Once the IRS actually confirms that Bank Negara Malaysia is a tax-exempt foreign government under IRC section 892 with no U.S. trade or business, does that change the earlier New York ruling that its franchise tax is capped at the $250 minimum?

Plain-English summary

This is a follow-up to TSB-A-86(23)C (Dec. 4, 1986), which had ruled -- on Bank Negara Malaysia's own ASSUMED facts, pending an IRS ruling that hadn't yet issued -- that Malaysia's central bank would owe only the $250 statutory minimum under New York's Article 32 bank franchise tax, provided it truly had no U.S. trade or business and no federal taxable income.

That IRS ruling has now come through: on March 31, 1987, the IRS ruled that Bank Negara Malaysia (1) is a "foreign government" within the meaning of IRC section 892, and (2) its U.S. investment income -- from U.S. government obligations, U.S. bank deposits, and spot/forward/futures contracts in foreign currencies and precious metals (including actual delivery of currency and gold) -- is exempt from U.S. income tax under section 892. The IRS also confirmed Bank Negara's activities aren't commercial and don't constitute a U.S. trade or business under IRC section 864(b), so it has no federal taxable income at all.

Because New York's entire-net-income calculation for bank franchise tax purposes starts from federal taxable income (Tax Law § 1453(a)), and Bank Negara now has confirmed federal taxable income of zero with no effectively-connected income under IRC section 864(c), none of the Article 32 modification provisions apply and the original December 1986 result stands unchanged: entire net income, alternative entire net income, and taxable assets all remain zero, leaving only the $250 alternative minimum tax under section 1455 for each taxable year.

What this means for you

Foreign sovereign entities relying on a "pending IRS ruling" state opinion

Once your anticipated federal ruling actually issues, you generally don't need a brand-new state advisory opinion from scratch if the federal result confirms your original assumption -- the Department can simply "append" the federal ruling to the original opinion, as it did here, since the state analysis derives directly from the federal outcome.

Section 892 foreign-government exemption cases in New York

If the IRS confirms your entity is an exempt "foreign government" under IRC section 892 with no U.S. trade-or-business income, that federal determination flows straight through to New York's Article 32 entire-net-income calculation, typically leaving only the flat $250 minimum tax.

Common questions

Q: Did this modified opinion change the original result? A: No -- it confirms the original TSB-A-86(23)C result now that the IRS ruling backing it has actually issued.

Q: What did the IRS specifically rule?
A: That Bank Negara Malaysia is a "foreign government" under IRC § 892 and that its described U.S. investment income is exempt from federal income tax under that section.

Q: Does Bank Negara now owe zero New York tax?
A: Not quite zero -- it still owes the $250 statutory alternative minimum tax under section 1455 each taxable year, since entire net income and the other tax bases are all zero.

Q: Can another foreign government agency 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 foreign sovereign entities.

Citations and references

Statutes and regulations:

• Tax Law § 1453(a), § 1453(b)-(i) (entire net income and modifications)
• Tax Law § 1455 (alternative minimum tax)
• Internal Revenue Code § 892 (foreign government exemption); § 864(b), § 864(c) (U.S. trade or business; effectively connected income)

Related rulings:

• TSB-A-86(23)C -- the original December 1986 opinion this ruling modifies

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_23_1c.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-86 (23.1) C
Corporation Tax
June 10, 1987

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

PETITION NO. C861002A

On December 4, 1986, an Advisory Opinion was issued to Bank Negara Malaysia, P.0. Box 10922, Jalan Kuching, 50929 Kuala Lampur, Malaysia. Such Advisory Opinion is modified by appending thereto the following discussion of additional facts subsequently presented by Petitioner. On March 31, 1987, Petitioner was issued a ruling by the Internal Revenue Service to the effect that (1) Petitioner is a foreign government within the meaning of section 892 of the Internal Revenue Code and (2) the income received by Petitioner from its investments in the United States in U.S. government obligations, deposits in banks in the United States of moneys belonging to Petitioner, spot, forward and futures contracts in foreign currencies and precious metals (and underlying foreign currency and gold actually delivered to Petitioner), is exempt from United States income taxation pursuant to section 892 of the Internal Revenue Code. As stated in the original Advisory Opinion, the starting point for computing entire net income, pursuant to section 1453(a) of the Tax Law, is Petitioner's federal taxable income. It has been determined by the Internal Revenue Service that Petitioner's activities do not constitute commercial activities and do not constitute the conduct of a trade or business in the United States under section 864(b) of the Internal Revenue Code, that Petitioner has no federal taxable income and that its income is exempt from tax. Since Petitioner does not have any federal taxable income, it does not have any income which is effectively connected with the conduct of a trade or business within the United States pursuant to section 864(c) of the Internal Revenue Code. Therefore, as stated in the original Advisory Opinion, the modifications contained in section 1453(b) through (i) of the Tax Law are not applicable. Accordingly, for New York State franchise tax purposes, the determination reached in the original Advisory Opinion is not changed. Petitioner's entire net income, alternative entire net income and taxable assets would all be zero and the tax liability of Petitioner pursuant to section 1455 of the Tax Law would be the $250 alternative minimum tax for each taxable year.

DATED: June 10, 1987

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