Can an out-of-state life insurance company that isn't licensed to do business in New York buy mortgages secured by New York real estate for investment without owing New York franchise tax?

Plain-English summary

A life insurance company licensed in roughly 40 states, but not licensed or qualified to do business in New York, wanted to buy mortgages secured by New York real estate purely as an investment -- negotiated partly in and out of New York, serviced by an agent who could be located anywhere. It asked the Department whether that investment activity would trigger New York franchise tax.

The Department said no tax results, for a structural reason specific to insurers: Article 33's franchise tax on foreign insurance corporations (§ 1501(a)) is capped by § 1505 at whatever the company would owe under the premiums-based tax in § 1510 -- and § 1510 only reaches insurers authorized to transact business under a certificate of authority from the Superintendent of Insurance. Since this company holds no such certificate, its § 1510 premiums tax is zero, which caps its total Article 33 liability at zero regardless of what § 1501(a) might otherwise impose. And because it's an insurance corporation, § 209.4 excludes it from the separate Article 9-A general corporate franchise tax entirely -- so there's no fallback tax either. With no tax owed under either article, the Department found the second question (whether the mortgage activity itself counts as "doing business" in New York) moot.

What this means for you

Out-of-state insurers investing in New York mortgages

For the unlicensed insurer and proposed mortgage purchases described here, the Department found no Article 33 or Article 9-A franchise tax liability. Its Article 33 calculation was capped at zero because the company was not authorized to transact insurance business in New York, and § 209.4 excluded it from Article 9-A. The opinion did not address purchases of securities or other kinds of assets, and it left the separate "doing business" question undecided.

Accountants and tax professionals

This result followed from the interaction of §§ 1501(a), 1510, and 1505 on the company's stated facts. A different insurer's authorization and activities require their own analysis. The Department never reached the "doing business" question, so the ruling does not establish whether this mortgage investment activity constituted doing business in New York.

Common questions

Q: Does an insurance company avoid New York tax just because it isn't licensed here? A: Not automatically -- it's the specific interplay of Article 33's premiums-tax cap (zero premiums tax for an unauthorized insurer means a zero-cap ceiling) that produces zero liability here. A different fact pattern or a licensed insurer could come out differently.

Q: Would this company owe New York's regular corporate franchise tax (Article 9-A) instead? A: No. Insurance corporations subject to Article 33 are excluded from Article 9-A by § 209.4, regardless of how much Article 33 tax, if any, they actually owe.

Q: Can another insurance company rely on this opinion?
A: No. It binds the Department only for the petitioner on these facts: an insurer licensed elsewhere but not in New York, considering New York mortgages for investment under the described purchase and servicing arrangements.

Citations and references

Statutes:

• Tax Law § 1501(a) (Article 33 franchise tax on foreign insurance corporations)
• Tax Law § 1510 (premiums-based tax on authorized foreign insurance corporations)
• Tax Law § 1505 (cap tying total Article 33 tax to the § 1510 premiums-tax amount)
• Tax Law § 209.4 (Article 9-A exclusion for insurance corporations taxable under Article 33)

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_20c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88 (20)C
Corporation Tax
September 16, 1988

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C880707A

On July 7, 1988, a Petition for Advisory Opinion was received from Mound, Cotton & Wollan, 125 Maiden Lane, New York, New York 10038. The issues raised are (1) whether a foreign life insurance company not licensed or otherwise qualified to do business in New York State can purchase, for investment purposes, mortgages secured by New York real estate without incurring an obligation to pay New York State franchise taxes, and (2) whether such company would be doing business in New York State if it engages in such activities. A foreign life insurance company (hereinafter "Company") is licensed in approximately 40 states and does business in those states. However, it is not licensed or qualified to do business in New York State. The Company is considering the purchase of mortgages secured by New York real estate. The mortgages would be purchased through a large corporate broker licensed in New York State. Negotiations would take place both in and out of New York and the contracts could be signed either in or out of New York. In addition, an agent, either in or out of New York, would service the mortgages. Section 1501(a) of Article 33 of the Tax Law imposes a franchise tax on every foreign insurance corporation for the privilege of doing business or of employing capital, or of owning or leasing property in New York State in a corporate or organized capacity, or of maintaining an office in New York State, for all or any part of its taxable year. An insurance corporation includes a corporation, association, joint stock company or association, person, society, aggregation or partnership, by whatever name known, doing an insurance business. Section 1510 of the Tax Law imposes a franchise tax based on premiums. The tax is imposed on every foreign insurance corporation authorized to transact business in New York State under a certificate of authority from the Superintendent of Insurance for the privilege of carrying on business in a corporate or organized capacity in New York State. Section 1505 of the Tax Law limits the amount of taxes imposed by providing that, notwithstanding the provisions of sections 1501 and 1510, the amount of taxes imposed under such sections shall not exceed an amount computed as if such taxes were determined solely under section 1510 at the reduced rate of 2.6%. Herein, the Company is not authorized to transact business in New York State under a certificate of authority from the Superintendent of Insurance. Therefore, the company is not subject to the premiums tax under section 1510. As a result, the amount of tax that can be imposed under Article 33 is zero, because section 1505 provides that the amount of taxes that can be imposed under both section 1501 and 1510 is limited to the amount of tax computed solely under section 1510.

-2­
TSB-A-88 (20)C
Corporation Tax
September 16, 1988

Accordingly, with regard to Issue 1, the Company can purchase, for investment purposes, mortgages secured by New York real estate without incurring franchise tax liability under Article 33 of the Tax Law. In addition, pursuant to section 209.4 of the Tax Law, the Company would not be subject to the franchise tax under Article 9-A of the Tax Law because it is an insurance corporation subject to the franchise taxes under Article 33 of the Tax Law. As a result of the determination in Issue 1, Issue 2 is moot.

DATED: September 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.