Within a multi-tier corporate family, does New York's 90%-interest-add-back rule reach interest paid to a 'grandparent' corporation (a shareholder's own parent) or to a 'nephew' corporation (a sibling subsidiary's own subsidiary) -- or does it only reach interest paid to a DIRECT 5%-plus stockholder or that stockholder's OWN subsidiary?

Plain-English summary

Mitsui & Co. (U.S.A.), Inc. ("Mitsui USA"), a New York taxpayer engaged in international trading, is the sole shareholder of several "trading subsidiaries" (some also New York taxpayers) and planned a new financing structure: Mitsui USA would become an 80% shareholder of Mitsui & Co. Investment Corp. ("MCIC"), a New York taxpayer, with the remaining 20% held by Mitsui Ltd. (Mitsui USA's own 100% parent, based in Japan). MCIC would in turn wholly own Mitsui & Co. Finance Corp. ("MCFC"), also a New York taxpayer, which would provide financing to Mitsui USA's trading subsidiaries. Mapped onto a family tree: Mitsui Ltd. is Mitsui USA's PARENT; MCFC is Mitsui USA's grandchild through MCIC; and relative to any given trading subsidiary (a direct child of Mitsui USA), MCFC is a nephew -- the second-tier subsidiary of a sibling.

New York's Article 9-A entire net income computation requires adding back 90% of interest paid on debt owed, directly or indirectly, to any stockholder owning more than 5% of the paying corporation's stock, OR to a SUBSIDIARY of that stockholder (section 208.9(b)(5)). The Petition tested this rule against two family-tree relationships under two funding scenarios.

Issue I -- interest to a grandparent. In Situation A, MCFC is financed by outside banks and by Mitsui Ltd. (MCFC's grandparent two tiers up, being Mitsui USA's own 100% parent) -- with no financing from Mitsui USA itself. In Situation B, MCFC is financed by outside banks, Mitsui Ltd., AND Mitsui USA (the Mitsui USA financing invested only in treasury bills, not used to fund MCFC's own lending). In both scenarios, the Department held that MCFC's interest payments to Mitsui Ltd. and Mitsui USA are NOT payments to an entity described in section 208.9(b)(5) -- neither Mitsui Ltd. nor Mitsui USA is a direct 5%-plus stockholder of MCFC (MCIC is MCFC's only direct parent) or a "subsidiary" of such a stockholder. So no 90% add-back applies, consistent with the Department's own prior Hooker Chemical and Ore and Chemical Corporation rulings on the same statutory language.

Issue II -- interest to a nephew. The Department also addressed whether a New York trading subsidiary's interest payments to MCFC (its nephew -- the second-tier subsidiary of its sibling MCIC, MCFC's direct parent) trigger the add-back. Same answer: MCFC is not a 5%-plus stockholder of the trading subsidiary, nor a subsidiary of such a stockholder, so 90% of those interest payments is likewise NOT required to be added back.

What this means for you

Multi-tier corporate groups structuring internal financing

New York's related-party interest add-back under section 208.9(b)(5) is narrowly drawn -- it reaches only interest paid to a DIRECT 5%-plus stockholder or that stockholder's own subsidiary, not to more distantly related entities like a grandparent corporation or a nephew (a sibling's sub-subsidiary). If your internal financing entity sits two tiers removed from the corporation paying it interest, the add-back likely doesn't apply -- but confirm your specific ownership chain against the statute's precise language.

Designing intercompany finance subsidiaries

Where a captive finance subsidiary is owned through an intermediate holding company (like MCIC here) rather than directly by the ultimate parent, that extra tier can keep interest payments to the ultimate parent (or to sibling-adjacent entities) outside the reach of New York's interest add-back -- a structural detail worth confirming with counsel when designing group financing.

Common questions

Q: Does New York's 90% interest add-back reach a corporation's grandparent (its parent's own parent)?
A: No -- the add-back only applies to a direct 5%-plus stockholder or that stockholder's own subsidiary, not to more remote entities like a grandparent.

Q: What about interest paid to a nephew corporation -- a sibling subsidiary's own subsidiary?
A: Also no -- a nephew corporation isn't a 5%-plus stockholder or a subsidiary of one, so it falls outside section 208.9(b)(5).

Q: Does it matter whether the intermediate holding company also invests the parent's financing in unrelated instruments (like treasury bills) rather than passing it through to fund loans?
A: No -- the Department reached the same "no add-back" conclusion whether the grandparent's financing was directly re-lent (Situation A) or parked in treasury bills (Situation B); the controlling fact was the corporate relationship, not how the funds were used.

Q: Can another corporate group rely on this specific ruling?
A: No. It binds the Department only for this petitioner's specific facts and can't be relied upon by other multi-tier corporate groups, even with similar ownership structures.

Citations and references

Statutes and regulations:

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

Related rulings:

• TSB-A-85(10)C, TSB-A-85(11)C, TSB-A-85(12)C -- three near-identical July 1985 grandparent-interest rulings this ruling's holding builds on
• TSB-A-84(4)C through TSB-A-84(8)C -- a five-ruling same-day batch from May-June 1984
• TSB-A-83(8)C -- the earliest-SIGNED instance of this doctrine line recovered so far (Chase Manhattan, signed July 8, 1983)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1986.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a86_14c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-86 (14) C
Corporation Tax
July 3, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C860311A

On March 11, 1986, a Petition for Advisory Opinion was received from Mitsui & Co. (USA),
Inc., 200 Park Avenue, New York, New York 10166.
The issues raised are (I) whether interest paid by a second tier subsidiary to its "grandparent"
corporation is 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, and
(II) whether interest paid by a corporation to a "nephew" corporation (the second tier subsidiary of
its parent) is required to be added to Federal entire taxable income by the corporation in computing
its entire net income under section 208.9(b)(5) of the Tax Law, contained in Article 9-A thereof.
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 90 percent of the 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.
Petitioner presents two sets of facts as follows:
Situation A
1)

Mitsui & Co. (U.S.A.), Inc. (hereinafter "Mitsui USA"), a New York taxpayer engaged in
international trading activities, is the sole shareholder of various companies (hereinafter the
"trading subsidiaries") also engaged in trading or similar activities. Some of these trading
subsidiaries are New York taxpayers.

2)

In addition to being the sole shareholder of a number of subsidiaries, Mitsui USA plans to
make an investment as an 80 percent shareholder of a New York taxpayer, to be known as
Mitsui & Co. Investment Corp. (hereinafter "MCIC"). MCIC will in turn form a wholly
owned subsidiary to be known as Mitsui & Co. Finance Corp. (hereinafter "MCFC") also a
New York taxpayer. MCIC will furnish services to MCFC, which in turn will engage in
various financing projects, including financing Mitsui USA's trading subsidiaries.

RODERICK G. W. CHU, COMMISSIONER
GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (3/83)

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TSB-A-86 (14) C
Corporation Tax
July 3, 1986

3)

MCFC is financed by outside banks and by Mitsui & Co. Ltd. (hereinafter "Mitsui Ltd."),
Mitsui USA's 100 percent shareholder. No loans are made directly or indirectly to MCFC
from Mitsui USA.

4)

The minority shareholder interest of 20 percent in MCIC is held by Mitsui Ltd.

Situation B
The facts are the same as Situation A, except that MCFC is financed by outside banks, Mitsui
Ltd., and by Mitsui USA. The financing received from Mitsui USA, however, will be invested fully
in treasury bills and similar instruments, as it will not be directly needed to finance MCFC's loans
to the trading subsidiaries or others.
Issue I
The Situation A question is whether MCFC's interest payments to its grandparent
corporation, Mitsui Ltd. are required to be added to Federal entire taxable income of MCFC when
it computes entire net income.
The Situation B question is whether MCFC's interest payments to both grandparent
corporations, Mitsui Ltd. and Mitsui USA, are required to be added to Federal entire taxable income
of MCFC when it computes its entire net income.
Inasmuch as MCFC's interest payments to Mitsui Ltd. and Mitsui USA are not payments to
an entity described in section 208.9(b)(5) of the Tax Law, 90 percent amount of such payments are
not required to be added to Federal entire taxable income pursuant to such section 208.9(b)(5).
Hooker Chemical & Plastics Corp., State Tax Commission Advisory Opinion, 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.
Issue II
The question in both Situation A and Situation B is whether a New York trading subsidiary's
interest payments to its nephew corporation MCFC, the second tier subsidiary of its parent
corporation, are required to be added to Federal entire taxable income when such trading subsidiary
computes its entire net income.

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TSB-A-86 (14) C
Corporation Tax
July 3, 1986

In applying section 208.9(b)(5) of the Tax Law, it has been determined that the trading
subsidiary's interest payments to its nephew corporation, MCFC, are not payments to an entity
described in such section 208.9(b)(5). Thus, 90 percent of such interest payments is not required to
be added to the trading subsidiary's Federal entire taxable income, pursuant to such section
208.9(b)(5), when the trading subsidiary computes its entire net income.

DATED: July 3, 1986

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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