A bank's two new securities-dealer subsidiaries (one owning the other) want to file a combined Article 9-A return together, and also want to know whether interest they'll pay on short-term borrowings from the bank -- their common grandparent -- is subject to the related-party interest add-back. What's the answer to both questions?

Plain-English summary

Chase Manhattan Bank, N.A. ("CMB") planned to launch two new securities-related subsidiaries: Chase Manhattan Capital Markets Corporation ("CMCM"), a registered securities dealer that would trade, underwrite, and sell municipal securities, provide merchant-banking financial advisory services, and arrange loan syndications; and Chase Manhattan Government Securities, Inc. ("CMGS"), CMCM's own wholly owned subsidiary, a non-registered dealer trading only in U.S. Treasury and Federal Agency securities (since it stays within that narrow product line, it doesn't need separate SEC/NASD registration). CMGS would refer any inquiries about other securities to CMCM, and CMCM would provide administrative services, shared executive officers, and fiscal/management oversight to CMGS. Both companies expected their planned capitalization to fully support their securities activities, but anticipated occasionally needing short-term borrowings from CMB (their common parent/grandparent) to carry securities inventory.

Issue I -- combined filing. Tax Law § 211.4 allows discretionary combined Article 9-A filing for corporations under sufficient common ownership, subject to three regulatory tests (20 NYCRR 6-2.3): (1) sufficient stock ownership/control -- clearly met, since CMGS is wholly owned by CMCM; (2) a "unitary business" -- met, since both companies are "engaged in the same or related lines of business" (securities dealing); and (3) "substantial intercorporate transactions" -- met only where 50% or more of a corporation's receipts come from activities tied to the other group members (manufacturing/acquiring goods for each other, selling goods acquired from each other, or financing each other's sales). The facts Petitioner presented did NOT establish this third requirement -- CMGS mostly just refers customer inquiries to CMCM and receives administrative support, which doesn't rise to the level of substantial receipts-generating intercompany transactions. So combined filing was not permitted on the facts presented.

Issue II -- interest add-back. Tax Law § 208.9(b)(5) requires adding back interest paid on debt owed to a more-than-5% shareholder or that shareholder's own subsidiary. Since CMB is CMCM's and CMGS's common "grandparent" (two and three tiers up, respectively) rather than either company's direct shareholder, the Department held the add-back does not apply to interest either company might pay CMB on short-term borrowings -- citing the Department's own Ore and Chemical Corporation precedent (TSB-A-82(15)C).

One of the earliest-SIGNED instances of the grandparent-interest doctrine recovered so far. Though published in the same May 9, 1984 TSB-A batch as several other 1983-numbered opinions, this ruling's actual sign-off date is July 8, 1983 -- earlier than the TSB-A-84(3)C through TSB-A-84(8)C 1984 batch (signed May-June 1984), making it one of the earliest known APPLICATIONS of this doctrine, after the origin ruling itself, TSB-A-82(15)C (The Ore and Chemical Corporation, October 1982 -- now recovered).

What this means for you

Sibling subsidiaries seeking combined New York filing

Common ownership and a shared line of business aren't enough -- you also need SUBSTANTIAL intercorporate transactions (roughly, 50%+ of receipts tied to activities with group members) between the specific corporations you want to combine. Administrative support and customer referrals between affiliates, without more, may not clear this bar.

Multi-tier groups with a shared treasury function

Short-term borrowings from a common grandparent entity (rather than a direct parent/shareholder) stay outside the section 208.9(b)(5) related-party interest add-back -- consistent with the broader grandparent-interest doctrine line.

Common questions

Q: Do sibling subsidiaries in the same business line automatically qualify for combined New York filing?
A: No -- beyond common ownership and a unitary business, the group must also show substantial intercorporate transactions (generally 50%+ of receipts tied to group-member activities), which wasn't established here.

Q: Does interest paid to a common grandparent bank trigger the related-party add-back?
A: No -- section 208.9(b)(5) only reaches interest paid to a direct 5%-plus shareholder or that shareholder's own subsidiary, not a grandparent.

Q: Can another bank holding company group rely on this specific ruling?
A: No. It binds the Department only as to Chase Manhattan's own facts and can't be relied upon by other taxpayers, even those with similar securities-subsidiary structures.

Citations and references

Statutes and regulations:

• Tax Law § 211.4
• 20 NYCRR 6-2.3(a)(1)-(2), 6-2.3(b)
• Tax Law § 208.9(b)(5)
• The Ore and Chemical Corporation, TSB-A-82(15)C

Related rulings:

• TSB-A-84(3)C through TSB-A-84(8)C, TSB-A-85(10)C through TSB-A-85(12)C, TSB-A-86(14)C -- the broader "grandparent interest" doctrine line, all citing the same Ore and Chemical Corporation precedent
• TSB-A-82(7)C -- another combined-filing request denied for failing the same "substantial intercorporate transactions" test, there because a brand-new clearing subsidiary's receipts were mostly investment income rather than intercompany service fees

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_8c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-83(8)C
Corporation Tax
May 9, 1984

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C820629A

On June 29, 1982 a Petition for Advisory Opinion was received from Chase Manhattan Bank,
N.A., 1 Chase Manhattan Plaza, New York, New York 10081.
Petitioner inquires as to whether two new corporations, first and second tier subsidiaries,
respectively, of Chase Manhattan Capital Markets (Holdings), Inc. (hereinafter "CMCMHI"), will
be permitted to file franchise tax reports under Article 9-A of the Tax Law on a combined basis.
Petitioner also inquires as to whether certain interest payments made by such new corporations
would be subject to the interest add-back requirement set forth in section 208.9(b)(5) of the Tax Law.
The two new corporations referred to are Chase Manhattan Capital Markets Corporation (hereinafter
"CMCM"), a subsidiary of CMCMHI, which is itself a subsidiary of Chase Manhattan Bank, N.A.
(hereinafter "CMB"), and Chase Manhattan Government Securities, Inc. (hereinafter "CMGS"), a
subsidiary of CMCM.
Petitioner has provided the following statement of facts as a basis for the requested Advisory
Opinion. CMCM will be a registered securities dealer with the Securities and Exchange Commission
and the National Association of Securities Dealers. In addition, it will conduct domestic merchant
banking activities, such as acting as a financial advisor in connection with acquisitions and mergers
and arranging loan syndications and placements. CMCM will have offices in New York. CMGS will
be a non-registered government securities dealer trading in U.S. government and Federal agency
obligations. Its office will be in New York.
CMCM, as a registered securities dealer, will trade, underwrite and sell municipal securities
for customers and for its own account. The company will also provide certain services to states and
municipalities such as advising on how to manage finances and arranging financing, including loan
syndications and the underwriting of securities. In addition, it will provide certain financial advisory
services including those related to private placements and mergers and acquisitions and loan
syndications. CMCM will also be positioned to underwrite revenue bonds and conduct money
market fund operations if proposed legislation authorizing such activities is enacted.
CMGS will be formed as a separate legal entity, and will not be required to register with any
federal securities regulatory body so long as it engages only in activities in U.S. Treasury and Federal
Agency securities, such as buying and selling such securities for customers and for its own account.
Because CMGS will not be a federally registered securities dealer, its sales personnel cannot take
any order for other types of securities, including without limitation municipal securities or other
obligations, and all inquiries for such securities will be referred to CMCM. When CMCM salesmen

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

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

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TSB-A-83(8)C
Corporation Tax
May 9, 1984
receive an inquiry regarding U.S. Treasury or Federal Agency securities, any resulting order would
be executed as agent for CMGS. It is also expected that CMCM will provide certain administrative
services (e.g., accounting, purchasing, etc.) and operational assistance to CMGS, that certain
executive officers of CMCM will also act in that capacity for CMGS, and that CMCM will exercise
fiscal and management control over CMGS.
While it is contemplated that the proposed capitalization of the two companies will fully
support their respective securities activities, it is possible that short-term borrowings from CMB may
be required from time to time to allow them to carry their inventories of securities.
Section 211.4 of the Tax Law provides for the filing of franchise tax returns on a combined
basis, as follows:
"In the discretion of the tax commission, any taxpayer, which owns
or controls either directly or indirectly substantially all the capital
stock of one or more other corporations, or substantially all the capital
stock of which is owned or controlled either directly or indirectly by
one or more other corporations or by interests which own or control
either directly or indirectly substantially all the capital stock of one or
more other corporations, may be required or permitted to make a
report on a combined basis covering any such other corporations and
setting forth such information as the tax commission may require . .
.."
Sections 6-2.1 et seq of the Franchise Tax Regulations set forth the requirements which must
be met before the Tax Commission will exercise its discretion in requiring or permitting the filing
of reports on a combined basis.
The first such requirement, that of sufficient stock ownership or control, is clearly met here,
inasmuch as CMGS is estated to be a wholly owned subsidiary of CMGS.
The second requirement is that "the corporations are in substance parts of a unitary business
conducted by the entire group of corporations . . ."20 NYCRR 6-2.3(a)(1). This requirement is met
where, as here, the corporations in question are "engaged in the same or related lines of business .
. . . "20 NYCRR 6-2.3(b).
The third requirement is that there be "substantial intercorporate transactions among the
corporations. "20 NYCRR 6-2.3(a)(2). This requirement is met where 50 per cent or more of a
corporation's receipts are from activities related to the activities of the other corporation or
corporations in a proposed group. Such qualified activities include manufacturing or acquiring goods
or property for other corporations in the group, selling goods acquired from other corporations in the
group, or financing sales of other corporations in the group. The facts set forth by Petitioner do not
indicate the existence of such substantial intercorporate transactions.
Accordingly, under the facts presented, CMCM and CMGS would not be permitted to file
their franchise tax reports on a combined basis.

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TSB-A-83(8)C
Corporation Tax
May 9, 1984
II
The second issue raised by Petitioner relates to the deductibility of interest paid by CMCM
and CMGS on loans from CMB.
Section 208.9(b)(5) of the Tax Law provides for the disallowance of certain amounts of
interest paid on "indebtedness directly or indirectly owed to any stockholder or shareholder
(including subsidiaries of a corporate stockholder or shareholder), . . . owning in the aggregate in
excess of five per centum of the issued capital stock of the taxpayer . . . . "
In the present instance the interest paid by CMCM to CMB would be interest paid on
indebtedness not to a shareholder but to a grandparent. Accordingly the disallowance provided for
by section 208.9(b)(5) of the Tax Law would not be applicable. The same conclusion would apply,
a fortiori, to interest payments made by CMGS to CMB. The Ore and Chemical Corporation, State
Tax Commission Advisory Opinion, TSB-A-82(15)C.

DATED: July 8, 1983

s/FRANK J. PUCCIA
Director
Technical Services Bureau