NY TSB-A-92(17)C Corporation Tax 1992-12-16

Is a bank holding company subsidiary a banking corporation taxable under Article 32, or is it taxed under Article 9-A?

Short answer: Not necessarily a banking corporation. A corporation 65 percent or more owned or controlled by a bank holding company is a 'banking corporation' subject to Article 32 only if it is also principally engaged -- deriving more than half of its gross receipts -- in a business that a bank or national banking association may lawfully conduct, or one so closely related to banking as to be a proper incident. Here the subsidiary's equity investments exceeded the limits a bank may hold under Banking Law section 97.4-b, and it was not principally engaged in a bank-permissible business. So it is not a banking corporation under Tax Law section 1452(a)(9), is not subject to Article 32, and is instead taxed under Article 9-A.

Disclaimer: This is an official New York State Department of Taxation and Finance Advisory Opinion (TSB-A), issued by the Office of Counsel at a taxpayer's request. It is limited to the facts set forth in it and binds the Department only with respect to the petitioner to whom it was issued, and only if that petitioner fully and accurately described all relevant facts; another taxpayer cannot rely on it. It reflects the law, regulations, and Department policy in effect when issued and may since have changed. Taxpayer-identifying details are redacted. New York State and local sales taxes are administered centrally by the Department. This summary is informational only and is not legal or tax advice. Consult a licensed New York tax professional about your specific situation.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked at the bottom of this page, or PDF in the sidebar) is the authoritative source for any reliance.

View original ruling (PDF)

Plain-English summary

J.P. Morgan & Co. asked about the taxation of JPMCC, an indirectly wholly owned subsidiary organized under section 4(c)(7) of the Bank Holding Company Act: is it a "banking corporation" subject to Article 32 (the bank franchise tax), or is it taxed under Article 9-A?

It is not a banking corporation -- so Article 9-A applies. Under Tax Law section 1452(a)(9), a corporation 65 percent or more owned or controlled by a bank holding company is a banking corporation only if it is also "principally engaged" in a business that a bank or national banking association may lawfully conduct, or one so closely related to banking as to be a proper incident. "Principally engaged" means the corporation derives more than half of its gross receipts from such a business (20 NYCRR 16-2.5(j)(4)).

Here, JPMCC's equity investments exceeded the limits a bank may hold under Banking Law section 97.4-b, and it was not principally engaged in a business a national banking association may lawfully conduct (nor one so closely related to banking as to be a proper incident under section 4(c)(8) of the Bank Holding Company Act). Because it fails the "principally engaged" test, JPMCC is not a banking corporation under section 1452(a)(9), is not subject to Article 32, and is taxed under Article 9-A. (The petitioner's remaining questions about the gross-receipts test were therefore moot.)

This is the rule the later Bankers Trust / BTIP opinion, TSB-A-94(11)C, applies to reach the same result for a securities subsidiary.

What this means for you

Being owned by a bank holding company is not enough

A 65-percent-owned subsidiary is a banking corporation only if it is also principally engaged in a business a bank may lawfully conduct.

"Principally engaged" is a gross-receipts test

It means more than half of gross receipts from a bank-permissible business; a subsidiary that mainly does something else is not a banking corporation.

Exceeding a bank's investment limits points away from Article 32

Holding equity investments beyond what Banking Law section 97.4-b allows a bank shows the business is not bank-permissible, so the subsidiary is taxed under Article 9-A.

Common questions

Q: Is our bank holding company subsidiary automatically a banking corporation?
A: No. It is a banking corporation under section 1452(a)(9) only if it is also principally engaged in a business a bank or national banking association may lawfully conduct.

Q: What does "principally engaged" mean?
A: Deriving more than half of gross receipts from a bank-permissible business.

Q: If it fails that test, what tax applies?
A: Article 9-A, the general business corporation franchise tax -- not the Article 32 bank franchise tax.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 1452(a)(9) (banking corporation; subsidiary of a bank holding company principally engaged in a bank-permissible business)
- 20 NYCRR 16-2.5(j)(4) (principally engaged means deriving more than half of gross receipts)
- Banking Law section 97.4-b (limits on a bank's equity investments)
- Bank Holding Company Act of 1956 sections 4(c)(7) and 4(c)(8)

Source

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-92 (17) C
Corporation Tax
December 16, 1992

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C920318B

On March 18, 1992, a Petition for Advisory Opinion was received from J.P. Morgan & Co.
Incorporated, 60 Wall Street, New York, New York 10260.
The issue raised by Petitioner, J.P. Morgan & Co. Incorporated ("JPM"), relates to an
Advisory Opinion issued to Petitioner on January 31, 1991 (J.P. Morgan & Co. Incorporated, Adv
Op Comm T&F, January 31, 1991, TSB-A-91(4)C) regarding the taxation of Newco, and questions
as to whether certain activities are included in the gross receipts test for purposes of determining
whether Newco, an indirectly wholly-owned subsidiary of Petitioner, organized pursuant to section
4(c)(7) of the Bank Holding Company Act of 1956, as amended, is subject to the franchise tax under
Article 32 of the Tax Law.
Specifically, for purposes of the gross receipts test pursuant to section 16-2.5(j)(4) of the
Franchise Tax on Banking Corporations Regulations (hereinafter "Regulations"), is the "business
which might be lawfully conducted" limited to those activities that Morgan Guaranty Trust Company
of New York ("MGT") is permitted to lawfully conduct as a state member bank of the Federal
Reserve System subject to the Glass-Steagall Act of 1933. Also, for purposes of the gross receipts
test, does gross receipts include all income and when computing gains net of losses, may net losses
from a business that may not be lawfully conducted by a banking corporation offset net gains arising
from a business that may be lawfully conducted and vice versa.
The previously issued Advisory Opinion holds that Newco, an indirectly wholly-owned
subsidiary of JPM will be subject to the franchise tax on banking corporations if it is principally
engaged in a business 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 Bank Holding Company Act of 1956, as amended. The Advisory Opinion also holds that Newco
will be principally engaged in a banking business if more than 50 percent in the aggregate, of
Newco's gross receipts for the taxable year are from a business described in either ii) or (ii) above.
JPM is a corporation organized under the Bank Holding Company Act. JPM owns 100
percent of the outstanding stock of MGT. MGT is a New York State chartered bank that is a
member of the Federal Reserve System (state member bank). JPM, MGT and certain affiliated
corporations file combined returns under Article 32 of the Tax Law.
On March 28, 1991, JPM formed the corporation, referred to as Newco in the previously
issued Advisory Opinion, as an indirectly wholly-owned subsidiary named, J.P. Morgan Capital
Corporation ("JPMCC"). JPMCC is incorporated in Delaware and has its only office and place of
business in New York. None of JPMCC's officers or employees are officers or employees of JPM
TP-9 (9/88)

-2
TSB-A-92 (17) C
Corporation Tax
December 16, 1992

or MGT. JPMCC's sole business is investing in securities. All decisions regarding the making and
disposition of investments are made by the officers and employees of JPMCC. JPMCC invests in
equity securities of privately held and publicly traded companies. It also invests in debt securities
which are convertible into equity, stock warrants and equity options. JPMCC's investment activities
in equity securities is its principal business activity. JPMCC's investment in stock is in excess of 90
percent of its assets. A portion of the securities held by JPMCC are equity investments in
corporations acquired in leveraged buy-out transactions. MGT acts as a lender to the acquired
corporations in many of these transactions. The remaining securities held by JPMCC constitute
venture capital investments.
Section 97.5 of the Banking Law restricts a bank from purchasing any stock of any
corporation except as provided pursuant to section 97. Sections 97.2, 97.3, 97.4 and 97.4-a permit
ownership of stock of certain specified entities not relevant to the investment portfolio of JPMCC.
Pursuant to section 97.4-b of the Banking Law, New York banks are permitted to invest in common
or preferred stock registered (listed) on a national securities exchange subject to the following
restrictions:
(a) The aggregate amount of all investments in common and preferred stock
permitted by section 97.4-b shall at no time exceed two percent of the assets or
twenty percent of the capital, surplus and undivided profits of the bank, whichever
is less.
(b) The aggregate amount of all investments in the common and preferred stock of
any one issuer pursuant to this subdivision, together with the aggregate amount of all
investments in the bonds, debentures, notes or other obligations of such issuer made
pursuant to section 103.1(i) shall at no time exceed one percent of the assets or
fifteen percent of the capital, surplus and undivided profits of the bank, whichever
is less.
(c) No bank shall at any time hold more than two percent of the total issued and
outstanding shares of stock of any one issuer.
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 Bank Holding Company 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 Bank Holding Company
Act.

-3
TSB-A-92 (17) C
Corporation Tax
December 16, 1992

Section 16-2.5(j)(1)(ii) of the 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 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.
In both section 1452(a)(9) of the Tax Law and section 16-2.5(j) of the Regulations, when
determining whether a corporation is principally engaged in a business which might be lawfully
conducted by a corporation subject to Article 3 of the Banking Law or by a national banking
association, any activity permissible under Article 3 of the Banking Law without the needfor a
specific grant of authorization by the Banking Department is a "businesswhich might be lawfully
conducted". Neither the statute nor the regulationslimit such activities to those activities that a
particular bank might be restricted from engaging in because of its membership in the Federal
Reserve System or because it is insured by the Federal Deposit Insurance Corporation ("FDIC").

-4
TSB-A-92 (17) C
Corporation Tax
December 16, 1992

Herein, the gross receipts that JPMCC receives from activities permitted by Article 3 of the
Banking Law are permissible activities for purposes of the gross receipts test under section 16
2.5(j)(4) of the Regulations even though HGT may not engage in such activities because of
restrictions placed on it by its membership in the Federal Reserve System and by the FDIC.
However, under section 97.4-b of the Banking Law, a bank's power to invest in equity securities is
an ancillary one and severely restricted. Section 97.4-b provides that the aggregate amount of all
investments in common and preferred stock shall not exceed two percent of assets or 20 percent of
capital, whichever is less.
Since JPMCC investment in stock is in excess of 90 percent of its assets, it exceeds the
limitations under section 97.4-b of the Banking Law and is not principally engaged in a business
which might be lawfully conducted by a corporation subject to Article 3 of the Banking Law. In
addition, JPMCC is not principally engaged in a business which might be lawfully conducted by a
national banking association, nor is it principally engaged in a business that is so closely related to
banking or managing or controlling banks as to have been a proper incident to a banking business
as set forth in section(4)(c)(8) of the Bank Holding Company Act of 1956.
Accordingly, JPMCC is not a banking corporation pursuant to section 1452(a)(9) of the Tax
Law and is not subject to the franchise tax under Article 32 of the Tax Law. Petitioner's other
questions with respect to the gross receipts test are moot.

DATED: December 16, 1992

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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