Can a corporation elect to treat its Eurodollar deposits, other time deposits, and Yankee certificates of deposit as investment capital, apportioned by its investment allocation percentage?
Plain-English summary
A holding company for a manufacturing group (Article 9-A taxpayer) held a portfolio of stocks, bonds, and other securities that qualify as investment capital, plus shorter-term cash-like instruments: Eurodollar deposits, other time deposits, and Yankee certificates of deposit, all maturing within six months and one day. It asked whether those short-term instruments count as "cash on hand or on deposit" that it could elect to treat as investment capital under Tax Law § 208.7(a), and so apportion by its (here, zero) investment allocation percentage.
The Department said yes. Although "cash on hand" and "cash on deposit" are not defined in the statute, 20 NYCRR § 3-3.2(a)(1) deems a qualifying debt instrument (including a certificate of deposit) that is payable on demand or within six months and one day to be cash on hand or on deposit. Eurodollar deposits, other time deposits, and Yankee CDs are unconditional bank obligations to repay principal with interest at the end of a fixed term, with early-withdrawal penalties — substantially similar to ordinary U.S. bank CDs — so they are debt instruments that, assuming they meet § 3-3.2(a)(1), are cash on hand and cash on deposit.
The key gate: a taxpayer may elect to treat such cash items as investment capital only if it also holds items of investment capital that do not mature within six months and one day. This corporation did, so it can make the § 208.7(a) election, and the income from those cash items is investment income under § 208.6.
What this means for you
Corporations with cash-management portfolios
Short-term bank instruments — Eurodollar deposits, time deposits, Yankee CDs — are generally cash on deposit, not standalone investment capital. But if you also hold longer-dated investment capital, you can elect to fold the cash into investment capital and allocate it by your investment allocation percentage, which can be favorable when that percentage is low.
Treasury and tax-planning functions
The election under § 208.7(a) hinges on holding at least some investment capital that matures beyond six months and one day. Confirm that anchor before electing, and remember a debt instrument maturing later is itself treated as cash on deposit during the last six-months-and-a-day window before maturity.
Accountants and tax professionals
Test each instrument against 20 NYCRR § 3-3.2(a)(1): is it a qualifying debt instrument payable within six months and one day? If so it is cash on deposit, electable as investment capital under § 208.7(a) when paired with longer-maturity investment capital, with the resulting income treated as investment income under § 208.6 (see Deloitte & Touche LLP, TSB-A-02(10)C).
Common questions
Q: Are Eurodollar deposits investment capital in New York?
A: They are cash on deposit, which a corporation may elect to treat as investment capital under section 208.7(a) if it also holds investment capital maturing beyond six months and one day.
Q: Why does the six-months-and-one-day line matter?
A: A qualifying debt instrument payable within six months and one day is deemed cash on hand or on deposit under 20 NYCRR § 3-3.2(a)(1); the election lets such cash be treated as investment capital.
Q: How is the income allocated?
A: As investment income under section 208.6, apportioned by the investment allocation percentage (which was zero here), once the election is made.
Citations and references
Statutes, regulations, and authorities:
- Tax Law § 208.7(a) (election to treat cash on hand/on deposit as investment capital)
- Tax Law § 208.6 (investment income)
- 20 NYCRR § 3-3.2(a)(1) (debt instruments deemed cash on hand or on deposit)
- 20 NYCRR § 3-3.2(c) (certificates of deposit)
- Deloitte & Touche LLP, TSB-A-02(10)C
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2006.htm
- Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a06_8c.pdf
Original ruling text
New York State Department of Taxation and Finance
TSB-A-06(8)C
Corporation Tax
November 30, 2006
Office of Tax Policy Analysis
Technical Services Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. C060327B
On March 27, 2006, a Petition for Advisory Opinion was received from Irwin M.
Slomka, c/o Morrison & Foerster LLP, 1290 Avenue of the Americas, New York, NY 10104.
The issue raised by Petitioner, Irwin M. Slomka, is whether Corporation A’s investments
in Eurodollar deposits and other time deposits and Yankee certificates of deposit are considered
cash on hand or on deposit eligible to be treated as investment capital at Corporation A’s election
under section 208.7(a) of the Tax Law and subject to apportionment by its zero investment
allocation percentage.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Corporation A, a holding company for an affiliated group of manufacturing corporations,
is subject to tax in New York State pursuant to Article 9-A of the Tax Law.
Corporation A invests in stocks, bonds and other securities that qualify as investment
capital. None of the debt instruments (bonds) are payable on demand or within six months and
one day. The issuer’s allocation percentage for each of these items of investment capital is zero.
Corporation A’s investment allocation percentage is zero.
Corporation A invests in various types of time deposits, including Eurodollar time
deposits. These time deposits are usually placed with a bank’s Cayman Island branch and
represent unconditional obligations of the bank to repay the principal, with interest, at the
conclusion of a fixed period of time, typically from overnight to six months (although the term
may be as long as five years). Currently, Corporation A invests in Eurodollar deposits and other
time deposits with maturities of less than six months and one day. There are penalties for early
withdrawals.
Corporation A also invests in instruments known as Yankee certificates of deposit
(Yankee CDs) with maturities of less than six months and one day. A Yankee CD is a certificate
of deposit issued by a U.S. branch of a bank located outside the United States. All of the issuers
are banking corporations. A Yankee CD is substantially similar to an ordinary certificate of
deposit issued by a U.S. bank. Corporation A always acquires Yankee CDs directly from the
issuing bank.
Applicable law and regulations
Section 208.5 of Article 9-A of the Tax Law provides, in part:
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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 208.6 of the Tax Law provides, in part:
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 208.7(a) of the Tax Law provides:
The term “business capital” means all assets, other than subsidiary capital,
investment capital and stock issued by the taxpayer, less liabilities not 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 210.3(b) of the Tax Law provides for investment income to be allocated to
New York State, in part, as follows:
multiplying its investment income by an investment allocation percentage…
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(3) … if a taxpayer’s investment allocation percentage is zero, interest received
on bank accounts shall be multiplied by its business allocation percentage …;
Section 3-3.2 of the Business Corporation Franchise Tax Regulations (“Regulations”)
provides, in part:
(a)(1) 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
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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.
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(2) Investment capital does not include:
(i) stock issued by the taxpayer;
(ii) stocks, bonds or other securities constituting subsidiary capital;
(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 Federal National Mortgage Association and Government National Mortgage
Association 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.
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(c) For purposes of paragraph (1) of subdivision (a) of this section, the phrase
stocks, bonds and other securities means:
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(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);
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(d) Qualifying corporate debt instruments. (1) 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 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.
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Opinion
In Deloitte & Touche LLP, Adv Op Comm T&F, June 26, 2002, TSB-A-02(10)C, it was
determined that where a taxpayer has debt instruments constituting investment capital that do not
mature within six months and one day and the investment allocation percentage of the
instruments is zero, investment income that represents interest income received on bank accounts
is multiplied by the business allocation percentage and investment income attributable to items
of cash on hand and on deposit, other than interest received on bank accounts, is multiplied by
the zero investment allocation percentage.
Cash on hand and cash on deposit as used in section 208.7(a) of the Tax Law are not
defined in Article 9-A of the Tax Law or in the Regulations. However, section 3-3.2(a)(1) of the
Regulations, in defining investment capital, provides that any debt instrument, including a
certificate of deposit that is described in section 3-3.2(c)(2) or (3) of the Regulations, is not
described in section 3-3.2(a)(2) of the Regulations, and 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 that 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, Corporation A has investments not maturing within six months and one day
that constitute investment capital pursuant to section 3-3.2 of the Regulations. Corporation A
also has investments in Eurodollar deposits, other time deposits, and Yankee CDs, all maturing
within six months and one day. Petitioner states that Yankee CDs are substantially similar to an
ordinary certificate of deposit issued by a U.S. bank. Petitioner states that Eurodollar deposits
and other time deposits represent unconditional obligations of the bank to repay the principal
with interest at the conclusion of a fixed period of time. Petitioner also states that there are
penalties for early withdrawals of Eurodollar deposits and other time deposits. Therefore, the
Eurodollar deposits and other time deposits are also substantially similar to certificates of deposit
issued by U.S. banks. Accordingly, the Eurodollar deposits, other time deposits, and Yankee
CDs are debt instruments and, assuming they meet all of the requirements of section 3-3.2(a)(1)
of the Regulations, they constitute cash on hand and cash on deposit. Since Corporation A has
items of investment capital not maturing within six months and one day, Corporation A is
allowed, pursuant to section 208.7(a) of the Tax Law and section 3-3.2(a)(1), to elect to treat the
investments constituting cash on hand and on deposit as investment capital.
Income from Corporation A’s investment capital not maturing within six months and one
day and, if Corporation A elects, income from all of Corporation A’s items of cash on hand and
on deposit (including the investments in Eurodollar deposits, other time deposits, and Yankee
CDs) constitute investment income pursuant to section 208.6 of the Tax Law.
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Pursuant to section 210.3(b) of the Tax Law, Corporation A’s investment income is
multiplied by its investment allocation percentage. However, since Corporation A’s investment
allocation percentage is zero, section 210.3(b)(3) of the Tax Law provides that Corporation A’s
interest received on bank accounts, if any, must be multiplied by Corporation A’s business
allocation percentage. Black’s Law Dictionary, Eighth Edition, defines a bank account as “A
deposit or credit account with a bank, such as a demand, time, savings, or passbook account.
UCC § 4-104(a).” (p.18.) These accounts are different from a traditional certificate of deposit in
that a customer can deposit and withdraw money from the account (that is, the amount of
principal in the account is not fixed), and, with the possible exception of a “time” account, these
accounts do not have a maturity date. The Eurodollar deposits, other time deposits, and Yankee
CDs described in this Opinion are not bank accounts. Therefore, any income from such
instruments is not required to be multiplied by the business allocation percentage. If Corporation
A elects to treat the investments constituting cash on hand and on deposit as investment capital,
Corporation A’s investment income attributable to Corporation A’s items of cash on hand and on
deposit, other than interest received on bank accounts, is multiplied by Corporation A’s zero
investment allocation percentage. See Deloitte & Touche LLP, supra.
DATED: November 30, 2006
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.