A bank operating an International Banking Facility (IBF) asked the Department to bless roughly two dozen specific proposed shortcuts and interpretations for computing the IBF's tax-favored 'eligible gross income,' its allocable expenses, its bad debt deduction, its 'ineligible funding' add-back, and its 'floor amount' -- largely based on how the bank already reports to the Federal Reserve Board. Do the state's own detailed IBF regulations, freshly adopted at the time, generally track federal banking reports, or do they impose their own separate computational requirements?

Plain-English summary

An International Banking Facility (IBF) is a set of accounts a bank maintains, under Federal Reserve Board rules, to conduct banking business with foreign customers -- income from qualifying IBF activity gets favorable New York Article 32 tax treatment. The Chase Manhattan Bank, N.A. had just seen the Department adopt a detailed new set of IBF regulations (20 NYCRR Part 38) and asked, in a single comprehensive petition, for roughly two dozen specific rulings on how those regulations should be applied -- essentially testing whether the bank could rely on its existing Federal Reserve Board reporting and its own preferred computational shortcuts, or whether New York's regulations required something more specific.

The pattern across the Department's answers is consistent: for the great majority of Chase's proposed rulings, the answer was "No," each time pointing to a specific section of 20 NYCRR Part 38 that already addresses the point with its own, more detailed requirement. This covered: how IBF loan and deposit amounts are documented (not simply by reference to Federal Reserve Board reports, § 38.4); how "use of proceeds" is verified (the IBF must independently obtain and retain a borrower's statement of loan purpose, § 38.4(b)); what counts as eligible gross income from foreign-exchange hedging and other transactions (must be recorded in the IBF's own financial accounts, § 38.4(a), (d)); how interest expense is allocated for borrowings from related entities or other offices of the same taxpayer (specific formulas in § 38.6, not the bank's proposed shortcuts); how the bad debt deduction is computed (§ 38.7); how "other deductions" not directly tied to the IBF are apportioned (§ 38.8-38.9); how IBF balance sheet items factor into the "ineligible funding" fraction (§§ 38.1(c), 38.10); and how IBF loans that are effectively ineligibly funded are treated for the "floor amount" computation (still counted as eligible-income-producing, since funding source doesn't affect whether a loan produces eligible income).

Chase did get several requests granted. The Department agreed that: (1) interest expense on a borrowing from an UNRELATED party may simply equal the interest actually paid or accrued on it, so long as it's included in entire net income and the taxpayer doesn't use the alternative federal method under 26 CFR § 1.882-5; (2) a bank may transfer its existing bad-debt reserve to the IBF tax-free (no gain, loss, or deduction on the transfer itself); (3) expenses directly related to IBF income, gains, deductions, assets, or liabilities are treated as IBF expenses; (4) certain "ineligible funding" computations may be made quarterly or more often, at the taxpayer's option, if applied consistently; (5) the IBF's tax year ends with the taxpayer's own tax year, with all liabilities and assets pro-rated for a short year; (6) transfers of assets and liabilities to the IBF are tax-free with a carryover basis; and, notably, (7) for the "floor amount" (a base-period computation tied to 1975-1977 activity), a taxpayer that filed CONSOLIDATED returns for those years, or files consolidated for the current year, computes the floor amount as if separate returns had been filed for all relevant years -- a taxpayer-favorable clarification for banks with a group filing history.

What this means for you

Banks operating International Banking Facilities

Don't assume New York's IBF tax treatment simply mirrors your Federal Reserve Board reporting or your own internal accounting shortcuts -- 20 NYCRR Part 38 imposes its own detailed, independent computational rules for nearly every element of IBF taxation (documentation of loans/deposits, interest expense allocation, bad debt, other-deduction apportionment, and the ineligible-funding fraction), and this Opinion is a useful roadmap to exactly which regulation section governs which computation.

Where the regulations DID accommodate taxpayer flexibility

A few areas do track ordinary practice or give taxpayers a choice: interest expense on unrelated-party borrowings can equal amounts actually paid/accrued; several computations (ineligible funding, floor-amount base) may be done quarterly or more frequently at the taxpayer's election, as long as applied consistently; and asset/liability transfers into the IBF are tax-free. If you're setting up or auditing an IBF, these are the places where the regulations gave taxpayers latitude.

The floor-amount consolidated-return clarification is broadly useful

Any bank that filed consolidated New York returns for 1975-1977 (the IBF floor-amount base period) or currently files consolidated, and is now computing an IBF floor amount, can rely on the general principle recognized here: compute the floor amount as if separate returns had been filed for all the relevant years, even though actual filings were consolidated.

Common questions

Q: Can a bank use its Federal Reserve Board IBF reports as its New York tax documentation?
A: Largely no -- the Department held that New York's own regulations (20 NYCRR Part 38) impose independent documentation and computation requirements for IBF loans, deposits, use-of-proceeds verification, and related items, distinct from Federal Reserve reporting.

Q: Is interest expense on IBF borrowings from related parties or other offices of the same bank computed the same way as for unrelated-party borrowings?
A: No -- unrelated-party interest expense can equal amounts actually paid or accrued, but interest on borrowings from related corporate entities or other offices of the same taxpayer must follow the specific formulas in 20 NYCRR § 38.6, not a simplified open-market-rate or average-rate shortcut.

Q: Can another bank with a similar IBF rely on this Opinion?
A: No. It binds the Department only as to Chase Manhattan's own facts and can't be relied upon by other taxpayers, though it's a useful map of which specific 20 NYCRR Part 38 section governs each IBF computation question, since the regulations themselves are of general application.

Citations and references

Statutes and regulations:

• Tax Law § 1450(c) (definition of "international banking facility")
• Tax Law § 1453(f)(5) (ineligible funding fraction)
• Tax Law § 1462(f) (consolidated-return floor-amount computation)
• 20 NYCRR Part 38 (§§ 38.1 through 38.11, IBF regulations)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1982.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a82_12c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-82(12)C
Corporation Tax
August 25, 1982

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C810810A

On August 10, 1981 a Petition for Advisory Opinion was received from The Chase
Manhattan Bank, N.A., One Chase Manhattan Plaza, New York, N.Y. 10081.
Petitioner has framed its request for an Advisory Opinion in the form of a number of requests
for rulings. Each of these consists of a request that the Tax Commission adopt a specified position
with respect to international banking facilities (hereinafter referred to as "IBFs"). In what follows,
the ruling requests will be set forth in the form and order presented by Petitioner, and the appropriate
responses will follow each request. A "yes" response indicates the adoption of the proposed ruling,
with whatever modifications are there stated. A "no" response indicates a declination to adopt the
proposed ruling. The responses to Petitioner's ruling requests are based largely on recently
promulgated Regulations of the State Tax Commission regarding international banking facilities, and
citations to supporting or elucidating provisions of such Regulations are made wherever appropriate.
I.

ELIGIBLE GROSS INCOME

Rulings Requested
a.

Documenting income on loans to foreign persons

Ruling Requested - We request that you rule that the amounts of IBF loans and IBF deposits
shall be determined by reference to the taxpayer's reports to the Federal Reserve Board.
Responseb.

No. See 20 NYCRR 38.4.

Documenting use of proceeds

Ruling Requested - We request that you rule that the use of proceeds requirement of the Tax
Law be deemed satisfied where the IBF provided the borrower with the required notice, and received
any required written acknowledgment of such notice, pursuant to Federal Reserve Board Reg. Sec.
204.8(b).
Response-

c.

No. In addition to the factors cited by Petitioner, the IBF must also obtain and retain
a borrower's statement of the purpose of the loan. See 20 NYCRR 38.4(b).
Other eligible gross income
Rulings Requested - We request that you rule that:

JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

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August 25, 1982
(1) the eligible gross income of an IBF includes related foreign exchange trading or
hedging transactions even though the transactions are not recorded in the financial accounts of the
IBF.
Response-

No. See 20 NYCRR 38.4(d).

(2) the eligible gross income of an IBF also includes the income arising from other
IBF transactions and activities permissible under the Tax Law even though the related transactions,
assets and liabilities are not recorded in the financial accounts of the IBF.
Response-

No. See 20 NYCRR 38.1(c)(3) and 20 NYCRR 38.4(a).
(3) the term "related foreign exchange trading or hedging transaction" means:
(i) The purchase, sale or exchange of foreign currency in connection with the
receipt or disbursement of funds in an IBF loan or deposit placement
transaction or with respect to a deposit in an IBF (IBF borrowing); or
(ii) The acquisition, disposition or performance of any contract to purchase,
sell or exchange foreign currency at a future date under terms fixed in the
contract if the contract hedges a foreign currency-denominated IBF loan, IBF
deposit or IBF borrowing. A forward contract hedges a foreign currency­
denominated IBF loan, IBF deposit or IBF borrowing if the effect of a change
in the value of the foreign currency on the United States dollar value of the
forward contract, either alone or in combination with other such contracts,
offsets the effect of the change on the United States dollar value of the
foreign-currency-denominated IBF loan, IBF deposit or IBF borrowing. A
hedging relationship may be established either by reference to particular facts
and circumstances (e.g., the amount of the forward contract, particular
currency, initial date and maturity) indicating a hedging purpose, or by
designating a contract as being intended for the purpose of hedging an IBF
loan, IBF deposit or IBF borrowing.

Response-

No. See 20 NYCRR 38.4(d).

II. APPLICABLE EXPENSES
Rulings Requested
a.

Interest expense
Rulings Requested - It is requested that you rule that:

(1) the IBF shall bear the appropriate amount of interest expense associated with each
borrowing which is recorded in the financial accounts of the IBF. For this purpose, the term
"borrowing" includes a deposit or placement which is represented by a promissory note,

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acknowledgment of advance, or similar obligation (written or oral) which is issued as a means of
obtaining funds for the IBF.
Response-

No. For appropriate amount of interest expense associated with each borrowing, see
20 NYCRR 38.6. Borrowing is included in the definition of "deposit". See 20
NYCRR 38.2(c).

(2) the interest expense appropriate to an IBF borrowing from an unrelated party shall
be the amount of interest paid to the unrelated party, or accrued with respect to that borrowing in
accordance with the IBF accounting method and subsequently paid.
Response-

Yes, to the extent that the interest expense is included in the computation of entire
net income and 26 CFR 1.882-5 is not used for Federal income tax purposes. See 20
NYCRR 38.6.

(3) the interest expense appropriate to an IBF borrowing from a related corporate
entity shall be the open market rate of interest appropriate to a borrowing of that type.
Response-

No. See 20 NYCRR 38.6.

(4) the interest expense appropriate to an IBF borrowing from another office of the
taxpayer shall be based on the average interest rate incurred by the lending office which shall be
equal to the ratio of the total amount of interest expense recorded in the financial accounts of the
lending office to the average total amount of assets recorded in the financial accounts of the lending
office. This computation shall be made on a daily, monthly, quarterly or annual basis, at the
taxpayer's option, but once made shall be consistently applied.
Responseb.

No. See 20 NYCRR 38.6.

Bad Debt Deduction
Rulings Requested - It is requested that you rule that:

(1) the amount of the bad debt deduction that is allocable to the IBF may be
determined by reference to the bad debt deduction claimed by the taxpayer in its New York State
franchise with respect to loans and charge-offs of the IBF.
Response-

No. See 20 NYCRR 38.7

(2) the taxpayer may transfer to the IBF the amount of the reserve for bad debts
maintained by the taxpayer in accordance with the Tax Law with respect to loans transferred to the
IBF, as of the date of transfer of such loans. Such transfer shall not result in the realization of taxable
income or deductible expense to either the taxpayer or the IBF.
Responsec.

Yes.

Other Deductions

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Corporation Tax
August 25, 1982
Rulings Requested - It is requested that you rule that:
(1) each other deduction (other than interest expense and the bad debt deduction) of
the taxpayer that is directly related on the basis of facts and circumstances to the income, gains,
deductions, assets or liabilities of the IBF, i.e., (i) incurred as a result of, or incident to, an activity
from which such income, gains, deductions, assets or liabilities arise, or (ii) incurred in connection
with such assets or liabilities, shall be treated as an expense attributable to the IBF.
Response-

Yes. See 20 NYCRR 38.5 and 20 NYCRR 38.9.

(2) the taxpayer shall apportion among an IBF and the places of business of the
taxpayer located within and without New York State (treating the IBF for this purpose as a place of
business of the taxpayer located outside New York State) each other deduction that is not directly
related to the income, gains, deductions, assets or liabilities of the IBF on the basis of the factual
relationship between the deduction and the income, gains, deductions, assets or liabilities of the IBF.
Such deductions may be apportioned to the IBF in the ratio of the average aggregate amount for the
taxable year of the assets of the IBF to the average aggregate amount for the taxable year of all the
assets of the taxpayer.
Response-

No. See 20 NYCRR 38.8 and 20 NYCRR 38.9.

d [c].

Allocation to eligible gross income
Rulings Requested - It is requested that you rule that:

(1) the bad debt deduction and other deductions attributable to the IBF be directly
reduced where those attributable expenses are directly related to the IBF's ineligible gross income
or the loans giving rise to that ineligible gross income, and
Response-

Yes. See 20 NYCRR 38.9.

(2) the balance of such attributable expenses and the interest expense attributable to
the IBF be allocated between the IBF's ineligible and eligible gross income based on the ratio of the
loan balances (computed daily, monthly, quarterly or annually at the taxpayer's option and
consistently applied) with respect to the loans giving rise to ineligible and eligible gross income and
that the expenses so attributable to the IBF be reduced by the amount so allocated to ineligible gross
income.
Response-

No. See 20 NYCRR 38.9.

III. INELIGIBLE FUNDING AMOUNT
Rulings Requested
a.

IBF balance sheet items
Rulings Requested - It is requested that you rule that:

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August 25, 1982
(1) accrued interest, taxes and other current expenses, accounts payable, reserves for
deferred taxes and loan losses, and retained earnings may be treated as IBF liabilities whether or not
they are reflected in the accounts of the IBF or are indirectly reflected through some mechanism
allowable under the Federal Reserve Board rules.
Response-

No. See 20 NYCRR 38.1(c) and 38.10(b).

(2) accrued interest, taxes and other current expenses, accounts payable, and reserves
for deferred taxes and loan losses shall be eliminated from both the numerator and denominator of
the ineligible funding fraction.
Response-

No. See 20 NYCRR 38.10.
(3) retained earnings of an IBF are treated as lendable funds received from foreign

persons.
Response-

No. See 20 NYCRR 38.10(c).

(4) an IBF deposit includes a borrowing, deposit or placement which is represented
by a promissory note, acknowledgment of advance, or similar obligation (written or oral) which is
recorded in the financial accounts of an IBF and which is issued, as a means of obtaining funds for
the IBF, to one or more foreign persons.
Response-

No. See 20 NYCRR 38.2(c).

(5) the "average aggregate amount" of liabilities and other sources of funds generally
is to be computed on a quarterly or more frequent basis, at the option of the taxpayer, provided that
the computations are made on a consistent basis.
Responseb.

Yes. See 20 NYCRR 38.10(b).

Intercompany deposits from U.S. offices
Ruling Requested - It is requested that you rule that:

(1) there shall be excluded from the numerator and the denominator of the fraction
described in Section 1453(f)(5) of the Tax Law an amount determined by multiplying the average
aggregate amount for the taxable year of all liabilities and other sources of funds of the IBF by a
fraction:
(A) the numerator of which is the average aggregate amount for the taxable
year of the loans and deposits of the IBF which were ineligible IBF loans or IBF
deposit placements, and
(B) the denominator of which is the average aggregate amount for the taxable
year of all the loans and deposit placements of the IBF.

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Response-

No. The statutory formula arrives at an appropriate result because the ineligible
funding fraction is applied only to eligible net income, not total net income.

IV. FLOOR AMOUNT
Rulings Requested
a.

Developing Information
Rulings Requested - It is requested that you rule that:

(1) the floor amount for an IBF for the taxable year is computed by taking into
account only the loans made to, and deposits placed with, foreign persons by the taxpayer. In the case
of a taxpayer which, pursuant to Section 1462(f) of the Tax Law, made a consolidated return with
corporations affiliated with it for any of the taxable years 1975, 1976 and 1977, or makes a
consolidated return for the taxable year, the taxpayer shall compute the floor amount as if it had filed
separate returns for the taxable years 1975, 1976 and 1977 and as if it were filing a separate return
for the taxable year.
Response-

Yes.

See 20 NYCRR 38.11(c).

(2) the amounts of the taxpayer's loans to foreign persons and deposits with foreign
persons which are banks (including subsidiaries of the taxpayer) or foreign branches of banks
(including foreign branches of the taxpayer), which loans and deposits were recorded in the financial
accounts of the taxpayer for its branches, agencies and offices within New York State for the taxable
years 1975, 1976 and 1977, may be determined by reference to the monthly or quarterly reports of
the taxpayer to the Federal Reserve Bank of New York. The amount of such loans or deposits shall
not be reduced, increased, or offset by any other balances to or from such persons which do not
appear as loans or deposits in such reports.
Response-

No. Appropriate modifications must be made to the figures contained in the
taxpayer's report to the Federal Reserve Bank of New York. See 20 NYCRR
38.11(a)(1)(i).

(3) the average aggregate amount of loans made to, and deposits placed with, foreign
persons by the taxpayer for any taxable year generally is to be computed on a quarterly basis, or, at
the taxpayer's option, on a more frequent basis. The computation shall be made on a consistent basis
for all taxable years.
Responseb.

Yes. See 20 NYCRR 38.11(b).

Treatment of ineligible loans

Ruling Requested - It is requested that you rule that IBF loans, which in effect do not
give rise to eligible gross income by virtue of being ineligibly funded, be treated as loans of the
taxpayer (other than the IBF) for purposes of computing the floor amount.

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Response-

No. The funding of an IBF loan has no bearing on whether the loan produces eligible
gross income. Accordingly, such income must be included in the computation of the
floor amount.

V. ESTABLISHMENT OF AN IBF
Rulings Requested
a.

NYS qualification and definitions
Rulings Requested - It is requested that you rule that:

(1) an IBF shall be deemed established when the requisited requirement for
establishment of an IBF under the FRB regulations are complied with; that is, an accounting
segregation has been made and the 14 days notice has been provided.
Response-

No. See 20 NYCRR 38.1(c).

(2) the term "international banking facility" or "IBF" shall have the meaning set forth
in the regulations of the Board of Governors of the Federal Reserve System and official
interpretations thereof.
Responseb.

No. The applicable definition is that set forth in Tax Law, § 1450(c).

Year of transfer
Rulings Requested - It is requested that you rule that:

(1)(a) the tax year of the IBF shall end at the same time as that of the taxpayer and
(b) any resulting short year of the IBF shall be treated as a full year for all purposes, including the
floor amount computations.
Response-

(a) Yes.
(b) No. In the case of a short taxable year, all liabilities and assets must be pro-rated.
A short taxable year is treated as a full taxable year for purposes of the percentage
amounts set forth in 20 NYCRR 38.11(a)(ii).

(2) no gain or loss shall be recognized to the taxpayer upon the transfer by the
taxpayer to the IBF of assets and liabilities and the IBF shall have the same tax bases as that of the
taxpayer.
Response -

Yes.

DATED: August 20, 1982

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau