Is a proposed New York investment subsidiary of Chase Manhattan Corporation -- organized under the federal Bank Holding Company Act's section 4(c)(7) to invest in equity and debt securities for its own account -- taxed as a banking corporation under Article 32, or under the general Article 9-A franchise tax?

Plain-English summary

Chase Manhattan Corporation ("CMC"), a national bank holding company and parent of The Chase Manhattan Bank, N.A. ("CMB"), proposed forming a New York investment company (the "Company") under section 4(c)(7) of the federal Bank Holding Company Act. Section 4(c)(7) lets a bank holding company own an investment company that invests as principal in securities, as long as it never holds more than 5% of any one issuer's voting shares -- no regulatory pre-approval needed. The Company's mandate was broad: junk bonds, equity/debt securities with "equity kickers" (stock, warrants, options), leveraged-buyout and venture-capital fund investments, and securities purchased directly from CMB (at fair market value, with CMB shedding risk of loss) because bank regulatory rules limit how long CMB itself can hold such positions.

The question was which franchise tax article applies. Article 9-A generally taxes corporations doing business in New York, but Tax Law section 209.4 excludes corporations already taxed under Article 32 (the banking-corporation tax). Under section 1452(a)(9), a corporation becomes an Article 32 "banking corporation" if (1) 65% or more of its voting stock is owned/controlled by a bank-holding-company parent like CMC, and (2) it's "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. Critically, the Department held that the Company's section 4(c)(7) charter type is irrelevant to this test; what matters is the actual business the Company conducts, measured by gross receipts at the end of each taxable year -- not what it's merely authorized to do. That determination can't be made in advance in an advisory opinion since it depends on facts not yet in existence. The Department expressly pointed to its same-year TSB-A-91(4)C ruling for J.P. Morgan & Co. -- a nearly identical proposed 4(c)(7) investment subsidiary -- as setting out the same analysis.

What this means for you

Bank holding companies forming securities-investment subsidiaries

Don't assume your subsidiary's federal Bank Holding Company Act charter type (like section 4(c)(7)) determines its New York tax treatment. Article 32 vs. Article 9-A turns on a year-end factual test: whether more than 50% of the subsidiary's actual gross receipts come from banking-related business. Track and be ready to substantiate the character of the subsidiary's income annually.

Accountants and tax professionals

The "principally engaged" test aggregates gross receipts across all qualifying banking-related activities (bank-law-permissible business, national-bank-permissible business, and closely-related-to-banking business) -- they don't have to come from a single category, as the regulation's worked example illustrates. If the 65% ownership threshold is met but the 50% receipts threshold is not, the entity defaults to Article 9-A instead.

Watch the intercompany-pricing caveat

If the subsidiary ends up taxed under Article 9-A rather than Article 32, and any arrangement with the parent bank or holding company causes New York activity, income, or assets to be inaccurately reflected, the Commissioner can adjust the numbers under Tax Law section 1462(g) to prevent distortion.

Common questions

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

Q: Can the Department pre-clear which article will apply before the tax year ends?
A: No. This is a fact question that can't be resolved in an advisory opinion -- it can only be determined once the subsidiary's actual business activity for the year is known.

Q: Is this ruling the same as the J.P. Morgan ruling issued that year?
A: It applies the identical legal framework to a similar 4(c)(7) subsidiary structure -- see the companion opinion TSB-A-91(4)C -- but each is a separate advisory opinion binding only the taxpayer to whom it was issued.

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)

Prior opinions cited:

• J.P. Morgan & Co. Incorporated, Adv Op, Comm T&F, January 31, 1991, TSB-A-91(4)C

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_6c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-91(6)C
Corporation Tax
March 7, 1991

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.C900829A

On August 29, 1990, a Petition for Advisory Opinion was received from The Chase
Manhattan Bank, N.A., c/o Tax Department, 33 Maiden Lane, 20th Floor, New York, New York
10038.
The issue raised by Petitioner, Chase Manhattan Bank, N.A., is whether a New York
subsidiary of a national bank holding company, established 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
as a banking corporation under Article 32 where such subsidiary invests for its own account in a
variety of equity and debt securities.
Chase Manhattan Corporation ("CMC"), a national bank holding company, is the parent
company of Petitioner, The Chase Manhattan Bank, N.A. ("CMB") and a group of banking
corporations filing combined New York State Franchise Tax returns under Article 32 of the Tax law.
CMC proposes to locate in New York an investment company (the "Company"), organized pursuant
to section 4(c)(7) of the Act, to engage in the sole business of purchasing a variety of equity and debt
securities as principal for its own investment account. The Company's corporate charter authorizes
broad investment powers with respect to the purchase and sale of securities of a number of different
issuers, including banks and insurance companies, of which some may be considered to be
predominately speculative and high risk investments. The Company may acquire these securities
either directly (i.e., by direct purchase or by investing in certain leverage buy-out and venture capital
funds), or from CMB. Any purchase of securities from CMB will be for, and recorded at, fair market
value pursuant to section 23B of the Federal Reserve Act with any gain being recognized and any
risk of loss transferred to, and assumed by the Company.
Among the types of securities which may be purchased are junk bonds and equity and debt
securities that include equity kickers such as stock, warrants, options, or additional cash proceeds.
These securities may or may not be in registered form or traded on an established securities
exchange. It is also contemplated that the Company will, from time to time, purchase preferred stock
and/or warrants from CMB which it had received in connection with various lending transactions.
CMB will sell such securities because of certain regulatory restrictions, such as limitations on the
time period which a bank may own securities, and prohibitions on the exercise of stock warrants
received in lieu of interest or as additional consideration.
As part of the Company's investment strategies it may acquire securities of low credit grade
or quality such as those issued as part of bankruptcy or workout restructurings.
Pursuant to section 4(c)(7) of the Act, a bank holding company may own "shares of an
investment company which is not a banking holding company and which is not engaged
TP-9 (9/88)

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TSB-A-91(6)C
Corporation Tax
March 7, 1991
in any business other than investing in securities, which securities do not include more than 5 per
centum of the outstanding voting shares of any company" (a "4(c)(7) Investment Company"). The
Act does not require bank holding companies to obtain the prior approval of the Board of Governors
of the Federal Reserve System ("Federal Reserve Board") to establish and acquire a 4(c)(7)
Investment Company.
Under the terms of section 4(c)(7) of the Act, there are no limits on the dollar value of the
securities which may be acquired by a 4(c)(7) Investment Company. Furthermore, there are no limits
on the type of securities which may be acquired; they include, for example:
-

equity and debt securities,
both registered securities which are traded on a securities exchange, and registered
and unregistered securities which are not traded on a securities exchange, and
debt securities having restrictions on their transferability or having a very "thin"
market.

A 4(c)(7) Investment Company is limited to owning five percent of any class of the voting
shares of any one issuer. There are no statutory limits on the amount of nonvoting shares or debt
securities that may be acquired by such a company. However, while there are examples to the
contrary, the Federal Reserve Board has stated that an acquisition of more than 25 percent of the
"total equity" of a company will generally not be permitted.
In summary, Petitioner states that a 4(c)(7) Investment Company has very broad investment
powers regarding the purchase of securities as principal for its own account, whereas a national bank
is generally prohibited from such investment activities.
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 fanchise, 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.
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

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TSB-A-91(6)C
Corporation Tax
March 7, 1991
to be a proper incident thereto, as set forth in section 4(c)(8) of the Act.
Herein, the Company will be a banking corporation if 65 percent or more of the Company's
voting stock is owned or controlled directly or indirectly by CMC and the Company is principally
engaged in a business which (i) might be lawfully conducted by a corporation organized pursuant
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.
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 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 the Company is organized under section 4(c)(7) of the Act
and it is immaterial what business the Company is authorized to do.

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TSB-A-91(6)C
Corporation Tax
March 7, 1991
The Company's actual business activities must be analyzed at the end of the taxable year to
determine if the Company meets the "principally engaged in a business" requirement of section
1452(a)(9) of the Tax Law. When analyzing the Company's business activities for the taxable year,
it must be determined whether Company's business of investing for its own account in equity and
debt securities 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 Company engages in during the taxable year must be
analyzed. See, J.P. Morgan & Co. Incorporated, Adv Op, Comm T&F, January 31, 1991, TSB-A­
91(4)C.
If more than 50 percent, in the aggregate, of the Company'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, the Company will
meet the "principally engaged in a business" requirement of section 1452(a)(9) of the Tax Law for
the taxable year. If the Company is 65 percent or more owned or controlled directly or indirectly by
CMC and if the Company meets the "principally engaged in a business" requirement, the Company
will be a banking corporation pursuant to section 1452(a)(9) of the Tax Law and will be subject to
tax under Article 32 of the Tax Law.
If, in the aggregate, 50 percent or less of Company'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, Company will not meet, the
"principally engaged in a business" requirement of section 1452(a)(9) of the Tax Law for the taxable
year. If Company does not meet the "principally engaged in a business" requirement, Company will
be subject to tax under Article 9-A of the Tax Law.
The determination of whether the Company 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 CMC will own or control directly or indirectly 65 percent or more of the
Company's voting stock, the determination of whether the Company 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
will be based on what business the Company is principally engaged in during such taxable year.
It should be noted, that if it is determined that the Company is taxable under Article 9-A of
the Tax Law and if any agreement, understanding or arrangement exists between CMC or CMB and
the Company, whereby it appears to the Commissioner that the activity, business, income or assets

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TSB-A-91(6)C
Corporation Tax
March 7, 1991
of CMC or CMB 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 CMC or CMB.

DATED: March 7, 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.