Can an alien (foreign) bank with a New York International Banking Facility exclude interbranch interest income from its taxable entire net income while still counting that same interbranch income toward its separate, tax-favored IBF income calculation?

Plain-English summary

Hessische Landesbank Girozentrale, a German bank operating a New York International Banking Facility (IBF) since 1981, made regular interest payments between its various branches, some recorded on the IBF's books. Because an IBF has no separate existence for federal tax purposes, these interbranch payments wash out to zero on the bank's federal return -- a payment from one branch to another of the same corporation isn't income under IRC § 61/§ 882. The bank wanted to have it both ways for New York purposes: exclude that interbranch interest from its taxable "entire net income," while still counting the same interbranch interest as part of the IBF's "eligible gross income" for the separate, tax-favored IBF modification (which exempts qualifying international banking income from New York tax, within limits).

The Department said no. New York's entire net income starts from federal taxable income (§ 1453(a)), which -- like the federal return -- doesn't include interbranch amounts. But § 1453(f)'s IBF modification specifically does recognize interbranch transactions between the IBF and foreign branches when computing IBF eligible income. If the bank's starting entire net income never included those amounts in the first place, then applying the IBF modification to subtract them again would improperly shrink the bank's other, non-IBF income -- exactly the outcome the 1978 legislation creating IBFs was designed to prevent (the Legislature intended the exemption to apply only to the IBF's own income, with a "floor amount" specifically protecting revenue from the bank's other, taxable New York business). So the bank must first add back (restore) the interbranch income and expenses to entire net income, and only then apply the IBF modification on top of that restored base -- for every year at issue, 1982 through 1985 and beyond.

What this means for you

Alien (foreign) banks operating a New York IBF

If your bank has interbranch transactions between your New York IBF and foreign branches, you can't simply exclude that income from your starting entire net income calculation and then separately claim it as exempt IBF income -- doing so double-counts the exemption and improperly reduces tax on your non-IBF New York business. Restore the interbranch income and expenses first, then apply the § 1453(f) modification.

Accountants and tax professionals

This is the foundational ruling behind a later opinion, TSB-A-89(15)C, which applies the identical logic to a different alien bank. It was later modified (TSB-A-88(12.1)C, Nov. 8, 1990) to add that the Commissioner's separate discretionary anti-distortion authority under § 1462(g) independently supports the same result, though the core computational rule here (restore interbranch amounts before applying the IBF modification) was unchanged by that modification. Also note: a subsequent modification of the 89(15)C line, TSB-A-89(15.1)C, clarified that this specific restoration requirement is for alien banks -- a domestic bank using the IBF modification does not need the same extra adjustment.

Common questions

Q: Does this ruling mean IBF income isn't exempt from New York tax after all?
A: No -- the IBF's eligible net income is still deductible through the § 1453(f) modification. This ruling only requires that the modification be computed against the correct, complete base (entire net income restored to include interbranch amounts), so the exemption doesn't spill over to reduce tax on the bank's other activities.

Q: Does this apply to domestic (U.S.-chartered) banks the same way?
A: Not necessarily -- a later modification in a related opinion (TSB-A-89(15.1)C) distinguishes domestic banks, which don't need this same restoration adjustment.

Q: Can another bank rely on this specific computation?
A: No. This opinion binds the Department only for Hessische Landesbank Girozentrale on these facts; other banks with IBFs should confirm their own facts with a tax professional.

Citations and references

Statutes and regulations:

• Tax Law § 1453(a) (entire net income from federal taxable income)
• Tax Law § 1453(f) (IBF modification; eligible gross/net income; ineligible funding amount; floor amount)
• Franchise Tax on Banking Corporations Regulations Subpart 18-3; § 38.3 (pre-1985 IBF separate accounting)
• IRC § 882(a) (effectively connected income); IRC § 61 (gross income)
• Chapter 288 of the Laws of 1978 (IBF exemption legislative intent)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a88_12c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88 (12)C
Corporation Tax
May 16, 1988

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C870602B

On June 2, 1987, a Petition for Advisory Opinion was received from Hessische Landesbank Girozentrale, 499 Park Avenue, New York, New York 10022.
The issue raised is whether, under Article 32 of the Tax Law for taxable years ended 1982,
1983 and 1984, an alien banking corporation may determine entire net income by excluding from
gross income the interest income received from branches of the bank located outside the United
States, while including interbranch income in determining the eligible gross income of its
international banking facility ("IBF") for purposes of the IBF modification. Also, would the same
principles apply for taxable years ended 1985 and after when Petitioner does not make the election
to use the IBF formula allocation method.
Facts
Petitioner is an alien banking corporation organized in the Federal Republic of Germany. It
has conducted a banking business in the United States and has had an IBF in New York State since
1981. Petitioner files its return on a calendar year basis. In the ordinary course of its business,
payments have been made between various branches of Petitioner. These payments have consisted
primarily of interest on funds loaned between branches. Some, but not all, of the payments made
between branches have been recorded on the books of the IBF.
For federal income tax purposes, Petitioner includes in taxable income, pursuant to Internal
Revenue Code ("IRC") section 882(a), "only gross income which is effectively connected with the
conduct of a trade or business within the United States." Petitioner states that payments made by one
branch of the bank to another branch (whether those branches are located within or without the
United States) are not gross income to the bank, because they do not represent an accession to wealth
to the taxpayer. Any such payments made between branches of the same corporation are not
includible in gross income under IRC section 61 and, therefore, are not includible under IRC section
882.
Petitioner believes that it should properly exclude the interest and other payments received
from its branches located outside the United States when determining New York entire net income.
For taxable years beginning prior to January 1, 1987, section 1453 of Article 32 of the Tax Law
defined entire net income as "the same as the entire taxable income which the taxpayer is required
to report to the United States treasury department, except as hereinafter provided." Petitioner states
that it properly excluded, from its federal gross income, interbranch income received from its foreign
branches and that such income from foreign branches is not listed as an adjustment to federal taxable
income in sections 1453(b) through (e) or in the regulations promulgated thereunder.

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

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TSB-A-88 (12)C
Corporation Tax
May 16, 1988

Petitioner also believes that the eligible net income of the IBF should include payments of
interest received from foreign branches of Petitioner, together with the applicable expenses,
notwithstanding that entire net income does not include such interbranch payments. Section 1453(f)
of the Tax Law, and the regulations promulgated thereunder, provide that when computing entire net
income a modification is allowed for the adjusted eligible net income of the IBF ("IBF
modification").
It is Petitioner's understanding that in computing New York entire net income before
allocation (under the law as in effect for 1981-1984 and under the IBF modification method after
1984) interest income from foreign branches of the taxpayer is properly includible in IBF eligible
net income, but it is not included in entire net income before the modification for IBF adjusted
eligible net income. A corollary of this understanding is that expenses from foreign branches of the
taxpayer are properly includible in the computation of IBF eligible net income, but are not included
in the computation of entire net income before the modification for IBF adjusted eligible net income.
Discussion
Pursuant to section 1453(a) of the Tax Law, the starting point for computing entire net
income is federal taxable income. For federal income tax purposes, a corporation computes its
federal taxable income by excluding income and expenses attributable to interbranch transactions,
since only one legal entity is involved. For federal income tax purposes, an IBF is not recognized as
a separate legal entity. Therefore, federal taxable income does not include income and expenses
attributable to transactions between a taxpayer's IBF and the taxpayer's foreign branches.
When computing entire net income, federal taxable income must be modified as required by
sections 1453(b) through (i) for taxable years 1982, 1983 and 1984, and by sections 1453(b) through
(k) for taxable years 1985 and after.
Section 1453(f) provides a modification for the adjusted eligible net income of an IBF. For
taxable years 1982, 1983 and 1984, section 1453(f) provided, in pertinent part:
[t]here shall be allowed as a deduction from entire net income, to the extent
not deductible in determining federal taxable income, the adjusted eligible net
income of an international banking facility.
For taxable years 1985 and after, section 1453(f) provides, in pertinent part:
[p]rovided the taxpayer has not made an election ... there shall be allowed as
a deduction in determining entire net income, to the extent not deductible in
determining federal taxable income, the adjusted eligible net income of an
international banking facility.

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TSB-A-88 (12)C
Corporation Tax
May 16, 1988

For all taxable years at issue, section 1453(f) provides, in pertinent part:
(1) The eligible net income of an international banking facility shall be the amount remaining after
subtracting from the eligible gross income the applicable expenses.
(2) Eligible gross income shall be the gross income derived by an international banking facility
from:
(A) making, arranging for, placing or servicing loans to foreign persons,...
(B) making or placing deposits with foreign persons which are banks or foreign branches
of banks (including foreign subsidiaries or foreign branches of the taxpayer) or with other
international banking facilities; or
(C) entering into foreign exchange trading or hedging transactions related to any of the
transactions described in this paragraph.
(3) Applicable expenses shall be any expenses or other deductions attributable, directly or indirectly,
to the eligible gross income described in paragraph two of this subsection.
(4) Adjusted eligible net income shall be determined by subtracting from eligible net income the
ineligible funding amount, and by subtracting from the amount remaining the floor amount.
. . .
(8) For the purposes of this subsection the term 'foreign person' means
(A) an individual who is not a resident of the United States,
(B) a foreign corporation, a foreign partnership or a foreign trust, as defined in section
seventy-seven hundred one of the internal revenue code of nineteen hundred fifty-four, other than
a domestic branch thereof,
(C) a foreign branch of a domestic corporation (including the taxpayer),
(D) a foreign government of an international organization or any agency of either, or
(E) an international banking facility ....

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TSB-A-88 (12)C
Corporation Tax
May 16, 1988

Section 1453(f) was added by Chapter 288 of the Laws of 1978. Section one of such Chapter
states that "the legislature intends by the enactment of this act to permit the establishment of New
York based international banking facilities for the purpose of making loans to or accept [sic] deposits
from certain foreign customers, free from ... state ... taxes." Such section also states that:
provisions permit a domestic bank to make loans to and accept deposits from
specified foreign customers through their New York based international
banking facility under essentially the same conditions which exist outside the
United States where that business is conducted now.
The legislature further intends ... to provide for the exemption of the
income of an international banking facility ... subject to a tax floor provision
to maintain revenues from international business which is currently
conducted from New York sites and, therefore, taxable ....
A memorandum of the Rules Committee regarding Chapter 288 of the Laws of 1978 (NY
Legislative Annual, 1978, p. 198), states that:
if the international banking facility should suffer a loss, the loss may
not be taken against the income of the taxpayer's other branches ....
A further limitation is placed on the amount of the exemption
to protect revenues currently derived from existing business with
foreign customers recorded on the books of the taxpayer's New York
branches The limitation is based on a floor amount ....
As shown above, the eligible activities of an IBF are exempt from the franchise tax.
However, it was not intended that such exemption would reduce the tax revenue from the taxpayer's
other activities.
A bank computes its IBF modification using the principles of separate accounting, as required
by section 1453(f) of the Tax Law, section 38.3 of the Tax on State Banks, Other Financial
Corporations and National Banking Associations regulations for taxable years beginning prior to
January 1, 1985 and Subpart 18-3 of the Franchise Tax on Banking Corporations regulations for
taxable years beginning on or after January 1, 1985. When computing such IBF modification, an
improper result is achieved if the bank's entire net income does not include income and expenses
attributable to interbranch transactions between its New York IBF and its foreign branches, because
the IBF modification does recognize such transactions. The result would be an IBF modification for
income and expenses that were never included in the computation of entire net income before the
IBF modification. That is, the IBF modification would reduce the entire net income of the taxpayer's
other activities, which, as shown herein, was not the intent of the Legislature. Therefore, the bank's
entire net income as determined before the IBF modification is allowed must recognize the income
and expenses included in the computation of the IBF eligible net income.

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TSB-A-88 (12)C
Corporation Tax
May 16, 1988

Conclusion
For taxable years 1982, 1983, 1984, 1985 and after, Petitioner must compute entire net
income pursuant to section 1453(a) in accordance with the legislative intent outlined above. Before
the IBF modification is made, Petitioner must modify federal taxable income to recognize the
income and expenses included in the computation of the IBF eligible net income of its New York
IBF when such income and expenses are not otherwise included in such federal taxable income or
in the other modifications contained in section 1453. That is, Petitioner's entire net income must
recognize the income and expenses attributable to interbranch transactions between the New York
IBF and Petitioner's foreign branches. When computing the IBF modification pursuant to section
1453(f) for taxable years ended 1982, 1983, 1984, 1985 and after, Petitioner includes income and
expenses attributable to interbranch transactions between the New York IBF and Petitioner's foreign
branches in determining the eligible net income of its New York IBF.

DATED: May 16, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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