Does New York's rule requiring interest paid to a more-than-5%-stockholder to be added back to income also reach interest a corporation pays to its 'grandparent' corporation -- the parent of its direct parent?

Plain-English summary

Fleet Credit Corporation of New York, Inc., a Massachusetts equipment leasing and financing company subject to Article 9-A tax, sits three tiers down a corporate family: it's wholly owned by Fleet Credit Corporation (Rhode Island), which is wholly owned by Fleet National Bank (a commercial bank), which is itself wholly owned by Fleet Credit Group, Inc. Petitioner borrowed funds directly from its "grandparent," Fleet National Bank -- two tiers up, not its direct parent -- paying interest calculated partly by a fixed rate tied to Fleet Financial Group's long-term debt and partly by the bank's variable cost-of-funds rate.

Tax Law Section 208.9(b)(5) requires an addition to federal taxable income for interest paid on debt owed "directly or indirectly" to any 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 a grandparent corporation -- the direct parent's own parent -- doesn't fit either category: it isn't itself a direct stockholder of the paying corporation, and it isn't a "subsidiary" of the direct stockholder (a grandparent is the direct stockholder's PARENT, the opposite relationship). This reading follows the Department's own prior rulings in Hooker Chemical & Plastics Corp. (1981) and The Ore and Chemical Corporation (1982), both holding the add-back doesn't reach a grandparent. Accordingly, Fleet Credit Corporation of New York's interest payments to Fleet National Bank were not required to be added back to its New York entire net income.

This is one of three near-identical grandparent-interest rulings issued the same day, July 8, 1985 -- see the companion rulings TSB-A-85(10)C (Commercial Credit Financial Services) and TSB-A-85(11)C (Commercial Credit Business Services), both involving different second-tier subsidiaries of the unrelated Commercial Credit Company family asking the identical question and getting the identical answer. Together with the later TSB-A-86(14)C (Mitsui, which extends the same "grandparent" holding and adds a "nephew corporation" variant), these four rulings form a consistent doctrine line on how narrowly Section 208.9(b)(5) is drawn.

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, notably, involves the SAME Commercial Credit Company corporate family (via a different intermediate parent, Auto Fleet Leasing Corporation). All five 1984 rulings cite the identical TSB-A-82(15)C precedent this ruling also relies on.

What this means for you

Multi-tier corporate groups with internal financing arrangements

If your operating subsidiary borrows directly from a "grandparent" entity -- two or more tiers up the ownership chain, not your subsidiary's direct parent or shareholder -- the interest you pay is not subject to New York's Section 208.9(b)(5) add-back, regardless of how the interest rate is calculated or whether it references the broader corporate family's cost of funds.

Accountants structuring intercompany loans

The add-back turns strictly on the corporate RELATIONSHIP between payor and payee, not on economic substance or how centralized the group's treasury function is. A direct 5%-plus stockholder or that stockholder's own subsidiary triggers the add-back; a grandparent, an uncle, or (per the later Mitsui ruling) a "nephew" entity does not.

Common questions

Q: Does New York's related-party interest add-back reach payments to any related corporation in the ownership chain?
A: No -- Section 208.9(b)(5) is narrowly limited to interest paid to a direct 5%-plus stockholder or that stockholder's own subsidiary. More distant relationships, like a grandparent corporation, fall outside it.

Q: Does it matter how the interest rate on the grandparent loan was set?
A: No -- the Department's analysis turned entirely on the corporate relationship (grandparent, not direct stockholder or its subsidiary), not on how the interest rate was calculated.

Q: Can another multi-tier corporate group rely on this Opinion?
A: No. It binds the Department only as to Fleet Credit Corporation of New York'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 multiple companion rulings.

Citations and references

Statutes and prior rulings:

• Tax Law § 208.9(b)(5)
• Hooker Chemical & Plastics Corp., TSB-H-81(37)C (June 1, 1981)
• The Ore and Chemical Corporation, TSB-A-82(15)C (October 12, 1982)

Related rulings:

• TSB-A-85(10)C -- Commercial Credit Financial Services, same doctrine, same day
• TSB-A-85(11)C -- Commercial Credit Business Services, same doctrine, same day
• 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, including two from the same Commercial Credit Company family, predating this ruling by about 13 months
• TSB-A-84(3)C -- Fleet Factors Corporation, a DIFFERENT entity within the same broader Fleet corporate family as this ruling's petitioner, asking the identical question about 14 months earlier and getting the identical answer

Date note: The document header and sign-off line both fall within a week of each other -- header "July 8, 1985," sign-off "DATED: July 1, 1985" -- 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_12c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85 (12) C
Corporation Tax
July 8, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C850419A

On April 19, 1985, a Petition for Advisory Opinion was received from Fleet Credit
Corporation of New York, Inc. 111 Westminster Street, Providence, Rhode Island 02903.
The issue raised is whether interest paid by a second tier subsidiary to its "grandparent"
corporation must be added to federal entire taxable income by the subsidiary for purposes of
computing its entire net income under the Franchise Tax on Business Corporations imposed under
Article 9-A of the Tax Law.
Petitioner, a Massachusetts corporation subject to Article 9-A of the Tax Law, is engaged in
equipment leasing and financing. Petitioner is a wholly-owned subsidiary of Fleet Credit
Corporation, a Rhode Island corporation also engaged in equipment leasing and financing. Fleet
Credit Corporation is in turn wholly-owned by Fleet National Bank, a commercial banking business.
Fleet National Bank is itself wholly-owned by Fleet Credit Group, Inc.
Petitioner borrows funds from its grandparent corporation, Fleet National Bank. The interest
expense is determined by multiplying a portion of the borrowings by a fixed rate determined by
reference to Fleet Financial Group's long term debt and by multiplying the balance of the borrowings
by the Bank's variable cost of funds rate.
Section 208.9(b)(5) of the Tax Law provides 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 percent of the taxpayer's issued capital stock, or to a subsidiary of such corporate stockholder
or shareholder.
Interest payments to a grandparent corporation are not considered payments to an entity
described in section 208.9(b)(5) of the Tax Law. Hooker Chemical & Plastics Corp., Advisory
Opinion of the State Tax Commission, June 1, 1981, TSB-H-81(37)C; The Ore and Chemical
Corporation, State Tax Commission Advisory Opinion, October 12, 1982, TSB-A-82(15)C. The
amount of such payments, therefore, is not required to be added to entire taxable income.

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

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

-2­
TSB-A-85 (12) C
Corporation Tax
July 8, 1985

Accordingly, interest paid by Petitioner to Fleet National Bank is not required to be added
to Federal entire taxable income for purposes of Article 9-A of the Tax Law since such payments
are not made to an entity described in section 208.9(b)(5) of the Tax Law.

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.