Are funds a bank receives from a subsidiary's issuance of commercial paper 'deposits' includible in the bank's deposits allocation factor?
Plain-English summary
A Bank subject to Article 32 had a wholly owned subsidiary ("CP") whose sole business was issuing short-term commercial paper and lending the proceeds to the Bank. The funds were documented with a "Placing Document" (from CP) and a "Taking Document" (from the Bank); in one scenario both labeled the funds "deposits", in another both labeled them "loans." KPMG asked whether those funds are "deposits" includible in the denominator (and possibly numerator) of the deposits factor of the Bank's allocation percentage.
No. The deposits factor under Tax Law section 1454 and 20 NYCRR 19-7.1 divides New York-branch deposits by total deposits, using the definition of "deposits" in 20 NYCRR 19-7.2, which is substantially modeled on the federal FDIC definition (12 USC 1813). The proceeds of the subsidiary's commercial-paper issuance, placed with the parent bank, do not meet that definition. They are therefore excluded from both the numerator and the denominator of the deposits factor. Whether the documents check the box for "deposits" or "loans" is irrelevant -- the substance, not the label, controls.
What this means for you
The deposits factor uses the FDIC-style definition of "deposits"
New York's Article 32 deposits definition tracks the federal Deposit Insurance Act. Funds that are not deposits under that federal definition are not deposits for the deposits factor either.
Commercial-paper proceeds lent to the parent are not deposits
Money a subsidiary raises by issuing commercial paper and places with its parent bank does not fit the deposit definition and is left out of both the numerator and denominator of the factor.
Labels on the paperwork do not control
Checking "deposit" versus "loan" on the placing and taking documents does not change the result; the Department looks to the regulatory definition, not the chosen label.
Common questions
Q: Are commercial-paper proceeds a bank receives from its subsidiary "deposits"?
A: No. They do not meet the FDIC-style definition in 20 NYCRR 19-7.2, so they are not deposits for the deposits factor.
Q: Are these funds in the numerator or denominator of the deposits factor?
A: Neither. Because they are not deposits, they are excluded from both.
Q: Does it matter if the documents call them "deposits"?
A: No. The label does not control; the regulatory definition does.
Citations and references
Statutes, regulations, and authorities:
- Tax Law section 1454 (allocation; deposits factor)
- 20 NYCRR 19-7.1 (deposits allocation percentage)
- 20 NYCRR 19-7.2 (definition of "deposits")
- 12 USC 1813 / section 3 of the Federal Deposit Insurance Act (FDIC definition of "deposit")
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_21c.pdf
Original ruling text
New York State Department of Taxation and Finance
Taxpayer Services Division
Technical Services Bureau
TSB-A-96 (21) C
Corporation Tax
September 12, 1996
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. C951218B
On December 18, 1995, a Petition for Advisory Opinion was received from KPMG Peat
Marwick LLP, 345 Park Avenue, New York, New York 10154.
The issue raised by Petitioner, KPMG Peat Marwick LLP, is whether for purposes of section
1454 of Article 32 of the Tax Law funds received by a subsidiary of a bank from the issuance of
commercial paper and placed with the bank, as described in Scenarios A and B, respectively, are
considered to be deposits which are includible in the denominator (and possibly the numerator) of
the deposits factor of the bank's entire net income allocation percentage.
Petitioner submits the following facts as the basis for this Advisory Opinion.
The Bank is a banking corporation subject to Article 32 of the Tax Law. The Bank's
organization consists of a parent corporation engaged in the banking business not only in New York
State but also in a few additional states, in the form of branch offices. The Bank has a wholly owned
subsidiary ("CP") engaged solely in the business of issuing short-term commercial paper (i.e., of a
maturity less than one and one-half years) and loaning the proceeds to its parent, the Bank. The
Bank receives a portion of its funding from the funds received by CP from the issuance of
commercial paper. CP loans such funds to the Bank in the regular course of CP's operations.
Financing decisions are made on behalf of CP by employees of the Bank, who are employed
by its New York branch and are located in New York. The Bank charges an overall fee to CP for
such services. The Bank's acceptance of the terms of the funding received from CP is effectively
made by the employees of the Bank making the decisions related to the issuance of CP's commercial
paper.
The actual document evidencing the placement of funds by CP with the Bank ("Placing
Document") indicates the type and terms of indebtedness being created by the placement of funds
by CP with the Bank, e.g., deposit, loan, etc., to whom the funds are lent, type and amount of
currency, value date, maturity date, internal and external interest rates, as well as proper authorizing
signatures. The Bank's receipt of funds is documented by a Taking Document which details the same
information as the Placing Document except that it indicates from whom the funds are received
rather than with whom the funds are placed.
Scenario A:
Both the Placing Document issued by CP and the Taking Document issued by the Bank indicate that
the funds placed by CP with the Bank are "deposits".
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Scenario B:
Both the Placing Document issued by CP and the Taking Document issued by the Bank indicate that
the funds placed by CP with the Bank are "loans". That is, the forms show a check in the box labeled
"loans".
Section 1454 of the Tax Law and section 19-7.1 of the Franchise Tax on Banking
Corporations Regulations ("Article 32 Regulations") provide that the percentage of the taxpayer's
deposits allocated to New York State is determined by dividing the average value of deposits
maintained at branches of the taxpayer within New York State, during the period the taxpayer is
entitled to allocate, by the average value of all deposits maintained at branches of the taxpayer both
within and without New York State during the period the taxpayer is entitled to allocate.
Section 19-7.2 of the Article 32 Regulations defines the term "deposits" as follows:
(a) the unpaid balance of money or its equivalent received or held by a bank
in the usual course of business, and for which it has given or is obligated to give
credit, either conditionally or unconditionally, to a commercial, checking, savings,
time or thrift account, or which is evidenced by its certificate of deposit, thrift
certificate, investment certificate, certificate of indebtedness or other similar name,
or a check or draft drawn against a deposit account and certified by the bank, or a
letter of credit or a traveler's check on which the bank is primarily liable; provided
that, without limiting the generality of the term "money or its equivalent", any such
account or instrument must be regarded as evidencing the receipt of the equivalent
of money when credited or issued in exchange for checks or drafts or for a
promissory note upon which the person obtaining any such credit or instrument is
primarily or secondarily liable, or for a charge against a deposit account, or in
settlement of checks, drafts or other instruments forwarded to such bank for
collection;
(b) trust funds received or held by such bank, whether held in the trust
department or held or deposited in any other department of such bank;
(c) money received or held by a bank, or the credit given for money or its
equivalent received or held by a bank, in the usual course of business for a special or
specific purpose, regardless of the legal relationship thereby established, including
without being limited to escrow funds, funds held as security for an obligation due
to the bank or others (including funds held as dealers' reserves), or for securities
loaned by the bank, funds deposited by a debtor to meet maturing obligations, funds
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deposited as advance payment on subscriptions to United States Government
securities, funds held for distribution or purchase of securities, funds held to meet its
acceptances or letters of credit, and withheld taxes; provided that there shall not be
included funds which are received by the bank for immediate application to the
reduction of an indebtedness to the receiving bank, or under condition that the receipt
thereof immediately reduces or extinguishes such an indebtedness;
(d) outstanding drafts (including advice or authorization to charge a bank's
balance in another bank), cashier's checks, money orders, or other officers' checks
issued in the usual course of business for any purpose, but not including those issued
in payment for services, dividends, or purchases or other costs or expenses of the
bank itself.
The definition of "deposit" for purposes of section 19-7.2 of the Article 32 Regulations is
substantially similar to and is modeled after section 1813(1)(1)-(4) of the United States Code Service
(section 3(1)(1)-(4)of the Federal Deposit Insurance Act), which defines the term "deposit" for
purposes of the Federal Deposit Insurance Corporation ("FDIC"). After reviewing this definition,
it appears that the receipt of funds by the parent bank from its wholly owned subsidiary which
consists of the proceeds from the subsidiary's issuance of commercial paper does not constitute a
"deposit" under section 1813(1)(1)-(4) of the United State Code Service for purposes of the FDIC.
Accordingly, in this case, the receipt of funds by the Bank from CP that consists of the
proceeds from CP's issuance of commercial paper does not constitute a "deposit" as contemplated
under section 19-7.2 of the Article 32 Regulations. These funds may not be included in either the
numerator or denominator of the deposits factor of the Bank's entire net income allocation
percentage. It is irrelevant whether the funds are labeled "deposits" or "loans" on the Placing and
Taking Documents.
DATED: September 12, 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.