A finance company's home office is in New York, but larger loans require credit approval from out-of-state regional offices, with only the very largest requiring a final review back in New York. How much of the resulting loan interest income counts as 'earned within' New York for the business allocation percentage?

Plain-English summary

This is Petition C of three related petitions CIT Financial Corporation and Combined Subsidiaries filed the same day, May 5, 1982 -- see TSB-A-83(3)C (Petition A, combined-report capital eliminations) and TSB-A-83(1)C (Petition B, a 1972 national-bank subsidiary-capital question).

CIT Financial Corporation, headquartered in New York, is a finance-business holding company for various subsidiaries engaged in the same or related finance activities; Petitioner and some of its subsidiaries file combined Article 9-A returns. Its finance agreements go through tiered credit approval: first the originating office (wherever that is), then -- for transactions over a certain amount -- a regional CIT office (none in New York), and finally, for the very largest transactions, a third-level review at the New York home office. All other aspects of a given finance agreement are handled entirely by the office that initiated it.

The question was how much of the resulting loan interest income belongs in the numerator of the receipts factor used to compute the Article 9-A business allocation percentage. Tax Law § 210.3(a)(2)(D) includes "other business receipts... earned within the state" in that numerator, and interest income from a loan qualifies as this kind of receipt. The Department explained that where the labor performed to establish and maintain a loan happens, at more than a minimal level, in BOTH New York and another state, the income is fairly said to be "earned within" both states -- so the analysis turns on weighing the various activities involved (solicitation, investigation, negotiation, approval, and administration) and determining what portion of each is performed in New York. Loan approval specifically can range enormously in importance: sometimes it's merely pro forma, sometimes it's the single most consequential step in the transaction, depending on the loan.

The Department distinguished a prior decision, Walter E. Heller & Co. (1980), noting that decision didn't describe the precise activities behind its "approval" step, so it wasn't necessarily controlling here -- though the two decisions are consistent in principle, since Heller similarly looked to "the situs where the financing... [is] performed" as the determinative factor. Ultimately, the Department declined to determine the actual percentage split for CIT's specific loan portfolio: since an Advisory Opinion applies the law only to "a specified set of facts" (Tax Law § 171, subd. 24; 20 NYCRR 901.1(a)) and the underlying factual question was already the subject of a pending Audit, the Department left the precise numerical determination to that audit process, applying the framework it had just laid out.

What this means for you

Multi-state finance and lending businesses

If your loan-approval process spans multiple states, expect New York to source the resulting interest income based on WHERE the loan-establishment labor actually happens (solicitation, investigation, negotiation, approval, administration) -- not simply based on where your headquarters or a single approval step is located. A New York home-office "rubber stamp" review likely carries less weight than a substantive approval decision made there.

When to expect a definitive Advisory Opinion answer versus a framework

Some Opinions decline to give a specific numerical answer, especially when a matter is already under Audit -- the Department will lay out the correct legal framework and defer the fact-intensive number-crunching to that process rather than pre-empting it in an Advisory Opinion.

A related pattern: the Department declining to resolve contested facts

Compare TSB-A-85(3)C (Micro Leasing), where the Department similarly declined to give a single definitive answer -- there because the petitioner's own submissions were internally contradictory, here because the question is inherently fact-intensive and already under audit. Also compare TSB-A-82(10)C (Union Camp), where the Department likewise declined to pick between two competing property-valuation methods (company appraisal versus net book value) because the choice was a factual question already under Audit. All three illustrate that Advisory Opinions are not a substitute for factual determination.

Common questions

Q: If my company's loan approvals happen in multiple states, where is the interest income taxed for New York purposes?
A: It can be "earned within" more than one state if the loan-establishment labor (solicitation, investigation, negotiation, approval, administration) happens at more than a minimal level in each -- the actual split depends on weighing those activities' relative significance.

Q: Does a final "third-level" approval automatically make all the income New York-sourced?
A: Not necessarily -- the Department noted that approval can be pro forma or highly significant depending on the loan; a rubber-stamp final review may carry less weight than substantive approval decisions made elsewhere.

Q: Why didn't the Department just give a specific percentage?
A: Because determining the precise portion is a factual question, and this issue was already the subject of a pending Audit -- Advisory Opinions apply the law to specified facts rather than resolving open factual disputes.

Q: Can another finance company rely on this specific ruling?
A: No. It binds the Department only as to CIT Financial's own facts and can't be relied upon by other taxpayers, even those with similar tiered approval processes.

Citations and references

Statutes and prior rulings:

• Tax Law § 210.3(a)(2)(D)
• Walter E. Heller & Co., TSB-H-80(29)C (September 19, 1980)
• Tax Law § 171, subd. 24; 20 NYCRR 901.1(a)

Related rulings:

• TSB-A-85(3)C -- another case where the Department declined to give a single definitive answer, there due to contradictory facts in the petition rather than an inherently fact-intensive apportionment question
• TSB-A-83(3)C -- Petition A, filed the same day (May 5, 1982) by the same petitioner, on combined-report capital eliminations
• TSB-A-83(1)C -- Petition B, filed the same day, on a national-bank subsidiary-capital question for the 1972 tax year

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1983.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a83_7c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-83(7)C
Corporation Tax
May 9, 1984

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C820505C

On May 5, 1982 a Petition for Advisory Opinion was filed by CIT Financial Corporation and
Combined Subsidiaries, 650 Madison Avenue, New York, New York 10022.
The issue raised is whether any part of Petitioner's income derived from finance agreements
which are handled outside of New York, except that New York home office approval is required in
certain instances, is required to be included in the numerator of the receipts factor used in computing
the business allocation percentage under Article 9-A of the Tax Law.
Petitioner is a corporation engaged in the finance business, and is also a holding company
for various subsidiaries most of which are engaged in the same or related finance activities.
Petitioner and some of its subsidiaries file their franchise tax returns on a combined basis.
Petitioner's home office is in New York. The financing operations are described by Petitioner, in
brief, as follows:
"Each finance agreement must receive credit approval from the originating office.
Transactions over a certain amount must then receive credit approval from a regional CIT office
(none of which are located in New York State). If the amount of the transaction is still over a
specified higher amount, the finance agreement must also be sent to the CIT home office in New
York for a third level of credit approval. All other matters involving the finance agreement are
handled by the office which initiated the agreement."
The numerator of the receipts factor includes "other business receipts" (viz., other than from
sale of tangible personal property, the performance of services, and from rents and royalties and the
like) "earned within the state." Tax Law § 210.3(a)(2)(D). The income here in question falls within
such category of "other business receipts." Where the labor performed in order to establish and
maintain a loan is performed, at more than a minimal level, in both New York and another state, then
it can fairly be said that the interest income thereafter derived from such loan was "earned within"
both New York and such other state. It is thereupon necessary to determine what portion of the
income is attributable to New York, which is to say, what portion is to be included in the numerator
of the receipts factor. In making such determination consideration should be given to such activities
as solicitation, investigation, negotiation, approval and administration. It is to be noted, in regard to
the present matter, that the activity of loan approval can be of negligible import, as where it is merely
pro forma, or of the highest importance, depending upon the circumstances of any given loan
transaction. Walter E. Heller & Co., State Tax Commission, September 19, 1980, TSB-H-80(29)C,
is not necessarily controlling in the present matter. There, while loan approval from the Chicago
office was required in certain cases, the Decision gives no indication as to the precise nature of the

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

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

-2­
TSB-A-83(7)C
Corporation Tax
May 9, 1984

activities subsumed under the category of "approval" in such cases. It may be noted, further, that the
present Advisory Opinion is in fact in conformity with such Decision, for it is there stated that "It
is the situs where . . . the financing . . . [is] performed which is determinative of whether the receipts
are includable in the numerator of the receipts factor . . . . "
The precise portion of the receipts at issue, if any, which are properly includible in the
numerator of the receipts factor in the present matter is a question of fact not susceptible of
determination in an Advisory Opinion. An Advisory Opinion merely sets forth the applicability of
pertinent statutory and regulatory provisions to "a specified set of facts." Tax Law, § 171, subd.
twenty-fourth; 20 NYCRR 901.1(a). Inasmuch as the question presented here arises within the
context of an Audit, the necessary factual determination will be made within such context, in
accordance with the principles outlined above.

DATED: March 8, 1983

s/FRANK J. PUCCIA
Director
Technical Services Bureau