On a combined bank franchise tax return, how are a banking group's allocation factors and loan receipts sourced, and does an intercorporate transfer of a loan change its location?

Plain-English summary

Dime Savings Bank of New York, FSB, a federal savings bank, asked how its banking group should compute its allocation percentages and source loan receipts on a combined Article 32 return. Under the facts, Dime could originate loans either directly or through New York operating subsidiaries; the subsidiaries would handle solicitation, investigation, negotiation, and often final approval, then sell the loans to Dime at par or fair market value with an arm's-length origination fee.

The Department held:

• Combined group is one corporation. Under Tax Law section 1462(f)(3) and the Part 19 regulations, the combined activities of all members are used to compute the entire-net-income, alternative-entire-net-income, and asset allocation percentages, and intercorporate dividends and all other intercorporate transactions are eliminated.
• Character is determined group-wide, and intercompany transfers do not recharacterize assets. Viewing the group as one entity (with intercorporate transactions eliminated), transfers and sales between members do not recharacterize an asset or the receipts attributable to it.
• Loans are sourced where approved. Under 20 NYCRR 19-6.2, a loan is located where the greater portion of income-producing activity (solicitation, investigation, negotiation, final approval, administration) occurred; a loan is "made" when approved, and rebuttable presumptions depend on whether the bank or a subsidiary made it. Because intercorporate transactions are eliminated, transferring the loan within the group after it is made does not change its location -- so it does not matter which member ultimately owns the loan or records the receipts.

What this means for you

A combined bank group computes factors as a single corporation

All members' activities are combined and intercorporate transactions are eliminated when computing the entire-net-income, alternative-entire-net-income, and asset allocation percentages.

A loan's location is fixed when it is approved

Sourcing turns on where the greater portion of the income-producing activity occurred -- solicitation, investigation, negotiation, final approval, and administration -- and the loan is treated as "made" when it is approved.

Intercorporate transfers do not move a loan

Once a loan is made, transferring or selling it to another member of the combined group does not change where it is sourced, because intercorporate transactions are eliminated. Whether origination is run as a subsidiary or as a division changes which presumption applies, but not the fundamental sourcing rule.

Common questions

Q: Are a banking group's allocation factors computed member-by-member or combined?
A: Combined. The group is treated as one corporation and all intercorporate transactions are eliminated.

Q: Where is a loan sourced?
A: To where the greater portion of the income-producing activity occurred. The loan's location is fixed when it is approved.

Q: Does selling a loan from a subsidiary to the parent bank change its sourcing?
A: No. Intercorporate transfers within the combined group are eliminated and do not change the loan's location once it is made.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 1452(a) (banking corporation; federal savings bank and 65%-owned subsidiaries)
- Tax Law section 1454 (allocation); section 1462(f)(3) (combined return; eliminate intercorporate transactions)
- 20 NYCRR 19-2.4, 19-3.4, 19-4.3 (factors computed as one corporation); 20 NYCRR 19-6.10 (combined receipts factor)
- 20 NYCRR 19-6.2 (sourcing income from loans; greater-portion-of-income-producing-activity; rebuttable presumptions)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a96_20c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (20) C
Corporation Tax
July 25, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C960319A

On March 19,1996, a Petition for Advisory Opinion was received from Dime Savings Bank
of New York, FSB, EAB Plaza East Tower, Uniondale, New York 115560123.
The issues raised by Petitioner, Dime Savings Bank of New York, FSB, are:
(1) Whether the combined activities of a combined group are used in computing the entire
net income, alternative entire net income and taxable assets allocation percentages on a combined
return under Article 32 of the Tax Law.
(2) When sourcing the assets and receipts of the combined group: (a) whether the character
and nature of the assets and receipts are determined by viewing the combined group as if it were one
entity; and (b) whether the transfers and sales between entities of the combined group would result
in a recharacterization of the asset or the subsequent receipts attributable to the asset.
(3) When sourcing the receipts from the loan originations described below: (a) whether all
the activities and efforts undertaken by employees of all members of the combined group are
examined regardless of which entity ultimately has actual ownership of the assets and records the
receipts; and (b) whether the method for determining the correct sourcing of receipts from the loans
would differ if the loan origination activities of the subsidiaries described below were conducted as
divisions of Petitioner rather than through a subsidiary form.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is a Federal savings bank. Its Federal charter permits the active origination of
loans by Petitioner in states other than its state of commercial domicile. Alternatively, Petitioner is
permitted to conduct its loan origination activities in operating subsidiaries which would be
incorporated in New York.
Petitioner has loan origination offices in other states. Assuming Petitioner establishes
operating subsidiaries to conduct its residential loan origination activities in certain states outside
of New York, the subsidiaries would receive funding from Petitioner and would be responsible for
most aspects of the origination function, i.e., solicitation, investigation, negotiation and
administration of the initial loan. Final loan approval may also be made by the subsidiaries.
Establishment of the general credit standards as well as directives as to the financial terms and
products to be offered would come from Petitioner's management.

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Corporation Tax
July 25, 1996
Upon the successful underwriting of the loan, the subsidiaries intend to either sell the loan
immediately to Petitioner or sell certain loan products in the secondary market. Based on the
agreement in place, the sale to Petitioner would be at par (principal) or fair market value with an
appropriate arm's length fee structured to compensate the subsidiary for the origination effort.
Servicing rights and continued administration of the loan would be transferred to Petitioner along
with the loan.
Loans acquired by Petitioner from its subsidiaries and held in Petitioner's portfolio would be
classified as "loans" for financial statement presentation of the balance sheet to the Securities and
Exchange Commission and its banking regulators without any distinction made between these loans
and loans originated directly by Petitioner for its own portfolio.
Section 1452(a) of the Tax Law and section 16-2.5 of the Franchise Tax on Banking
Corporations Regulations ("Regulations") define "banking corporation." Section 1452(a)(4) of the
Tax Law and section 16-2.5(e) of the Regulations provides that every Federal savings bank which
is doing a banking business is a banking corporation. Section 1452(a)(9) of the Tax Law and section
162.5(j)(1)(i) of the Regulations provides that any corporation whose voting stock is 65 percent or
more owned or controlled, directly or indirectly, by a Federal savings bank is a banking corporation
if certain requirements are met. The requirements are that the corporation must be principally
engaged in a business which:
(a) might be lawfully conducted by a corporation subject to Article 3 of the New York State
Banking Law or by a national banking association; or
(b) 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 Federal Bank Holding Company Act of
1956, as amended (12 USC 1843(c)(8)).
Section 21-2.1 of the Regulations provides that each banking corporation, as defined in
section 16-2.5 of the Regulations, is a separate taxable entity and must file its own return. However,
where certain requirements are met, a group of banking corporations and bank holding companies
may be required or permitted to file a combined return.
Section 1462(f)(3) of the Tax Law states that:
[i]n the case of a combined return, the tax shall be measured by the combined entire
net income, combined alternative entire net income or combined assets of all the
corporations included in the return. The allocation percentage shall be computed
based on the combined factors with respect to all the corporations included in the
combined return. In computing combined entire net income and combined
alternative entire net income intercorporate dividends and all other intercorporate
transactions shall be eliminated and in computing combined assets intercorporate
stockholdings and intercorporate bills, notes and accounts receivable and payable and
other intercorporate indebtedness shall be eliminated.

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TSB-A-96 (20) C
Corporation Tax
July 25, 1996
Sections 19-2.4, 19-3.4, and 19-4.3 of the Regulations, respectively, provide that in the case
of a combined return, the factors comprising the entire net income, alternative entire net income and
asset allocation percentages, respectively, are computed as though the corporations included in the
return were one corporation. Intercorporate dividends and all other intercorporate transactions,
including intercorporate receipts between the corporations included in the combined return, are
eliminated.
Section 19-6.10 of the Regulations provides that the receipts factor on a combined return is
computed as though the corporations included in the return were one corporation. All intercorporate
receipts between the corporations included in the combined return are eliminated in computing the
combined receipts factor.
Section 19-6.2(a) of the Regulations provides that gross income from a loan is allocated to
New York State if the income is attributable to a loan which is located in New York State. A loan
is located where the greater portion of income-producing activity relating to the loan occurred.
Provided, however:
(1) In the case of a [Federal savings bank], a loan ... that is attributed by such
taxpayer to a branch without New York State is presumed to be properly attributed,
provided that such presumption may be rebutted if the [Commissioner of Taxation
and Finance] demonstrates that the greater portion of income-producing activity
relating to the loan ... did not occur at such branch. Where such presumption has
been rebutted by the [Commissioner], the loan ... shall be presumed to be within New
York State if the taxpayer had a branch within New York State at the time the loan
... was made. However, the taxpayer may rebut such presumption by demonstrating
that the greater portion of income-producing activity relating to the loan ... did not
occur within New York State. For purposes of this section, a loan ... is made when
such loan ... is approved.
(2) In the case of a [Federal savings bank] which records a loan ... on the books of a
place without New York State which is not a branch, it shall be presumed that the
greater portion of income-producing activity related to such loan ... occurred within
New York State if the taxpayer had a branch within New York State at the time the
loan ... was made. The taxpayer may rebut such presumption by demonstrating that
the greater portion of income-producing activity related to the loan ... did not occur
within New York State. A loan ... is made when such loan ... is approved.
(3) In the case of a taxpayer ... described in [section 16-2.5(j) of the Regulations], a
loan ... attributed by such taxpayer to a bona fide office without New York State is
presumed to be properly attributed, provided that such presumption may be rebutted
if the [Commissioner of Taxation and Finance] demonstrates that the greater portion
of income-producing activity relating to the loan did not occur without New York
State.

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TSB-A-96 (20) C
Corporation Tax
July 25, 1996
Section 19-6.2(c) of the Regulations provides that to determine where the greater portion of
income-producing activity relating to a loan occurred, consideration is given to such activities as the
solicitation, investigation, negotiation, final approval and administration of the loan. Each loan has
its own characteristics. In some cases, one or more of the activities to be considered may not be
present. The significance to be accorded to each activity depends upon the facts in each case.
In this case, it is assumed that Petitioner and the subsidiaries described above are permitted
or required to file a combined return pursuant to section 212.1 of the Regulations. It is also assumed
that the combined group has the right to allocate its combined entire net income, combined
alternative entire net income and combined assets pursuant to section 1454 of the Tax Law and Part
19 of the Regulations.
With respect to Issue "1", pursuant to section 1462(f)(3) of the Tax Law and sections 19-2.4,
19-3.4 and 19-4.3 of the Regulations, the combined activities of the combined group are used in
computing the factors of the entire net income, alternative entire net income and asset allocation
percentages on a combined return. The factors are computed as though the corporations included
in the combined return were one corporation. Intercorporate dividends and all other intercorporate
transactions between the corporations included in the combined return are eliminated.
With respect to Issue "2", when sourcing the assets and receipts of the combined group for
purposes of the allocation factors, the character and nature of the assets and receipts are determined
by viewing the activities of the combined group as if it were one entity, eliminating intercorporate
dividends and all other intercorporate transactions. Therefore, the transfers and sales between the
entities of the combined group are eliminated when computing the factors of the entire net income,
alternative net income and asset allocation percentages on the combined return. Accordingly, the
intercorporate transfers and sales would not result in a recharacterization of an asset or the
subsequent receipts attributable to the asset.
With respect to Issue "3", the method for determining the correct sourcing of receipts from
loans would differ if the loan origination activities of the subsidiaries described above were
conducted as divisions of Petitioner. Pursuant to section 1454 of the Tax Law and section 19-6.2
of the Regulations, gross income from a loan is allocated to New York State if the income is
attributable to a loan which is located in New York State. A loan is located where the greater portion
of income-producing activity relating to the loan occurred. Therefore, when determining the source
of a loan pursuant to section 19-6.2(c) of the Regulations, the activities and efforts undertaken by
employees of all members of the combined group in making the loan are considered, although the
significance to be accorded to each activity depends upon the facts in each case. However, when
sourcing loans, certain rebuttable presumptions are made depending on whether the bank, itself, or
a subsidiary made the loan. For these purposes, a loan is made when the loan is approved.

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TSB-A-96 (20) C
Corporation Tax
July 25, 1996
Accordingly, if the loan is made by a subsidiary described in section 162.5(j) of the
Regulations, the presumption contained in section 19-6.2(a)(3) of the Regulations applies. If the
loan is made by Petitioner, the presumption contained in section 19-6.2(a)(1) or (2) of the
Regulations would apply. The subsequent receipts attributable to the loan are allocated to New York
if the loan, when made, is located in New York. Because intercorporate transactions between the
entities of the combined group are eliminated when computing the receipts factor of the allocation
percentages on the combined return, the transfer or sale of a loan among the entities included in the
combined group would not change the location of the loan after it is made, that is, after it is
approved. Therefore, it does not matter which entity, the bank or the subsidiary, ultimately has
actual ownership of the assets and records the receipts.

DATED: July 25, 1996

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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