A more-than-5% shareholder borrows money from an outside lender solely to re-lend it to the corporation, and the corporation's interest payments to the shareholder simply pass through the shareholder, like a conduit, to that outside lender. Does that pass-through structure let the corporation fully deduct the interest instead of adding back 90% under the related-party interest rule?

Plain-English summary

This appears to be the origin/template ruling for the "pass-through interest" doctrine line already well-represented in this corpus -- a family of at least seven identical-boilerplate 1983 Advisory Opinions (Dean Witter Reynolds, MC Minerals/Mitsubishi, KB Business Credit, Heraeus-Volkert, General Discount/CBT Leasing, Esselte Pendaflex, and Ampal American Israel) that all reject the same pass-through/conduit theory in word-for-word identical language. This modification shares the EXACT SAME "DATED: October 6, 1983" sign-off as all seven of those later opinions -- strong evidence the Department answered this question once, here, and then reused the identical reasoning (and likely identical drafting) to dispose of a wave of near-identical petitions the same day.

This isn't a separate petition -- it's a modification appending a second question to the SAME petition already answered in TSB-A-82(15)C (the "grandparent interest" ruling, issued October 14, 1982). The Ore and Chemical Corporation asked a second, related question: if a more-than-5% shareholder borrows funds from an outside lender SOLELY to re-lend them to the corporation, and the corporation's interest payments to the shareholder simply pass through -- like a conduit -- to that outside lender, can the corporation fully deduct the interest rather than adding back 90% under Tax Law § 208.9(b)(5)?

The Department said no. Section 208.9(b)(5) requires a 90% add-back for interest paid to any more-than-5% shareholder, subject to exactly four listed exceptions: a $1,000 floor; interest on reorganization bonds issued to former bona fide creditors who weren't previously shareholders; cases where the investment allocation percentage applies to entire net income; and interest paid to a federally licensed small business investment company. A pass-through/conduit arrangement doesn't fit any of them. The Department held the requested interpretation "is not consonant with the applicable statutory provision," and that "it is not within the power of the administering agencies of the statute to permit other variations" beyond those four exceptions -- meaning the economic substance of the arrangement (the shareholder acting as a mere intermediary rather than an actual lender) doesn't matter; what matters is simply that the interest is paid to a direct more-than-5% shareholder.

What this means for you

A genuine doctrinal contrast with this same petitioner's OTHER question

The companion opinion on the SAME petition, TSB-A-82(15)C, reaches the OPPOSITE result for interest paid directly to a grandparent corporation (escapes the add-back entirely, because a grandparent is neither a direct shareholder nor that shareholder's subsidiary). Read together, the two questions on this single petition map out both edges of section 208.9(b)(5): pay your grandparent directly and the statute doesn't reach you at all; route the same economic arrangement through your direct shareholder as a pass-through and the statute reaches you regardless of substance. The corporate relationship between payor and payee is what controls -- not the underlying economics of who ultimately receives or supplies the funds.

Businesses financing through a majority shareholder as an intermediary

Don't assume that structuring shareholder debt as a "pass-through" of outside financing avoids New York's 90% related-party interest add-back. The statute looks only at WHO the interest is paid to, not at what that shareholder does with the money afterward -- and the administering agency has no discretion to recognize a substance-based exception beyond the four the statute itself lists.

Common questions

Q: If my more-than-5% shareholder is just passing borrowed funds through to me, is my interest exempt from the add-back?
A: No -- section 208.9(b)(5)'s add-back applies to interest paid to any more-than-5% shareholder regardless of the loan's economic substance or purpose; only the four specifically enumerated statutory exceptions escape it.

Q: How is this different from the "grandparent interest" rule that lets some interest escape the add-back entirely?
A: The grandparent rule applies when interest is paid to an entity that is neither your direct shareholder nor that shareholder's subsidiary (e.g., paid directly to your shareholder's own parent). This pass-through rule applies when interest IS paid to your direct shareholder, even if that shareholder is merely relaying borrowed funds -- direct-shareholder interest is covered regardless of the shareholder's economic role.

Q: Can another company with a similar pass-through financing arrangement rely on this Opinion?
A: No. It binds the Department only as to this Petitioner's own facts and can't be relied upon by other taxpayers -- though, as the shared October 6, 1983 date with six other petitioners' opinions suggests, the Department applied this exact reasoning to many other companies' near-identical arrangements that same day.

Citations and references

Statutes:

• Tax Law § 208.9(b)(5)

Related rulings:

• TSB-A-82(15)C -- the original opinion on this same petition, holding interest paid directly to a corporate grandparent escapes the add-back entirely (the doctrinal opposite of this ruling's direct-shareholder pass-through result)
• TSB-A-83(15)C (Dean Witter Reynolds) and its six identical-boilerplate companions -- TSB-A-83(10)C, TSB-A-83(11)C, TSB-A-83(12)C, TSB-A-83(13)C, TSB-A-83(14)C, TSB-A-83(16)C -- seven separate petitioners, all DATED October 6, 1983, all applying this exact pass-through/conduit holding word for word
• TSB-A-81(9.1)C -- ALSO dated October 6, 1983: the Department's formal revocation of its own prior (erroneous) 1981 ruling that had recognized a circumstance-based exception to the same section 208.9(b)(5) add-back, explaining why the Department needed this whole same-day wave of opinions to establish a fully consistent no-exceptions-beyond-the-statute rule

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_15_1c.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-82(15.1)C
Corporation Tax
May 9, 1984

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
MODIFIED ADVISORY OPINION

PETITION NO. C820830A

On October 12, 1982 an Advisory Opinion was issued to the Ore and Chemical Corporation,
605 Third Avenue, New York, N.Y. 10158. TSB-A-82(15)C. Such Advisory Opinion is modified
by appending thereto the following discussion of an issue not treated therein.
Petitioner requests an Advisory Opinion to the effect that interest paid by a corporation to
a shareholder owning more than 5% of the issued capital stock of such corporation would be fully
deductible where such shareholder borrows funds solely on behalf of such corporation, to which the
funds are re-lent in turn, the interest paid by such corporation to the shareholder being merely
"passed-through" the shareholder, as through a conduit, to the outside lender.
Article 9-A of the Tax Law imposes the State Franchise Tax on Business Corporations,
which tax is computed on the one of four alternative bases which yields the highest tax. One of these
bases is "entire net income", which is Federal taxable income with certain modifications. The
modification set forth in section 208.9(b)(5) of the Tax Law, with certain statutory exceptions,
disallows ninety per cent of a corporate taxpayer's Federal deduction for interest paid on
indebtedness to a shareholder owning more than 5% of the stock of the taxpayer. Such provision
reads as follows:
(b) Entire net income shall be determined without the exclusion, deduction or credit of:
. . .
(5) ninety per centum of interest on indebtedness directly or
indirectly owed to any stockholder or shareholder (including
subsidiaries of a corporate stockholder or shareholder), or members
of the immediate family of an individual stockholder or shareholder,
owning in the aggregate in excess of five per centum of the issued
capital stock of the taxpayer, except that such interest may, in any
event, be deducted.
(i) up to an amount not exceeding one thousand dollars,
(ii) in full to the extent that it relates to bonds or other evidences of
indebtedness issued, with stock, pursuant to a bona fide plan of
reorganization, to persons who, prior to such reorganization, were
bona fide creditors of the corporation or its predecessors, but were not
stockholders or shareholders thereof.

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-82(15.1)C
Corporation Tax
May 9, 1984

(iii) in full where the investment allocation percentage is applied to
entire net income, and
(iv) in full to the extent that it is paid to a federally licensed small
business investment company.
It is hereby determined that the interpretation requested by Petitioner is not consonant with
the applicable statutory provision. Section 208.9(b)(5) of the Tax Law requires the add-back of
ninety per cent of the taxpayer's Federal deduction for interest paid to the shareholder. The only
exceptions to this requirement arise in those situations which come within the purview of section
208.9(b)(5)(i) through (iv) of the Tax Law. It is not within the power of the administering agencies
of the statute to permit other variations.

DATED: October 6, 1983

s/FRANK J. PUCCIA
Director
Technical Services Bureau