Can interest from cash items other than bank deposits be allocated by a zero investment allocation percentage when cash is treated as investment capital?

Plain-English summary

Deloitte & Touche LLP, for XYZ corporation (not a securities dealer), asked how to allocate interest income from various cash items -- money market mutual funds, U.S. Treasury notes and bills, and interest-bearing bank accounts -- when XYZ treats its cash on hand and on deposit as investment capital under section 208.7(a) and its investment allocation percentage is zero.

The Department held:

• The interest from XYZ's cash items (bank accounts, money market funds, and Treasuries within the short-term window) is investment income under section 208.6.
• Under section 210.3(b), investment income is multiplied by the investment allocation percentage -- which is zero here.
• However, under section 210.3(b)(3), interest received on bank accounts must instead be multiplied by the business allocation percentage (not the zero investment percentage).
• So XYZ's investment income from cash items other than interest on bank accounts is multiplied by its zero investment allocation percentage (allocated to zero), while interest on bank accounts is allocated by the business allocation percentage.

What this means for you

Cash treated as investment capital generates investment income

If you elect to treat cash on hand and on deposit as investment capital under section 208.7(a), the interest it earns is investment income -- normally allocated by your investment allocation percentage.

Bank-account interest is the exception

Section 210.3(b)(3) carves out interest on bank accounts: it is allocated by the business allocation percentage, not the investment allocation percentage. So a zero investment percentage does not zero out your bank-account interest.

Sort your cash by type

Interest from money market funds and Treasuries rides the zero investment percentage, but bank-account interest must be run through the business percentage. Track the two categories separately.

Common questions

Q: Is interest on cash treated as investment capital investment income?
A: Yes, under section 208.6, and it is normally allocated by the investment allocation percentage.

Q: Does a zero investment allocation percentage zero out all the interest?
A: No. Interest on bank accounts must be allocated by the business allocation percentage under section 210.3(b)(3).

Q: Which interest does the zero percentage apply to?
A: Interest from non-bank cash items, such as money market funds and Treasuries.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 208.7(a) (cash on hand and on deposit treated as investment capital)
- Tax Law section 208.6 (investment income)
- Tax Law section 210.3(b) (investment allocation percentage)
- Tax Law section 210.3(b)(3) (interest on bank accounts allocated by business allocation percentage)
- Deloitte & Touche LLP, TSB-A-02(10)C (June 26, 2002)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2002.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a02_10c.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-02(10)C
Corporation Tax
June 26, 2002

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C011011A

On October 11, 2001, a Petition for Advisory Opinion was received from Deloitte & Touche
LLP, Attn. Russell W. Banigan, 1633 Broadway, New York, New York 10019-6754.
The issue raised by Petitioner, Deloitte & Touche LLP, is whether interest income from
items of “cash”, other than cash on deposit with a bank, may be allocated by a zero investment
allocation percentage under section 210.3(b) of the Tax Law, where the taxpayer is eligible to treat
its cash on hand and on deposit as investment capital under section 208.7(a) of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory Opinion.
XYZ corporation owns money market mutual funds and various U.S. Treasury Notes and
Treasury Bills, and is not a dealer in securities. The U.S. Treasury Notes and Treasury 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 the date of purchase. In addition, XYZ has money on
deposit in various interest bearing bank accounts, which are payable upon demand.
At any given point in time, XYZ’s portfolio consists of both short-term investments (items
payable on demand or that are within six months and one day of maturity) and non-short-term
investments (items that are 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 Treasury Bills maturing within six months and one day. The non-short-term investments
consist of 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 percent of XYZ’s investment capital (for this purpose, investments in the mutual funds, U.S.
Treasury Bills and Treasury Notes and various bank deposits are counted as investment capital).
XYZ owns no other items of investment capital.
On its tax return for the current year, 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.
XYZ’s New York business allocation percentage is greater than zero.
Law and Regulations
Section 208.7(a) of the Tax Law provides that the term “business capital” means “all assets,
other than subsidiary capital, investment capital and stock issued by the taxpayer, less liabilities not

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deducted from subsidiary or investment capital except that cash on hand and on deposit shall be
treated as investment capital or as business capital as the taxpayer may elect.”
Section 208.5 of the Tax Law provides that the term “investment capital” means
“investments in stocks, bonds and other securities, corporate and governmental, not held for sale to
customers in the regular course of business, exclusive of subsidiary capital and stock issued by the
taxpayer, provided, however, that, in the discretion of the commissioner, there shall be deducted
from investment capital any liabilities which are directly or indirectly attributable to investment
capital ....”
Section 3-3.2(a)(1) of the Business Corporation Franchise Tax Regulations (“Article 9-A
Regulations”) provides, in pertinent part, that:
The term “investment capital” means the taxpayer’s investments in stocks,
bonds and other securities issued by a corporation (except as provided in paragraph
(2) of this subdivision) or by the United States, any state, territory or possession of
the United States, the District of Columbia, or any foreign country, or any political
subdivision or governmental instrumentality of any of the foregoing . . . At the
election of the taxpayer, cash on hand and cash on deposit may be treated on any
report as either investment capital or business capital . . . Any debt instrument,
including a certificate of deposit, which is described in paragraph (2) or (3) of
subdivision (c) of this section and is not described in paragraph (2) of this
subdivision and which 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 such 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 which is not more than six months and one
day prior to its date of maturity. Cash also includes shares in a money market mutual
fund. A money market mutual fund is a no-load, open-end investment company
registered under the Federal Investment Company Act of 1940 which attempts to
maintain a constant net asset value per share and holds itself out to be a “money
market” fund. A taxpayer may not elect to treat part of its cash as investment capital
and part as business capital. No election to treat cash as investment capital may be
made where the taxpayer has no other investment capital.
Section 3-3.2(a)(2) of the Article 9-A Regulations provides that:
Investment capital does not include:
(i) stock issued by the taxpayer;
(ii) stocks, bonds or other securities constituting subsidiary capital;

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(iii) securities of an individual, partnership, trust or other nongovernmental
entity which is not a corporation within the definition contained in section 208.1 of
the Tax Law (such as [FNMA and GNMA] pass-through certificates);
(iv) stocks, bonds and other securities of a DISC, or any indebtedness from
a DISC;
(v) regular interests and residual interests in a real estate mortgage investment
conduit (REMIC), as defined in section 860D of the Internal Revenue Code;
(vi) futures contracts and forward contracts; and
(vii) stocks, bonds and other securities held by the taxpayer for sale to
customers in the regular course of its business.
Section 3-3.2(c) of the Article 9-A Regulations provides that:
For purposes of paragraph (1) of subdivision (a) of this section, the phrase
“stocks, bonds and other securities” means:
*

*

*

(2) debt instruments issued by the United States, any state, territory or
possession of the United States, the District of Columbia, or any foreign country, or
any political subdivision or governmental instrumentality of any of the foregoing;
(3) qualifying corporate debt instruments (see subdivision (d) of this
section) . . . .
Section 3-3.2(d)(1) of the Article 9-A Regulations provides that:
The term “qualifying corporate debt instruments” means all debt instruments
issued by a corporation other than the following:
(i) instruments issued by the taxpayer or a DISC;
(ii) instruments which constitute subsidiary capital in the hands of the
taxpayer;
(iii) instruments acquired by the taxpayer for services rendered or for the sale,
rental or other transfer of property, where the obligor is the recipient of the services
or property; however, where a taxpayer sells or otherwise transfers property which

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is investment capital in the hands of such taxpayer (e.g., stock) and receives in return
a corporate obligation issued by the recipient of such property, such corporate
obligation, if it is not otherwise excluded from the category of investment capital,
would constitute investment capital in the hands of the taxpayer;
(iv) instruments acquired for funds if:
(a) the obligor is the recipient of such funds;
(b) the taxpayer is principally engaged in the business of
lending funds; and
(c) the obligation is acquired in the regular course of the
taxpayer’s business of lending funds;
(v) accepted drafts (such as banker’s acceptances and trade acceptances)
where the taxpayer is the drawer of the draft;
(vi) instruments issued by a corporation which is a member of an affiliated
group which includes the taxpayer; and
(vii) accounts receivable, including those held by a factor.
Section 208.6 of the Tax Law provides that the term “investment income” means “income,
including capital gains in excess of capital losses, from investment capital, to the extent included
in computing entire net income, less, (a) in the discretion of the commissioner, any deductions
allowable in computing entire net income which are directly or indirectly attributable to investment
capital or investment income . . . .”
Section 210.3(b) of the Tax Law provides that a taxpayer “[multiplies] its investment income
by an investment allocation percentage . . . .” Section 210.3(b)(3) of the Tax Law provides, in
pertinent part, that “if a taxpayer’s investment allocation percentage is zero, interest received on
bank accounts shall be multiplied by its business allocation percentage.”
Discussion
“Cash on hand and cash on deposit” as used in section 208.7(a) of the Tax Law is not defined
in Article 9-A of the Tax Law or in the Article 9-A Regulations. However, section 3-3.2(a)(1) of
the Article 9-A Regulations, in defining investment capital, provides that any debt instrument,
including a certificate of deposit, which is described in section 3-3.2(c)(2) or (3) of the Article 9-A
Regulations, and is not described in section 3-3.2(a)(2) of the Article 9-A Regulations, and which
is payable by its terms on demand or within six months and one day from the date on which the debt

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was incurred is deemed to be cash on hand or on deposit. Any such 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 which is not more than six months and one
day prior to its date 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 section 3-3.2(c)(2) of
the Article 9-A Regulations. XYZ also has investments in interest bearing bank accounts, money
market mutual funds and U.S. Treasury Notes and Treasury Bills maturing within six months and
one day, thereby constituting cash on hand and cash on deposit as used in section 208.7(a) of the Tax
Law and section 3-3.2(a)(1) of the Article 9-A Regulations. 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 section 3-3.2(a)(1) of the Article 9-A Regulations, 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 Treasury Bills maturing within six months and one day) constitute investment income
pursuant to section 208.6 of the Tax Law.
Pursuant to section 210.3(b) of the Tax Law, XYZ’s investment income is multiplied by its
investment allocation percentage. However, since XYZ’s investment allocation percentage is zero,
section 210.3(b)(3) of the Tax Law provides that 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 XYZ’s items of cash on hand and on deposit, other than
interest received on bank accounts, is multiplied by XYZ’s zero investment allocation percentage.

DATED: June 26, 2002

NOTE:

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

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