Is a section 4(c)(7) investment subsidiary, owned by a bank holding company but whose sole business is investing in securities for its own account, a banking corporation subject to Article 32?
Plain-English summary
Bankers Trust New York Corporation, a registered bank holding company, owns (indirectly) all of BT Investment Partners, Inc. (BTIP), a Delaware corporation formed under section 4(c)(7) of the Bank Holding Company Act. BTIP's sole business is investing -- as principal, for its own account -- in equity and debt securities (private equity, leveraged buyouts, venture capital, speculative debt), with equity investments exceeding 90% of its assets (and never more than 5% of any one company). The question: is BTIP a banking corporation subject to Article 32, or is it taxed under Article 9-A?
It is not a banking corporation -- Article 9-A applies. Section 1452(a)(9) makes a corporation a banking corporation if (a) it is 65% or more owned by a registered bank holding company and (b) it is principally engaged in a business that might be lawfully conducted by a New York bank (Article 3 Banking Law) or a national bank, or that is closely related to banking. BTIP clearly meets the ownership prong. The question was the "principally engaged" prong -- which 20 NYCRR 16-2.5(j) defines as deriving more than 50% of gross receipts from such a business.
Under Banking Law section 97.4-b, a New York bank's power to invest in equity securities is ancillary and severely restricted -- capped at 2% of assets (or 20% of capital), with tighter per-issuer limits. BTIP's equity holdings, at over 90% of its assets, far exceed what a bank may lawfully do (see J.P. Morgan, TSB-A-92(17)C). So BTIP is not principally engaged in a business a bank might lawfully conduct, nor one closely related to banking. Therefore BTIP is not a banking corporation under section 1452(a)(9) and is not subject to Article 32 -- it is taxed under Article 9-A.
What this means for you
Bank-holding-company ownership alone does not make a banking corporation
Even a wholly owned subsidiary of a registered bank holding company is a banking corporation under section 1452(a)(9) only if it is also principally engaged in a business a bank could lawfully conduct.
"Principally engaged" is a more-than-50%-of-gross-receipts test
The activity must supply over half the corporation's gross receipts -- and it must be activity a New York or national bank could lawfully perform.
Large equity-investment portfolios are not bank-lawful business
Because Banking Law section 97.4-b caps a bank's equity investments at roughly 2% of assets, a subsidiary that invests over 90% of its assets in stock is doing something a bank may not -- so it falls under Article 9-A, not Article 32.
Common questions
Q: My subsidiary is owned by a bank holding company. Is it automatically taxed under Article 32?
A: No. It must also be principally engaged (over 50% of gross receipts) in a business a New York or national bank could lawfully conduct.
Q: Why doesn't a securities-investment subsidiary count as banking business?
A: Because a bank's authority to invest in equity securities is ancillary and capped at about 2% of assets under Banking Law section 97.4-b. A portfolio that is over 90% equities exceeds what a bank may lawfully do.
Q: So which tax applies to BTIP?
A: Article 9-A. It is not a banking corporation under section 1452(a)(9), so it is not subject to the Article 32 bank franchise tax.
Citations and references
Statutes, regulations, and authorities:
- Tax Law section 1451 (Article 32 franchise tax on banking corporations)
- Tax Law section 1452(a)(9) (a corporation 65% or more owned by a registered bank holding company is a banking corporation only if principally engaged in a business a bank might lawfully conduct)
- Tax Law section 209.4 (corporations taxable under Article 32 are not subject to Article 9-A)
- 20 NYCRR 16-2.5(j) (meaning of business that might be lawfully conducted and principally engaged -- more than 50% of gross receipts)
- Banking Law section 97.4-b (a bank's equity-stock investments capped at 2% of assets / 20% of capital)
- J. P. Morgan & Co. Incorporated, TSB-A-92(17)C (a bank's equity-investment power is ancillary and restricted)
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1994.htm
- Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a94_11c.pdf
Original ruling text
New York State Department of Taxation and Finance
Taxpayer Services Division
Technical Services Bureau
TSB-A-94 (11) C
Corporation Tax
June 14, 1994
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. C940329A
On March 29, 1994, a Petition for Advisory Opinion was received from Bankers Trust New
York Corporation, c/o Corporate Tax Division, 130 Liberty Street, 10th Floor, New York, New York
10006.
The issue raised by Petitioner, Bankers Trust New York Corporation, is whether a
corporation organized pursuant to section 4(c)(7) of the Bank Holding Company Act of 1956, as
amended, (hereinafter the "Act") is subject to franchise tax under Article 32 of the Tax Law when
its sole business is investing in securities for its own account.
Petitioner, a New York corporation, is a bank holding company and owns 100 percent of the
stock of Bankers Trust Company (hereinafter "BTCO"), a New York State chartered banking
corporation. Petitioner, BTCO and certain affiliated corporations file combined New York State
returns under Article 32 of the Tax Law.
BT Investment Partners, Inc. (hereinafter "BTIP") was incorporated in Delaware on
September 10, 1993 pursuant to section 4(c)(7) of the Act, as a wholly owned subsidiary of BT
Holdings (New York), Inc., a New York corporation, which is, in turn, a wholly owned subsidiary
of Petitioner. BTIP has an office and a place of business in New York.
BTIP's sole business is investing in a variety of equity and debt securities as principal for its
own account. All decisions regarding the acquisition and disposition of investments are made by
the officers and employees of BTIP. BTIP's equity investments may include stock in corporations
acquired in private equity transactions, in leveraged buyout transactions, in venture capital
transactions and in other equity related transactions. In addition to equity securities, BTIP may
acquire non-investment grade or speculative debt securities and debt securities that include equity
kickers such a stock, warrants or options. The securities may or may not be in registered form or
traded on an established securities exchange. The securities held by BTIP do not include more than
five percent of the outstanding voting shares of any corporation. BTIP's investment in equities is in
excess of 90 percent of its assets.
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 five percent of the outstanding shares of any company." Pursuant to this exception,
Petitioner is not prohibited from owning the stock of BTIP. No regulatory approval is necessary to
claim this exception, nor was any such approval sought by Petitioner or BTIP.
TP-9 (9/88)
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Section 97.5 of the Banking Law restricts a bank from purchasing any stock of any
corporation except as provided pursuant to section 97 of the Banking Law. 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 BTIP.
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, which ever is less.
(b) The aggregate amount of all investments in the common and preferred stock of any one
issuer pursuant to section 97.4-b 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) of the Banking Law, 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, pursuant to section 97.4-b, more than two percent of the
total issued and outstanding shares of stock of any one issuer.
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.
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
property incident thereto, as set forth in section 4(c)(8) of the Act.
Herein, BTIP is indirectly wholly owned by Petitioner, 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 BTIP is a banking corporation,
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the question remaining is whether BTIP meets the "principally engaged in a business" requirement.
Section 16-2.5(j)(1)(ii) of the Franchise Tax on Banking Corporations Regulations
(hereinafter "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 assaciation 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 need for a
specific grant of authorization by the Banking Department is a "business which might be lawfully
conducted". Neither the statute nor the regulations limit such activities to those activities that a
particular bank might be restricted from engaging in because of is membership in the Federal
Reserve System or because it is insured by the Federal Deposit Insurance Corporation.
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Section 97.4-b of the Banking Law 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.
Thus, 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. (See J. P. Morgan & Co. Incorporated, Adv Op Comm T & F,
December 16, 1992, TSB-A-92(17)C.)
Since BTIP's 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, BTIP 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 Act.
Accordingly, BTIP 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.
DATED: June 14, 1994
s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division
NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.