If a subsidiary switches from borrowing through its direct parent to borrowing directly from its 'grandparent' corporation, does New York's related-party interest add-back rule apply to the interest it now pays?

Plain-English summary

Commercial Credit Financial Services, Inc., a Delaware corporation subject to Article 9-A tax, was wholly owned by Textile Banking Company, Inc., which was itself wholly owned by Commercial Credit Company. Starting January 1, 1984, Petitioner changed how it funded its operations: instead of borrowing through its direct parent, Textile Banking Company, it began borrowing its operating funds directly from its "grandparent," Commercial Credit Company, and paying interest on those loans directly to the grandparent.

Tax Law Section 208.9(b)(5) requires interest paid on debt owed to a stockholder owning more than 5% of the taxpayer's own capital stock, or to a subsidiary of such a stockholder, to be added back to federal taxable income when computing New York entire net income. The Department held that Commercial Credit Company, as Petitioner's grandparent (two tiers removed) rather than its direct stockholder, falls outside that description -- so the switch to direct grandparent borrowing didn't change the answer. For 1984 and subsequent years, Petitioner's interest payments to Commercial Credit Company were not required to be added back, citing the Department's own prior Ore and Chemical Corporation ruling on the same statutory language.

This is one of three near-identical grandparent-interest rulings issued the same day, July 8, 1985. Its companion TSB-A-85(11)C involves a sibling subsidiary in the same Commercial Credit corporate family (Commercial Credit Business Services, which borrowed directly from the same grandparent without ever routing through a direct parent), and TSB-A-85(12)C applies the identical reasoning to an unrelated corporate family (Fleet Credit Corporation of New York). See TSB-A-85(12)C for the fuller citation trail, including the Department's earlier Hooker Chemical ruling, and the later TSB-A-86(14)C (Mitsui), which extends this same doctrine and adds a "nephew corporation" variant.

Even earlier precedent recovered: a five-ruling same-day batch from May-June 1984 -- TSB-A-84(4)C through TSB-A-84(8)C -- predates this ruling by about 13 months and involves the SAME Commercial Credit Company corporate family (there via a different intermediate parent, Auto Fleet Leasing Corporation, rather than Textile Banking Company). All five 1984 rulings cite the identical TSB-A-82(15)C precedent this ruling relies on.

What this means for you

Corporate groups restructuring intercompany financing

Switching your subsidiary's borrowing source from a direct parent to a grandparent doesn't create new New York tax exposure -- this ruling confirms the "no add-back" result applies from the effective date of the switch forward, since what matters is who the actual creditor is at the time interest is paid, not the taxpayer's prior funding history.

Accountants tracking effective dates of internal financing changes

Note that the Department's ruling was explicitly limited to interest paid "for 1984 and subsequent years" -- the specific tax years covered by the new direct-grandparent lending arrangement described in the Petition. Confirm the relevant lending relationship was actually in place for the year at issue.

Common questions

Q: If a subsidiary changes its internal lender from a direct parent to a grandparent, does that trigger New York's interest add-back?
A: No -- the add-back turns on whether the current creditor is a direct 5%-plus stockholder or that stockholder's own subsidiary. A grandparent falls outside that definition regardless of the subsidiary's prior borrowing history.

Q: Can another multi-tier corporate group rely on this Opinion?
A: No. It binds the Department only as to Commercial Credit Financial Services' 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 multiple companion rulings.

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-85(11)C -- sibling subsidiary in the same Commercial Credit family, same doctrine, same day
• TSB-A-85(12)C -- Fleet Credit Corporation of New York, unrelated corporate family, same doctrine, same day, fuller citation trail
• TSB-A-86(14)C -- Mitsui, extends this holding and adds a "nephew corporation" variant
• TSB-A-84(4)C through TSB-A-84(8)C -- an earlier (May-June 1984) five-ruling batch from the same Commercial Credit Company family, predating this ruling by about 13 months

Date note: The document header reads "July 8, 1985," while the sign-off line reads "DATED: July 1, 1985" -- a seven-day gap consistent with internal signing before the header/publication date; issued_date uses the header date without correction.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1985.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a85_10c.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-85 (10) C
Corporation Tax
July 8, 1985

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

PETITION NO.C841003A

On October 3, 1984 a Petition for Advisory Opinion was received from Commercial Credit
Financial Services, Inc., 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 Textile Banking Company, Inc. which is in turn a wholly owned subsidiary of
Commercial Credit Company. Since January 1, 1984, Petitioner has borrowed its operating funds
directly from Commercial Credit Company (its "grandparent"), rather than from Textile Banking
Company, Inc. (its shareholder). Petitioner pays interest on these borrowings directly to Commercial
Credit Company. For 1984 and subsequent years, Petitioner maintains that interest paid on such
loans from Commercial Credit Company is not required to be added to Federal entire taxable income
pursuant to Tax Law section 208.9(b)(5).
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 section 208.9(b)(5). The Ore and Chemical Corporation, State Tax Commission
Advisory Opinion, October 14, 1982, TSB-A-82(15)C.

DATED: July 1, 1985

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth herein.
RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

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