If a second-tier subsidiary borrows from its corporate 'grandparent' -- its direct parent's own parent -- rather than from its direct parent or a more-than-5% stockholder, does New York's related-party interest add-back rule reach that interest?

Plain-English summary

Commercial Credit Development Corp., a Delaware corporation subject to Article 9-A tax, is a wholly owned subsidiary of Auto Fleet Leasing Corporation, which is itself a wholly owned subsidiary of Commercial Credit Company. That makes Commercial Credit Company Petitioner's "grandparent" -- two ownership tiers up, not Petitioner's direct parent or shareholder. Commercial Credit Company lends money directly to Petitioner, its second-tier subsidiary, and Petitioner pays interest on those loans.

Tax Law § 208.9(b)(5) requires a corporation to add back to Federal taxable income any interest paid on debt owed "directly or indirectly" to a stockholder owning more than 5% of the taxpayer's OWN issued capital stock, or to a SUBSIDIARY of such a stockholder. The Department held that Commercial Credit Company, as Petitioner's grandparent rather than its direct stockholder (Auto Fleet Leasing Corporation holds that role) or a subsidiary of that direct stockholder, simply doesn't fit the statutory description. Accordingly, the interest Petitioner pays to its grandparent is not required to be added back when computing entire net income -- citing the Department's own prior ruling in The Ore and Chemical Corporation, TSB-A-82(15)C (October 14, 1982), which had already established this reading of section 208.9(b)(5).

This is one of five near-identical grandparent-interest rulings issued the same day, June 1, 1984 (all decided on petitions filed May 9, 1984 and signed May 29, 1984). All five petitioners are second-tier subsidiaries wholly owned by Auto Fleet Leasing Corporation, itself wholly owned by Commercial Credit Company -- see the companion rulings TSB-A-84(5)C (Commercial Credit Equipment Corp.), TSB-A-84(6)C (C C Leasing Corp.), TSB-A-84(7)C (Relocation Realty Service Corp.), and TSB-A-84(8)C (McCullagh Leasing, Inc., a Michigan corporation -- the only one of the five not incorporated in Delaware). This same-day batch is, so far, the EARLIEST instance of the "grandparent interest" doctrine line in this corpus -- it predates the previously-recovered TSB-A-85(10)C/TSB-A-85(11)C/TSB-A-85(12)C triplet (July 8, 1985) by about 13 months, and the later TSB-A-86(14)C (Mitsui, July 1986) by over two years -- and notably involves the SAME Commercial Credit Company corporate family that resurfaces the following year in TSB-A-85(10)C and TSB-A-85(11)C (there via a different intermediate parent, Textile Banking Company). All five 1984 rulings cite the identical earlier precedent, TSB-A-82(15)C (Ore and Chemical Corporation, October 1982), which is the true origin of this doctrine and has now been recovered in this corpus.

What this means for you

Multi-tier corporate groups with a captive finance/leasing subsidiary family

If several subsidiaries in your group are all owned through a common intermediate holding company (like Auto Fleet Leasing Corporation here) and all borrow directly from the ultimate parent two tiers up, none of that interest is subject to New York's related-party add-back -- the Department has confirmed this result repeatedly, across different subsidiaries in the same family and across different corporate families.

Accountants tracking this doctrine's paper trail

This was for a time the earliest-dated instance of the grandparent-interest holding in the corpus. The true origin has since been recovered: TSB-A-82(15)C (The Ore and Chemical Corporation, October 1982), the ruling every opinion in this doctrine line -- including this one -- ultimately cites back to.

Common questions

Q: Does New York's related-party interest add-back reach payments to a corporate grandparent?
A: No -- section 208.9(b)(5) only reaches interest paid to a direct 5%-plus stockholder or that stockholder's own subsidiary; a grandparent (the stockholder's own parent) falls outside both categories.

Q: Were multiple subsidiaries in the same corporate family able to get this same result?
A: Yes -- this ruling is one of five essentially identical opinions issued the same day for five different second-tier subsidiaries of the same corporate family (Auto Fleet Leasing Corporation / Commercial Credit Company).

Q: Can another multi-tier corporate group rely on this Opinion?
A: No. It binds the Department only as to Commercial Credit Development Corp.'s own facts and cannot be relied upon by other taxpayers, even in an identical corporate structure -- though the Department has reached the same result in numerous companion rulings across several corporate families.

Citations and references

Statutes and prior rulings:

• Tax Law § 208.9(b)(5)
• The Ore and Chemical Corporation, TSB-A-82(15)C (October 14, 1982)

Related rulings:

• TSB-A-84(5)C, TSB-A-84(6)C, TSB-A-84(7)C, TSB-A-84(8)C -- four sibling second-tier subsidiaries in the same Auto Fleet Leasing Corporation/Commercial Credit Company family, same doctrine, same day
• TSB-A-85(10)C, TSB-A-85(11)C, TSB-A-85(12)C -- a later (July 1985) triplet applying the identical doctrine, one pair from the same Commercial Credit Company family
• TSB-A-86(14)C -- a still-later (1986) Mitsui ruling extending this doctrine to a "nephew corporation" variant

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1984.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a84_4c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-84 (4) C
Corporation Tax
June 1, 1984

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C840509B

On May 9, 1984 a Petition for Advisory Opinion was received from Commercial Credit
Development Corp., 300 St. Paul Place, Baltimore, Maryland 21202.
The issue raised is whether interest paid by a second tier subsidiary to its "grandparent"
corporation would be required to be added to Federal entire taxable income by the subsidiary in
computing its entire net income under Section 208.9(b)(5) of the Tax Law, contained in Article 9-A
thereof.
Petitioner, a Delaware corporation subject to Article 9-A of the Tax Law, is a wholly owned
subsidiary of Auto Fleet Leasing Corporation, which is in turn a wholly owned subsidiary of
Commercial Credit Company. The latter makes loans to Petitioner, its second tier subsidiary.
Petitioner pays interest on such loans.
Section 208.9(b)(5) of the Tax Law provides, in pertinent part, that in arriving at entire net
income for franchise tax purposes, an addition to Federal entire taxable income must be made in the
amount of interest paid on indebtedness directly or indirectly owed to any stockholder or shareholder
owning more than five per cent of the taxpayer's issued capital stock, or to a subsidiary of such
corporate stockholder or shareholder.
Inasmuch as Petitioner's interest payments to Commercial Credit Company, its corporate
grandparent, are not payments to an entity described in section 208.9(b)(5) of the Tax Law, the
amount of such interest expense is not required to be added to Federal entire taxable income pursuant
to Tax Law, § 208.9(b)(5). The Ore and Chemical Corportion, State Tax Commission Advisory
Opinion, October 14, 1982, TSB-A-82(15)C.

DATED: May 29, 1984

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.

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

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