A bank holding company increased its ownership of a small business investment company (SBIC) subsidiary from 45% to 94.5%. Most of that subsidiary's invested capital goes into stock purchases and large loans that ordinary Article 3 banks aren't legally permitted to make. Can the subsidiary be included in the holding company's Article 32 consolidated banking-corporation tax return?

Plain-English summary

Bankers Trust New York Corporation, a bank holding company organized under Article 3-A of the Banking Law, files a consolidated Article 32 banking-corporation-tax return with its affiliated banking group under Tax Law § 1462(f). It asked whether one particular subsidiary, B.T. Capital Corporation (BTCC) -- a Delaware-incorporated small business investment company licensed under the federal Small Business Investment Company Act, operating out of a single New York office since 1972 -- had to be included in that consolidated return. Bankers Trust's ownership of BTCC jumped from 45% to 94.5% in February 1981.

Tax Law § 1452(a)(8) extends "banking corporation" status (and thus Article 32 eligibility for consolidation) to a subsidiary that is 80%-or-more owned by a bank holding company or bank, but ONLY if that subsidiary is "principally engaged in business which might be lawfully conducted by a corporation subject to article three of the banking law" -- i.e., ordinary bank/trust-company business. BTCC's actual 1980 activity broke down into several categories: purchasing original-issue capital stock in small businesses (a type of investment Article 3 banks are not permitted to make at all); making loans, some within the size limits Article 3 banks may extend to a single borrower and others exceeding those limits under Banking Law § 103(1); and earning fees for management services, including services tied to the oversized, non-bank-type loans. Numerically, capital-stock investments plus above-limit loans plus related management-service income made up the clear majority of BTCC's activity -- less than one-third of its invested capital went toward business an Article 3 bank could lawfully conduct.

Because BTCC's business was not "principally" bank-type business, the Department held it failed § 1452(a)(8)'s test regardless of Bankers Trust's now-94.5% ownership stake -- so BTCC was never eligible to be treated as a "banking corporation," and a corporation that doesn't qualify as a banking corporation in the first place cannot be swept into its parent's Article 32 consolidated return. The Department extended this conclusion to future years too, as long as BTCC's business activities remained substantially similar to what was described.

What this means for you

Bank holding companies with SBIC or other specialty-lending subsidiaries

Ownership percentage alone (even well above the 80% threshold) doesn't make a subsidiary eligible for Article 32 consolidated filing -- the subsidiary's actual BUSINESS MIX matters. If most of its activity (measured by invested capital, not just headline revenue) involves things an ordinary Article 3 bank or trust company can't legally do -- like purchasing original-issue stock or making loans above Article 3's per-borrower limits -- it likely won't qualify as a "banking corporation" under § 1452(a)(8), regardless of how closely it's affiliated with the bank family.

Track the "principally engaged" test using invested capital, not just line-item counts

The Department's analysis here weighed the DOLLAR AMOUNTS of invested capital across each activity category, not simply the number of business lines -- a subsidiary with several permissible-seeming activities can still fail the test if the bulk of its capital sits in non-bank-type investments.

Common questions

Q: Does 80%+ ownership by a bank holding company automatically make a subsidiary a "banking corporation" for Article 32 purposes?
A: No. The subsidiary must ALSO be "principally engaged" in business an ordinary Article 3 bank or trust company could lawfully conduct -- ownership percentage alone isn't sufficient.

Q: What kinds of activities disqualified BTCC here?
A: Purchasing original-issue capital stock (not permitted to Article 3 banks at all) and making loans exceeding Article 3's per-borrower size limits under Banking Law § 103(1), plus management-service fees tied to those oversized loans -- together making up more than two-thirds of BTCC's invested capital.

Q: Can another bank holding company with a similar SBIC subsidiary rely on this Opinion?
A: No. It binds the Department only as to Bankers Trust and BTCC's own facts and can't be relied upon by other taxpayers, even those with an SBIC subsidiary of a similar type.

Citations and references

Statutes:

• Tax Law § 1451(a); § 1452(a)(8); § 1462(f)
• Banking Law Article 3, §§ 96, 96-a, 97, 98, 100, 103(1)

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_3c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-82(3)C
Corporation Tax
March 22, 1982

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C810603A

On June 3, 1981, a Petition for Advisory Opinion was received from Bankers Trust New
York Corporation, P.O. Box 1703 - Wall Street Station, New York, New York 10268.
The issue presented is whether one of Petitioner's subsidiaries (B.T. Capital Corporation) is
required to be included in a consolidated return filed by Petitioner, with other of its subsidiaries,
under Article 32 of the Tax Law (Franchise Tax on Banking Corporations).
Petitioner is a bank holding company, organized under Article 3-A of the Banking Law, and
is the parent of a group of banking corporations. Petitioner files a consolidated return, under Article
32 of the Tax Law, with its affiliated group, pursuant to the provision of section 1462(f) of the Tax
Law.
B.T. Capital Corporation (hereinafter BTCC), incorporated in Delaware, is licensed to do
business under the Small Business Investment Company Act of 1958, as amended. Prior to 1981
Petitioner owned a 45% interest in BTCC. On February 24, 1981 such ownership was increased to
a 94.5% interest. The sole office of BTCC has been in New York since it began its operations in
1972. BTCC provides small business companies with financial assistance by granting loans and pur­
chasing corporate bonds and capital stock. BTCC also provides its customers with management
services.
Article 32 of the Tax Law imposes a tax on every "banking corporation" which exercises its
corporate franchise or does business in New York in a corporate or organized capacity. Tax Law,
§1451(a).
Section 1452(a)(8) of the Tax Law defines the term "banking corporation" to include:
"(8) any corporation eighty percent of more of whose voting stock is
beneficially owned by a corporation or corporations subject to article
three-a of the banking law or registered under the federal bank
holding company act of nineteen hundred fifty-six, as amended, and
which makes a consolidated return under the provisions of
subdivision (f) of section fourteen hundred sixty-two, or by a
corporation or corporations subject to article three of the banking law
or by a national banking association or associations, provided the
corporation whose voting stock is so owned is principally engaged in
business which might be lawfully conducted by corporation subject
to article three of the banking law or a national banking association."
(emphasis added)
JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

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

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TSB-A-82(3)C
Corporation Tax
March 22, 1982

Section 1462(f) of the Tax Law provides, in pertinent part, as follows:
"Corporations which are affiliated may, if authorized, and shall, if
required, by the commission, under regulations prescribed by the
commission, make a consolidated return for the purpose of this
article. The commission may, in its discretion, authorize bank holding
companies as defined in article three-a of the banking law or the
federal bank holding company act of nineteen hundred fifty-six, as
amended, to make a consolidated return with affiliated corporations
taxable under this article . . . . "
The dispositive question herein is thus whether BTCC is "principally engaged in business which
might be lawfully conducted by a corporation subject to article three of the banking law . . . . "
Article 3 of the Banking Law is applicable to banks and trust companies (hereinafter referred
to as "Article 3 banks"). Section 96 of the Banking Law, contained in such article, sets forth the
general powers of banks and trust companies, while sections 96-a, 97, 98 and 100 describe their
powers with respect to specified areas of activity.
BTCC's business is described as consisting of a number of components. First, investments
are made in small businesses by means of the purchase of original issue capital stock. The stocks
purchased are not of a type which Article three banks are permitted to purchase pursuant to the
Banking Law. Second, BTCC makes loans which fall into two categories, those of a type permitted
to Article three banks and those prohibited to such banks by virtue of section 103(1) of the Banking
Law. That provision prohibits loans in excess of specified amounts to individual borrowers. Finally,
BTCC derives income from the provision of management services, some of which are provided to
the recipients of loans from BTCC of a type prohibited by section 103(1) of the Banking Law.
Petitioner has supplied the following analysis of the operations of BTCC for the taxable year ending
December 31, 1980:

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TSB-A-82(3)C
Corporation Tax
March 22, 1982

Investment

Income

Loans of a type permissible
to Article 3 banks

$492,585

$75,057

Loans of a type prohibited to
Article 3 banks pursuant to
Banking Law, §103(1)

864,593

84,768

Investments in capital stock prohibited
as an investment by Article 3 banks

44,810

Management services (including
services provided to issuers of
debt prohibited to Article 3 banks
under Banking Law, §103(1)

36,210

Interest on idle funds

32,403

Miscellaneous

10,870

In addition, BTCC held cash, idle funds and other assets not invested in business activities. Such
assets amounted to $309,317.
Based on all of the facts here presented, and principally the fact that less than one third of
BTCC's invested capital is devoted to business of a type permitted to banks organized under Article
3 of the Banking Law, it is concluded that BTCC, during the taxable year ending December 31,
1980, was not "principally engaged in business which might be lawfully conducted by a corporation
subject to article three of the banking law "Tax Law, §1452(a)(8). Accordingly, even had it been
"affiliated" with Petitioner, it would not have been a corporation taxable under Article 32 of the Tax
Law, and thus could not have been permitted or required to file a consolidated return, under such
Article, with Petitioner. The same conclusion is applicable to subsequent years during which BTCC
is affiliated with Petitioner, where its business activities are substantially similar to those described
herein.

DATED: March 17, 1982

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau