NY TSB-A-03(3)C Corporation Tax 2003-04-04

Must a corporation add back to its entire net income the interest it pays on a loan from an individual shareholder who owns more than 50% of its stock?

Short answer: No. There is no provision in Article 9-A that requires a corporation to add back to federal taxable income the interest it pays to an individual shareholder -- even one owning more than 50% of the stock -- when computing its entire net income under section 208.9. The Line 3 addback on Form CT-3 (interest paid to a corporate stockholder owning more than 50% of the stock) applies to the parent-subsidiary subsidiary-capital rules of sections 208.3 and 208.4, not to a loan from an individual.

Disclaimer: This is an official New York State Department of Taxation and Finance Advisory Opinion (TSB-A), issued by the Office of Counsel at a taxpayer's request. It is limited to the facts set forth in it and binds the Department only with respect to the petitioner to whom it was issued, and only if that petitioner fully and accurately described all relevant facts; another taxpayer cannot rely on it. It reflects the law, regulations, and Department policy in effect when issued and may since have changed. Taxpayer-identifying details are redacted. New York State and local sales taxes are administered centrally by the Department. This summary is informational only and is not legal or tax advice. Consult a licensed New York tax professional about your specific situation.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked at the bottom of this page, or PDF in the sidebar) is the authoritative source for any reliance.

View original ruling (PDF)

Plain-English summary

An individual owns 100% of a company and lends it money; the company pays him interest on the loan. The petitioner, Robert Ganz, CPA, asked whether that interest must be added back to federal taxable income when the corporation computes its entire net income under Tax Law section 208.9.

The Department explained how the addback actually works:

The subsidiary-capital machinery of sections 208.3 and 208.4 addresses loans between a corporate parent and a corporate subsidiary. A parent's loan to a subsidiary counts as the parent's "subsidiary capital" only if the subsidiary does not deduct the interest -- which the subsidiary accomplishes by adding the interest back at Line 3 of Form CT-3 ("interest paid to a corporate stockholder owning more than 50% of issued and outstanding stock"). In that case the parent excludes the interest income under section 208.9(a)(1).
But where the lender is an individual shareholder, there is no provision in Article 9-A requiring the corporation to add back the interest it pays. (The opinion assumes the advance was a genuine loan, not a contribution to capital.)

What this means for you

Interest to an individual owner is not added back

If you own your corporation and lend it money, the corporation generally deducts the interest it pays you (for federal purposes) and does not have to add it back when computing New York entire net income. The Line 3 CT-3 addback is aimed at corporate stockholders, not individuals.

The addback is part of the subsidiary-capital rules

The "interest paid to a corporate stockholder owning more than 50%" addback exists so a corporate parent can treat a loan to its subsidiary as subsidiary capital (and exclude the interest income). It is a parent-subsidiary mechanism, not a general rule for all majority shareholders.

Loan vs. capital contribution still matters

The opinion assumed a true loan. If an advance is really a contribution to capital, the analysis -- and the deductibility of any "interest" -- could differ.

Common questions

Q: Does a corporation add back interest paid to its individual majority shareholder?
A: No. Article 9-A has no provision requiring that addback when the lender is an individual.

Q: When does the CT-3 Line 3 addback apply?
A: When a corporate subsidiary pays interest to a corporate parent that owns more than 50% of its stock and the parent wants to treat the loan as subsidiary capital under sections 208.3 and 208.4.

Q: Does it matter whether the advance is a loan or capital?
A: Yes. The opinion assumes a genuine loan; a contribution to capital would be analyzed differently.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 208.9 (entire net income; additions and exclusions)
- Tax Law section 208.4 (subsidiary capital; indebtedness on which interest is not claimed by the subsidiary)
- Tax Law section 208.3 (subsidiary defined)
- Robert Ganz, CPA, TSB-A-03(3)C (Apr. 4, 2003)

Source

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-03(3)C
Corporation Tax
April 4, 2003

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.C021122A

On November 22, 2002, a Petition for Advisory Opinion was received from Robert Ganz,
CPA, c/o Spar & Boyer CPAs, 615 Broadway, Hastings-on-Hudson, New York 10706.
The issue raised by Petitioner, Robert Ganz, CPA, is whether the amount of interest paid to
an individual shareholder on a loan made to the corporation must be added to federal taxable
income, when computing entire net income under section 208.9 of Article 9-A of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory Opinion.
An individual owns 100 percent of a company and the individual shareholder lends the
company money. The company pays the shareholder interest on the loan during the taxable year.
Applicable Law
Section 208.3 of the Tax Law provides that the term “subsidiary” means “a corporation of
which over fifty percent of the number of shares of stock entitling the holders thereof to vote for the
election of directors or trustees is owned by the taxpayer.”
Section 208.4 of the Tax Law provides, in part:
The term “subsidiary capital” means investments in the stock of subsidiaries
and any indebtedness from subsidiaries ... whether or not evidenced by written
instrument, on which interest is not claimed and deducted by the subsidiary for
purposes of taxation under article nine-A ... provided, however, that, in the discretion
of the commissioner, there shall be deducted from subsidiary capital any liabilities
which are directly or indirectly attributable to subsidiary capital.
Section 208.9 of the Tax Law provides, in part:
The term “entire net income” means total net income from all sources, which
shall be presumably the same as the entire taxable income (but not alternative
minimum taxable income),
(i) which the taxpayer is required to report to the United States treasury
department,

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TSB-A-03(3)C
Corporation Tax
April 4, 2003
*
*
*
except as hereinafter provided, and subject to any modification required by
paragraphs (d) and (e) of subdivision three of section two hundred ten of this article.
(a) Entire net income shall not include:
(1) income, gains and losses from subsidiary capital ....
Opinion
When a corporation owns a subsidiary as defined in section 208.3 of the Tax Law, and the
parent corporation makes a loan to the subsidiary, such loan is an indebtedness of the subsidiary.
Such loan will constitute subsidiary capital of the parent corporation under section 208.4 of the Tax
Law only when the interest expense paid by the subsidiary to the parent corporation is not claimed
and deducted by the subsidiary in computing the subsidiary’s entire net income. Since interest
expense is a deduction in computing federal taxable income, the subsidiary may accomplish this by
adding the interest expense paid to the parent corporation at Line 3 of the subsidiary’s Form CT-3
General Business Corporation Franchise Tax Return, which provides for an addition to federal
taxable income in computing entire net income for “Interest paid to a corporate stockholder owning
more than 50% of issued and outstanding stock.” In such case, the parent corporation is allowed a
deduction in computing the parent corporation’s entire net income for the interest income it receives
from the subsidiary on such loan under section 208.9(a)(1) of the Tax Law, as income from
subsidiary capital.
However, if the subsidiary deducts the interest expense paid to the parent corporation, i.e.,
the subsidiary does not add the interest expense to federal taxable income at Line 3 of Form CT-3
when computing the subsidiary’s entire net income, the loan is not considered subsidiary capital in
the hands of the parent corporation. In that case, the parent corporation is not allowed a deduction
under section 208.9(a)(1) of the Tax Law for the interest income it receives from the subsidiary on
the loan.
Where an individual shareholder owning more than 50 percent of the stock of a corporation
makes a loan to the corporation, there is no provision under Article 9-A of the Tax Law that requires
the corporation to add the interest expense that it paid to the individual shareholder to the
corporation’s federal taxable income when computing its entire net income under section 208.9 of
the Tax Law.

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TSB-A-03(3)C
Corporation Tax
April 4, 2003
It is assumed for purposes of this Advisory Opinion that the individual shareholder has made
a loan to the corporation rather than a contribution to capital.

DATED: April 4, 2003

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.