Is J.P. Morgan's proposed new New York investment subsidiary -- formed under the federal Bank Holding Company Act's section 4(c)(7) to make leveraged-buyout and venture-capital securities investments -- taxed as an Article 32 banking corporation, or under general Article 9-A?

Plain-English summary

J.P. Morgan & Co. Incorporated ("JPM") owns 100% of Morgan Guaranty Trust Company of New York ("MGT"), and JPM, MGT, and affiliates file combined New York franchise tax returns under Article 32. JPM planned to form an indirectly wholly-owned New York subsidiary ("Newco"), chartered under section 4(c)(7) of the Bank Holding Company Act, with its own independent officers and employees (none shared with JPM or MGT). Newco's sole business would be investing as principal in securities: equity stakes in companies acquired through leveraged buyouts (with MGT itself acting as lender to those same acquired companies) and venture-capital investments -- never more than 5% of any single company's voting shares, matching the federal exemption's limit.

The Department applied the same two-part test as its companion Chase Manhattan ruling issued the same year (TSB-A-91(6)C). Under Tax Law section 1452(a)(9), Newco becomes an Article 32 "banking corporation" if (1) JPM owns or controls 65% or more of Newco's voting stock (assumed satisfied here), and (2) Newco is "principally engaged" -- deriving more than 50% of its gross receipts -- in a business that could lawfully be conducted by a state-chartered bank, a national bank, or a business closely related to banking, per Regulations section 16-2.5(j). The Department emphasized that Newco's section 4(c)(7) charter and its broad authorized powers are immaterial; only the business it actually conducts, measured at year end, controls. If Newco clears the 50% threshold, it's taxed under Article 32; if not, it defaults to Article 9-A. Because that facts-at-year-end determination can't be made in advance, the Department could only lay out the framework, not a definitive answer.

What this means for you

Bank holding companies structuring securities-investment subsidiaries in New York

Choosing a federal Bank Holding Company Act exemption (like section 4(c)(7)) for regulatory purposes doesn't dictate your subsidiary's New York tax article. Plan to track and document the actual character of the subsidiary's gross receipts each year -- the Article 32 vs. Article 9-A line is drawn by what percentage of receipts trace to banking-related business, not by the entity's charter or stated powers.

Accountants and tax professionals structuring leveraged-buyout or venture-capital investment vehicles for bank affiliates

Watch related-party transactions carefully: here, the parent bank (MGT) both lent to the buyout targets and sold securities to the new subsidiary at fair value. If the subsidiary ends up under Article 9-A instead of Article 32, Tax Law section 1462(g) still gives the Commissioner discretion to adjust for any arrangement that inaccurately reflects the New York activity, business, income, or assets of JPM or MGT.

This ruling travels with its companion opinion

The Department cited the identical legal framework the same year in TSB-A-91(6)C for Chase Manhattan Bank's nearly identical proposed 4(c)(7) subsidiary -- read them together for a fuller picture of how the "principally engaged" test is meant to apply to bank-affiliate investment vehicles.

Common questions

Q: Does forming an investment subsidiary under Bank Holding Company Act section 4(c)(7) automatically make it subject to Article 32?
A: No. The charter type and authorized business are immaterial; classification depends on the subsidiary's actual gross receipts from banking-related business at year end, combined with the 65%-or-more ownership test.

Q: Can a bank holding company get certainty in advance about which article will apply to a not-yet-operating subsidiary?
A: Not through an advisory opinion -- the "principally engaged" determination is inherently a factual test that can only be applied once actual year-end receipts are known.

Q: Does the parent bank lending to companies the subsidiary also invests in create a problem?
A: The ruling didn't flag it as disqualifying, but noted the Commissioner retains discretion under section 1462(g) to adjust for related-party arrangements that distort the parent's or bank's reflected New York tax liability.

Citations and references

Statutes and regulations:

• Tax Law section 209.1, 209.4 (Article 9-A tax; exclusion for Article 32 taxpayers)
• Tax Law section 1451 (Article 32 franchise tax on banking corporations)
• Tax Law section 1452(a)(9) (banking corporation definition: 65%+ ownership plus "principally engaged" test)
• Tax Law section 1462(g) (Commissioner's discretion to adjust intercompany distortion)
• Franchise Tax on Banking Corporations Regulations section 16-2.5(j)(1)(ii), (j)(4) ("business which might be lawfully conducted"; "principally engaged in a business")
• 12 U.S.C. section 1843(c)(7) (Bank Holding Company Act section 4(c)(7) investment-company exemption)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1991.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a91_4c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-91(4)C
Corporation Tax
January 31, 1991

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C900911B

On September 11, 1990, a Petition for Advisory Opinion was received from J.P. Morgan &
Co. Incorporated, 60 Wall Street, New York, New York 10015.
The issued raised by Petitioner, J.P. Morgan & Co. Incorporated ("JPM") is whether its
indirectly wholly-owned subsidiary organized pursuant to section 4(c)(7) of the Bank Holding
Company Act of 1956, as amended (the "Act"), is subject to New York State franchise tax under
Article 32 of the Tax Law where the subsidiary's sole business will be investing in securities.
JPM is a corporation organized under the Act. JPM owns 100 percent of the outstanding
stock of Morgan Guaranty Trust Company of New York ("MGT"). JPM, MGT and certain affiliated
corporations file combined returns under Article 32 of the Tax Law.
JPM intends to form an indirectly wholly-owned subsidiary ("Newco") which will be
incorporated in either New York or Delaware and which will have its only office and place of
business in New York. None of Newco's officers or employees will be officers or employees of JPM
or MGT.
Newco's sole business will be investing in securities. All decisions regarding the making and
disposition of investments will be made by the officers and employees of Newco independently. A
portion of the securities held by Newco will be equity investments in corporations acquired in
leveraged buy-out transactions. MGT will act as a lender to the acquired corporations in these
transactions. The remaining securities held by Newco will constitute venture capital investments.
The securities held by Newco will not include more than five percent of the outstanding voting
shares of any corporation.
Subject to certain exceptions, section 4(a) of the Act prohibits a bank holding company from
holding the shares of any corporation that is not a bank. Section 4(c)(7) of the Act provides an
exemption for "shares of an investment company which is not a bank holding company and which
is not engaged in any business other than investing in securities, which securities do not include
more than 5 percent of the outstanding shares of any company." (12 U.S.C. 1843(c)(7).) Pursuant
to this exception, JPM will not be prohibited from owning the stock of Newco. No regulatory
approval is necessary to claim this exception nor will any such approval be sought by JPM or
Newco.
Section 209.1 of Article 9-A of the Tax Law imposes an annual franchise tax on domestic
or foreign corporations for the privilege of exercising a corporate franchise, doing business,
employing capital, owning or leasing property in a corporate or organized capacity, or maintaining
an office, in New York State during the taxable year. Section 209.4 of the Tax Law, provides that
corporations liable to tax under Article 32 of the Tax Law are not subject to tax under Article 9-A.
TP-9 (9/88)

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TSB-A-91(4)C
Corporation Tax
January 31, 1991
Section 1451 of Article 32 of the Tax Law imposes an annual franchise tax on every banking
corporation for the privilege of exercising its franchise or doing business in New York State in a
corporate or organized capacity during the taxable year.
Section 1452(a) of the Tax Law defines “banking corporation” for purposes of Article 32 of
the Tax Law. Section 1452(a)(9) of the. Tax. Law provides that a corporation 65 percent or more
of whose voting stock is owned or controlled directly or indirectly by a corporation registered under
the Act is a banking corporation provided that the corporation whose voting stock is so owned or
controlled is principally engaged in a business, regardless of where conducted, which (i) might be
lawfully conducted by a corporation subject to Article 3 of the Banking Law or by a national banking
association or (ii) is so closely related to banking or managing or controlling banks as to be a proper
incident thereto, as set forth in section 4(c)(8) of the Act.
Herein, Newco will be indirectly wholly owned by JPM, a corporation registered under the
Act thereby meeting the "ownership" requirement contained in section 1452(a)(9) of the Tax Law.
Therefore, when determining whether Newco is a banking corporation the question remaining is
whether Newco will meet the "principally engaged in a business" requirement.
Section 16-2.5(j)(1)(ii) of the Franchise Tax on Banking Corporations Regulations provides
that
. . .the phrase business which might be lawfully conducted means the nature of
business, regardless of where such business is conducted, that a corporation
organized pursuant to article 3 of the New York State Banking Law or a national
banking association having its principal office in New York State may conduct:
(a)

without the need for a specific grant of authorization by the appropriate
regulatory authorities; or

(b)

with a specific grant of authorization if such corporation or association has
in fact received such authorization from the appropriate regulatory authority.

Section 16-2.5(j)(4)

of the Franchise Tax on Banking Corporations Regulations provides

that:
. . .the phrase principally engaged in a business means that a corporation derives
more than 50 percent of its gross receipts from such business during its taxable year
for Federal income tax purposes. Gross receipts from various aspects of a
corporation's business may be aggregated to determine what business the corporation
is principally engaged in. For example, corporation P derives 40 percent of its gross
receipts from a business which might be lawfully conducted by a corporation subject
to article 3 of the New York State Banking Law, 40 percent of its gross receipts from
a business which is so closely related to banking or managing or controlling banks
as to be a proper incident thereto, and 20 percent of its gross receipts from a business
which may not be lawfully conducted by a corporation subject to article

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TSB-A-91(4)C
Corporation Tax
January 31, 1991
3 of the New York State Banking Law and is not so closely related to banking or
managing or controlling banks as to be a proper incident thereto. Since corporation
P derives more than 50 percent of its total gross receipts from a business which might
be lawfully conducted by a corporation subject to article 3 of the New York State
Banking Law or is so closely related to banking or managing or controlling banks as
to be a proper incident thereto, the "principally engaged in a business" requirement
. . . is met.
Accordingly, it is immaterial that Newco will be organized under section 4(c)(7) of the Act
and it is immaterial what business Newco is authorized to do. Newco's actual business activities
must be analyzed at the end of the taxable year to determine if Newco meets the "principally engaged
in a business" requirement of section 1452(a)(9) of the Tax Law. When analyzing Newco's business
activities for the taxable year, it must be determined whether Newco's business of investing for its
own account in securities that constitute equity investments in corporations acquired in leveraged
buy-out transactions or venture capital investments constitute (1) a business which might be lawfully
conducted by a corporation subject to Article 3 of the Banking Law, (2) a business which might be
lawfully conducted by a national banking association or (3) a business which is so closely related
to banking or managing or controlling banks as to be a proper incident thereto, as set forth in section
4(c)(8) of the Act. In addition, any other business activity that Newco engages in during the taxable
year must be analyzed.
If more than 50 percent, in the aggregate, of Newco's gross receipts for the taxable year are
from (1) a business which might be lawfully conducted by a corporation subject to Article 3 of the
Banking Law, (2) a business which might be lawfully conducted by a national banking association
and (3) a business which is so closely related to banking or managing or controlling banks as to be
a proper incident thereto, as set forth in section 4(c)(8) of the Act, Newco will meet the "principally
engaged in a business" requirement of section 1452(a)(9) of the Tax Law for the taxable year. If
Newco meets the "principally engaged in a business" requirement, Newco will be subject to tax
under Article 32 of the Tax Law.
If, in the aggregate, 50 percent or less of Newco's gross receipts for the taxable year are from
(1) a business which might be lawfully conducted by a corporation subject to Article 3 of the
Banking Law, (2) a business which might be lawfully conducted by a national banking association
or (3) a business which is so closely related to banking or managing or controlling banks as to be a
proper incident thereto, as set forth in section 4(c)(8) of the Act, Newco will not meet the
"principally engaged in a business" requirement of section 1452(a)(9) of the Tax Law for the taxable
year. If Newco does not meet the "principally engaged in a business" requirement, Newco will be
subject to tax under Article 9-A of the Tax Law.
The determination of whether Newco will meet the requirements of section 1452(a)(9) of the
Tax Law is a factual matter not susceptible of determination within the context of 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). Assuming Newco will meet the "ownership" requirement, the determination of

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January 31, 1991
whether Newco will be a banking corporation pursuant to such section 1452(a)(9) of the Tax Law
must be made at the end of its taxable year and based on what business Newco is principally engaged
in during such taxable year.
It should be noted, that if it is determined that Newco is taxable under Article 9-A of the Tax
Law and if any agreement, understanding or arrangement exists between JPM or MGT and Newco,
whereby it appears to the Commissioner that the activity, business, income or assets of JPM or MGT
within New York State is improperly or inaccurately reflected, the Commissioner may exercise his
discretion, pursuant to section 1462(g) of the Tax Law, by making adjustments he deems necessary
in order to accurately reflect the tax liability of JPM or MGT.

DATED: January 31, 1991

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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