When a mortgage banking company packages New York mortgage loans into FNMA/GNMA certificates and sells them, how much of its origination fees, servicing fees, sale gains, and interest income counts as New York business receipts for the corporate franchise tax?

Plain-English summary

The Lomas & Nettleton Company, a Connecticut mortgage banker with a New York office, originated mortgages secured by New York real estate, then packaged them (along with out-of-state loans) into FNMA and GNMA certificates and sold the certificates through New York brokers -- with most of the sale negotiation happening out of state but delivery and payment occurring in New York through a NY bank acting as agent. The Department addressed how four income streams (origination fees, servicing fees, certificate-sale gains, and interest on retained loans) factor into the numerator of Lomas & Nettleton's New York business allocation percentage under Article 9-A.

Two clean rules emerged: (1) for the certificate sales, only the gain, not the gross sale proceeds, counts as a "business receipt" at all, because business receipts means gross income and only the profit portion is income; and (2) for every category of income here, the New York-sourced share turns on where the underlying work was actually performed -- origination, negotiation, approval, and servicing activity -- not on where documents were signed or money changed hands. Where that work happened both in and out of New York, the Department would not do the math itself: it called that "a question of fact... not susceptible of determination in an Advisory Opinion," leaving the taxpayer to apply the cost-of-performance guidance to its own records.

What this means for you

Mortgage bankers and other secondary-market originators

If you originate loans in New York but sell them (directly or packaged into agency certificates) with much of the deal work done elsewhere, don't assume the full transaction value is New York business receipts. Gains, not gross proceeds, are what counts on a certificate or loan sale, and the New York share of any income stream is proportional to the New York share of the actual work -- solicitation, negotiation, approval, servicing -- not where a check clears.

Accountants and tax professionals

This opinion is one link in a chain of Department guidance (CIT Financial 1983, Walter E. Heller 1980, GEF Funding 1988) applying a cost-of-performance test to receipts-factor sourcing for finance companies, all under Tax Law § 210.3(a)(2)(D)'s "other business receipts" catch-all and Regulations § 4-4.1/4-4.3. Because the Department will not quantify a taxpayer's specific facts in an advisory opinion, expect any real-world sourcing dispute in this area to be an audit-level fact fight, not something a ruling will settle for you.

Common questions

Q: Is the full sale price of an FNMA or GNMA certificate a New York business receipt?
A: No. Only the gain realized on the sale is included in gross income, and only that gain (not the gross proceeds) goes into the receipts factor.

Q: How do I know what portion of my origination fees, servicing fees, or interest income is "earned" in New York?
A: Look at where the labor of establishing and servicing the loan was actually performed -- solicitation, investigation, negotiation, approval, and administration -- in both New York and elsewhere. If that work happened in more than one state at more than a minimal level, the income is "earned" in both, and you must allocate based on the facts of each transaction.

Q: Can I rely on this opinion for my own company's receipts-factor sourcing?
A: No. It binds the Department only for Lomas & Nettleton on these specific facts, and even here the Department declined to fix an exact allocation percentage, leaving that to the facts of each loan or certificate sale.

Citations and references

Statutes and regulations:

• Tax Law § 210.3(a)(2)(D) (other business receipts earned within the state)
• Business Corporation Franchise Tax Regulations §§ 4-4.1, 4-4.3, 4-4.6, 4-2.2(c)
• TSB-A-83(7)C, CIT Financial Corporation (Mar. 8, 1983)
• TSB-H-80(29)C, Walter E. Heller & Co. (Sept. 19, 1980)
• TSB-A-88(2)C, GEF Funding Corp. (Jan. 26, 1988)

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_21c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88 (21)C
Corporation Tax
September 29, 1988

STATE OF NEW YORK
C0MMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C880718A

On July 18, 1988, a Petition for Advisory Opinion was received from The Lomas & Nettleton
Company, 2001 Bryan Tower, Dallas, Texas 75265.
The issue raised is the treatment of mortgage loan origination and resale activities under
Article 9-A of the Tax Law. Specifically, the questions are:
(1)
Assuming that Petitioner is subject to tax under Article 9-A of the Tax Law, would
the sales of FNMA and GNMA certificates ("Sales") be considered to be New York business
receipts?
(2)
Assuming that Petitioner is subject to tax under Article 9-A of the Tax Law, would
the receipts from the Sales be considered "New York State business receipts"
for purposes of
determining Petitioner's business allocation percentage?
(3)
Would the gross proceeds or only the net gain, if any, realized upon the Sales be
included in the computation of Petitioner's "business receipts?"
(4)
If the gross proceeds realized upon the Sales are included in the computation of
Petitioner's business receipts, would the Tax Commission, in the circumstances described above and
pursuant to Regulation Section 4-2.2(c), adjust Petitioner's business allocation percentage to more
properly reflect Petitioner's New York activity and income?
(5)
Would the income from origination fees, servicing fees and interest on retained loans
and certificates be considered "New York State business receipts" for purposes of determining
Petitioner's business allocation percentage?
Facts
Petitioner, incorporated in Connecticut, conducts a mortgage banking business and maintains
an office and employees in New York through which Petitioner originates mortgage loans secured
by New York real property. To avoid the financial risks associated with a substantial investment in
mortgage loans, Petitioner packages the loans together with non-New York mortgage loans and
exchanges them for certificates issued by the Federal National Mortgage Association ("FNMA")or
the Government National Mortgage Association ("GNMA"). An out-of-state office of Petitioner then
sells the FNMA and GNMA certificates through New York brokers. Substantially all steps in the
FNMA and GNMA sale negotiation process (which consists primarily of telephone negotiations)
occur outside of New York. However, a New York bank, acting as agent for Petitioner, delivers the

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certificates to the buyers and receives payment for the certificates in New York. An out-of-state
office of Petitioner services the loans from outside New York. (Servicing requires no New York
activities except in the occasional case of foreclosure.)
Petitioner's income consists of origination fees paid by mortgagors, servicing fees in the form
of retained portions of cash flow of mortgage loans, gain realized on the sale of the FNMA and
GNMA certificates, and interest on retained loans and certificates. (For federal income tax purposes,
income is not realized on the exchange of loans for FNMA and GNMA certificates. Rev. Rul. 70544,
1970-2 C.B. 6; Rev. Rul. 70-545, 1970-2 C.B. 7; Rev. Rul. 84-10 1984-1 C.B. 155.) Servicing
activities are performed predominately in Texas as determined on a cost of performance basis. The
gross proceeds from the sales of certificates greatly exceeds the profit, if any, realized on such sales.
For example, the sale of a $50,000,000 GNMA certificate typically would generate a profit of
$50,000 to $100,000. In some cases, losses are incurred on the sale of certificates. Accordingly, if
such gross proceeds were included in the computation of Petitioner's "business receipts," as that term
is used in sections 4-4.1 and 4-4.6 of the Business Corporation Franchise Tax Regulations
(hereinafter "Article 9-A regulations"), Petitioner's New York business receipts factor could be
distorted and disproportionate in size to its payroll and property factors.
Discussion
The conducting of a mortgage banking business and the maintenance of an office in New
York State would make Petitioner subject to the franchise tax under Article 9-A of the Tax Law.
Section 210.1 of the Tax Law provides that, except in the case of a small business taxpayer,
the tax imposed by section 209.1 of the Tax Law is the sum of the highest of the amounts prescribed
by the entire net income base, the capital base, the minimum taxable income base and the fixed
dollar minimum, plus the amount prescribed by the subsidiary capital base.
When computing the entire net income base, a taxpayer must determine the portion of entire
net income to be allocated within New York State. Generally, business income is allocated by the
business allocation percentage as provided in section 210.3(a) of the Tax Law. Subpart 4-4 of the
Article 9-A regulations provides the rules for determining the receipts factor of such percentage.
Section 4-4.1 of the Article 9-A regulations provides that the term business receipts means
gross income received in the regular course of the taxpayer's business, provided such receipts are
includible in the computation of the taxpayer's entire net income for the taxable year. All business
receipts for the period covered by the report must be taken into account.

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Section 210.3(a)(2)(D) of the Tax Law provides that the numerator of the receipts factor
includes "other business receipts" (e.g., other than from sales of tangible personal property, the
performance of services, and from rents and royalties) "earned within the state." The income here
in question (origination fees, servicing fees, gain realized on the sale of FNMA and GNMA
certificates and interest on retained loans and certificates) falls within the category of "other business
receipts."
In CIT Financial Corporation, State Tax Commission Advisory Opinion, March 8, 1983,
TSB-A-83(7)C, it was determined that the precise portion of interest income from a loan that is to
be included in the numerator of the receipts factor is a question of fact not susceptible of
determination in an Advisory Opinion. An Advisory Opinion merely sets forth the applicability of
pertinent statutory and regulatory provisions to "a specified set of facts." Tax Law, § 171, subd.
twenty- fourth; 20 NYCRR 901.1(a). However, the opinion does give guidance in making such
determination by stating that where the labor needed to establish and maintain (make and service)
a loan is performed at more than a minimal level, in both New York and another state, the interest
income derived from such loan is "earned within" both New York and such other state. To determine
what portion of the income is attributable to New York, consideration should be given to such
activities as solicitation, investigation, negotiation, approval and administration. The activity of loan
approval can be of negligible import; as where it is merely pro forma, or of the highest importance,
depending upon the circumstances of any given loan transaction. As stated in Walter E. Heller &
Co., Decision of the State Tax Commission, September 19, 1980, TSB-H-80(29)C, "[i]t is the situs
where...the financing...[is] performed which is determinative of whether the receipts are includible
in the numerator of the receipts factor .... "
Accordingly, where the activities conducted in connection with a loan transaction were
performed both within and without New York State, the portion of the interest income and the loan
origination fees attributable to such loan that is to be included in the numerator of the receipts factor
is a matter of fact and is determined by applying the above guidelines to the circumstances of the
particular loan. See GEF Funding Corp., Commissioner of Taxation and Finance Advisory Opinion,
January 26, 1988, TSB-A-88(2)C.
Section 4-4.1 of the Article 9-A regulations provides that business receipts means gross
income. With regard to the sale of a FNMA or GNMA certificate, only the gain on such sale is
included within gross income. Accordingly, only the gain on such sale is included in the receipts
factor.
In determining when the gain on the sale of a FNMA or GNMA certificate should be
included in the numerator of the receipts factor, the rationale of CIT Financial and Walter E. Heller
should be followed. That is, when activities attributable to the sale of the certificate are performed
in New York State. Again, this is a question of fact and the precise portion of the gain to be included

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in the numerator of the receipts factor is not susceptible of determination in an Advisory Opinion.
It must be determined based on the circumstances of sale of the particular certificate. See GEF
Funding Corp., infra.
The servicing fees received from contractual agreements to service loans or securities that
have been sold (i.e. FNMA and GNMA certificates) should be allocated to New York State and
included in the numerator of the receipts factor if the services were performed in New York State,
pursuant to section 4-4.3 of the Article 9-A regulations.

DATED: September 29, 1988

FRANK J. PUCCIA
Director
Technical Services Bureau

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