, the
petitioner was a bank organized outside of the United States, that was a banking corporation subject
to tax under Article 32 of the Tax Law. After the petitioner was required to cease its operations in
New York State by the New York State Superintendent of Banks and the Board of Governors of the
Federal Reserve System (the “Order”), the petitioner surrendered its New York banking license to
maintain a branch in New York City on February 2, 1996, after which the petitioner did not conduct
a banking business in New York State or operate a branch, agency, loan production office,
representative office or bona fide office in New York State. However, the petitioner continued to
be a banking corporation (because of its activities in Japan) and it would continue to be subject to
tax under Article 32 if it was considered to be doing business in New York State, pursuant to section
16-2.7 of the Article 32 Regulations, after it ceased its banking operations in New York. Pursuant
to the Order, the petitioner was permitted to establish a service subsidiary in the United States. It
appeared that pursuant to the Order, the sole business of the subsidiary was limited to administering
the books and records required by bank regulatory agencies, administering the petitioner’s ongoing
affairs and other matters with federal, state and local tax authorities and regulatory bodies, defending
or prosecuting any action, inquiry or investigation to which petitioner became a party, and
administering the orderly termination of petitioner's banking operations in the United States. To
accomplish this, the petitioner executed a power of attorney granting limited authority to two
employees of the subsidiary. The opinion held that an agency relationship existed between petitioner
and the subsidiary.
With respect to Issue 1, Petitioner states that some of the Sub-Custodians have the power to
take actions that bind Petitioner, and at least one has a power of attorney. Following Daiwa Bank,
supra, if it is determined that an agency relationship exists between Petitioner and at least some of
the Sub-Custodians, then where the agents are performing services for Petitioner outside of
New York State, Petitioner is deemed to be carrying on business outside of New York State.
Accordingly, pursuant to section 1454(b)(1) of the Tax Law and section 19-1.1of the Article 32

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Regulations, if Petitioner is performing services without New York State through agents, Petitioner
may allocate its entire net income within and without New York State.
However, it is not within the scope of this Advisory Opinion to determine whether an agency
relationship exists between Petitioner and the Sub-Custodians. The determination of such existence
is a factual matter that is not susceptible of determination in this Advisory Opinion. An Advisory
Opinion merely sets forth the applicability of pertinent statutory and regulatory provisions to “a
specified set of facts.” Tax Law,§171.Twenty-fourth; 20 NYCRR 2376.1(a).
With respect to Issue 2, section 1454(b)(1) of the Tax Law and Subpart 19-2 of the Article
32 Regulations provide that the portion of entire net income which is derived from business carried
on within New York State is determined by multiplying entire net income by the entire net income
allocation percentage. The entire net income allocation percentage is determined by a formula
consisting of a payroll factor determined under section 1454(a)(1) of the Tax Law, a receipts factor
determined under section 1454(a)(2) of the Tax Law, a deposits factor determined under section
1454(a)(3), and an additional factor equal to the receipts factor and an additional factor equal to the
deposits factor, which factors are added together and divided by the number of percentages so added
together.
Section 1454(a)(2)(H) of the Tax Law, provides that in computing the receipts factor, “[a]ll
receipts from the performance of services not described [in section 1454(a)(2)(A) through (G)] are
earned within the state if the services are performed in the state. When a service is performed both
within and without the state, the receipts shall be allocated within and without the state in accordance
with rules and regulations of the [Commissioner of Taxation and Finance].”
Section 19-6.7 of the Article 32 Regulations provides that for purposes of computing the
receipts factor:
(a) Receipts for services performed by the taxpayer’s employees regularly
connected with or working out of a New York State office of the taxpayer are
allocated to New York State if such services are performed within New York State.
(b) When allocating receipts for services performed, it is immaterial where
such receipts are payable or where they are actually received.
(c) Where services are performed both within and without New York State,
the portion of the receipt attributable to services performed within New York State
is determined on the basis of the relative value of, or amount of time spent in
performance of, such services within New York State, or by some other reasonable
method. Full details must be submitted with the taxpayer’s return.

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In this case, if it is determined in Issue 1, that Petitioner is performing the custodial services
provided for Customers both within and without New York State, Petitioner may allocate its entire
net income within and without New York State, and the numerator of the receipts factor may be
determined as follows. Petitioner’s employees perform the services provided within New York
State, and services performed outside of New York State are performed by the Sub-Custodians,
except for the occasions that an employee or officer of Petitioner meets with a Sub-Custodian outside
of New York State to discuss matters relating to the Custody Agreements. Under section 19-6.7(c)
of the Article 32 Regulations, a reasonable method to determine the portion of Petitioner’s Custody
Fees for custodial services provided in New York State is to use Petitioner’s costs attributable to the
performance of services by the Sub-Custodians. Assuming that the services provided by the SubCustodians are performed at third-party arm’s length rates, it is presumed that Petitioner’s costs
attributable to the performance of such services are the fees reflected in the sub-custodian
agreements. Therefore, the portion of Petitioner’s Custody Fees for providing custodial services
outside of New York State would be the amount of the fees Petitioner pays to the Sub-Custodians,
and the balance of the Custody Fees would be the portion that is attributable to the services provided
within New York State.
Note that section 19-6.7(c) of the Article 32 Regulations provides that a taxpayer may use
some other reasonable method to determine the portion of Petitioner’s receipts for providing
custodial services for customers that is attributable to services performed within New York State,
and that the taxpayer must submit full details with its return.

DATED: May 30, 2001

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist III
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.