Does a foreign life insurer with no New York certificate of authority owe New York tax if it makes mortgage loans on New York commercial real property?

Plain-English summary

The Manufacturers Life Insurance Company (USA), a Michigan life insurer not authorized to do an insurance business in New York, asked whether it would owe New York tax if it began making mortgage loans on New York commercial real property. It would send employees into New York to contact borrowers and brokers, gather market information, perform due diligence, and negotiate and monitor closings (though loans are executed outside New York), and might foreclose and manage property to resell it.

An insurance corporation is taxed under Article 33, not Article 9-A (Tax Law section 209.4). The totality of these New York activities would constitute doing business, so the insurer is subject to the Article 33 franchise tax under section 1501. However, because it will not hold a certificate of authority from the Superintendent of Insurance, it has no taxable premiums under section 1510. Section 1505 caps the combined Article 33 tax at the amount computed solely under the premiums tax -- which here is zero.

So, following Mound, Cotton & Wollan (TSB-A-88(20)C), the insurer's Article 33 liability is zero, and it is not subject to Article 9-A because it is a corporation taxable under Article 33.

What this means for you

Insurance corporations are taxed under Article 33, not Article 9-A

A corporation doing an insurance business is taxed under Article 33; section 209.4 keeps any corporation taxable under Article 33 out of the Article 9-A franchise tax.

Mortgage lending in New York can be "doing business" under Article 33

Sending employees into New York to find borrowers, perform due diligence, and negotiate and monitor loan closings -- even with the loans executed outside the state -- is enough, in totality, to be doing business and subject to the section 1501 franchise tax.

No insurance license means no premiums, and the section 1505 cap zeroes the tax

A foreign insurer without a certificate of authority from the Superintendent of Insurance has no taxable premiums under section 1510, so the section 1505 cap -- which limits the tax to the premiums computation -- reduces the Article 33 tax to zero.

Common questions

Q: Does a foreign insurer making New York mortgage loans owe New York franchise tax?
A: It is subject to the Article 33 franchise tax because the lending activity is doing business, but if it has no New York insurance license it has no taxable premiums, and the section 1505 cap limits the tax to zero.

Q: Why isn't it taxed under Article 9-A instead?
A: Because it is an insurance corporation taxable under Article 33, and section 209.4 excludes any Article 33 taxpayer from Article 9-A.

Q: Would buying New York mortgages for investment alone be doing business?
A: In Mound, Cotton & Wollan an unauthorized insurer's purchase of New York mortgages for investment did not create Article 33 tax (and its tax was zero under the section 1505 cap); active lending here is doing business, but the cap still produces zero tax.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 209.4 (Article 33 taxpayer not subject to Article 9-A)
- Tax Law section 1500(a) (definition of insurance corporation)
- Tax Law section 1501(a) (Article 33 franchise tax; doing business)
- Tax Law section 1505 (cap limiting tax to the section 1510 premiums computation)
- Tax Law section 1510(b)(1) (premiums tax on authorized life insurers)
- Mound, Cotton & Wollan, TSB-A-88(20)C (September 16, 1988) (unauthorized insurer; zero tax under 1505 cap)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1997.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a97_23c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(23)C
Corporation Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C970528A

On May 28, 1997, a Petition for Advisory Opinion was received from The
Manufacturers Life Insurance Company (USA), 73 Tremont Street, Suite 1300,
Boston, Massachusetts 02108-3915.
The issue raised by Petitioner, The Manufacturers Life Insurance Company
(USA), is whether an insurance company, that does not conduct an insurance
business in New York State and does not have a certificate of authority from the
New York State Insurance Department, is subject to New York State franchise tax
if it makes loans secured by mortgages on commercial real property in the state.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner, a stock life insurance company organized under the laws of
Michigan, is engaged in the business of writing life insurance policies and
annuities ("policies") for all states other than New York.
Petitioner is a
wholly owned subsidiary of The Manufacturers Life Insurance Company, a mutual
life insurance company, organized under the laws of Canada.
Petitioner is authorized by the insurance departments of 49 states and the
District of Columbia to conduct an insurance business in those jurisdictions.
Petitioner does not solicit insurance business in New York State and is not
authorized to transact an insurance business under a certificate of authority
from the New York State Insurance Department. In a very limited number of cases,
Petitioner receives premium payments from persons to whom it sold policies while
they were non-New York residents and who subsequently relocated to New York
State.
Petitioner is considering making loans that are secured by mortgages on
commercial real property located in New York (the "Loans"). Petitioner currently
has no loans secured by New York real property. In making the Loans, Petitioner
will not maintain any office in New York, but will occasionally send employees
to New York to contact potential borrowers, existing borrowers, or mortgage
brokers (who will be unaffiliated independent contractors representing the
potential borrowers), gather market information and perform due diligence.
Petitioner's employees or the mortgage brokers will solicit and aid in the
preparation of applications for Loans and, in connection therewith, assemble
credit information (including property inspection reports and appraisals) and
title information. All information assembled will be sent to Petitioner to be
reviewed and approved in Massachusetts and/or Canada. Petitioner occasionally
may send employees to New York to negotiate and monitor the closing of the Loans,
but will enter into and execute all the documentation evidencing the Loans
outside of New York.

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TSB-A-97(23)C
Corporation Tax

Petitioner maintains a significant majority of its U.S. assets in New York
custodial accounts, but will open no bank account in New York (other than
possibly a "lock box") to facilitate its mortgage lending in New York. Loans
made by Petitioner will generally be funded entirely by Petitioner, with the
proceeds of any Loan being disbursed to the borrower from one of its existing
bank accounts. Petitioner may occasionally sell one or more participations in
a Loan to non-New York banks or other non-New York institutions. Petitioner will
maintain no employees within New York to service any of the Loans. All Loans
will be serviced by Petitioner in Toronto, Canada. Monthly payments of principal
of, and interest on, the Loans will be mailed to a post office box in Buffalo,
New York, but all payments will be processed in Toronto, Canada. Petitioner will
not hold title to real property within New York other than title necessary to
secure a Loan or property foreclosed or otherwise taken to satisfy a defaulted
Loan, and Petitioner would manage such foreclosed property until an opportune
time for resale. Petitioner expects to make only four to ten Loans annually
pursuant to the above procedures.
Further, (i) Petitioner does not and will not have an office, place of
doing business or telephone listing in New York, (ii) Petitioner's directors,
officers and employees may visit New York to take part in seminars, visit rating
agencies, and attend closings of purchases and sales of securities (other than
Loans), (iii) Petitioner currently has no employees or agents stationed in New
York, and (iv) the income to be derived by Petitioner from making Loans in New
York will be insubstantial in comparison to the income to be derived by
Petitioner from its ordinary and regular insurance activities, all of which are
conducted outside of New York.
Petitioner will obtain a certificate of authority to conduct business in
New York pursuant to section 1301 of the New York Business Corporation Law, but
will not obtain a Certificate of Authority to conduct an insurance business from
the New York Insurance Department and will not conduct an insurance business in
New York. Petitioner does not presently conduct any business activity in New
York and will not in the future conduct any business activity in New York other
than the Loan program.
Pursuant to Article 33 of the Tax Law, two of the franchise taxes imposed
on insurance corporations are contained in sections 1501 and 1510 with a cap
contained in section 1505.
The tax imposed pursuant to section 1501(a) of the Tax Law provides:
[e]very domestic insurance corporation and every foreign or alien
insurance corporation, for the privilege of exercising its corporate
franchise, or of doing business, or of employing capital, or of
owning or leasing property in this state in a corporate or organized
capacity, or of maintaining an office in this state ... shall
annually pay a franchise tax ....
Section 1510(b)(1) of the Tax Law provides for an additional premiums tax
on insurance corporations as follows:

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TSB-A-97(23)C
Corporation Tax

[e]xcept as hereinafter provided, every domestic life insurance
corporation, and every foreign and alien life insurance corporation
authorized to transact business in this state under a certificate of
authority from the superintendent of insurance, shall, for the
privilege of exercising corporate franchises or for carrying on
business in a corporate or organized capacity within this state, and
in addition to any other taxes imposed for such privilege, pay a tax
on all gross direct premiums, less return premiums thereon, received
in cash or otherwise on risks resident in this state ....
Section 1505 of the Tax Law limits the amount of taxes imposed by providing
that, notwithstanding the provisions of sections 1501 and 1510, the amount of
taxes imposed under such sections shall not exceed an amount computed as if such
taxes were determined solely under section 1510 at the reduced rate of 2.6
percent.
Section 1500(a) of the Tax Law provides that the term "insurance
corporation" includes a corporation, association, joint stock company or
association, person, society, aggregation or partnership, by whatever name known,
doing an insurance business.
Section 209.4 of Article 9-A of the Tax Law provides that a corporation
that is taxable under Article 33 of the Tax Law is not subject to tax under
Article 9-A of the Tax Law.
In Mound, Cotton & Wollan, Adv Op Comm T & F, September 16, 1988, TSB-A-88
(20)C, it was held that a foreign insurance company not authorized to transact
business in New York State could purchase, for investment purposes, mortgages
secured by New York real estate without incurring franchise tax liability under
Article 33 of the Tax Law and, pursuant to section 209.4 of the Tax Law, was not
subject to tax under Article 9-A of the Tax Law because it was an insurance
corporation subject to franchise tax under Article 33 of the Tax Law.
The
company was not licensed or qualified to do business in New York State. The
company was considering the purchase of mortgages secured by New York real
estate.
The mortgages would be purchased through a large corporate broker
licensed in New York. Negotiations would take place both in and out of New York
and the contracts could be signed either in or out of New York. In addition, an
agent, either in or out of New York, would service the mortgages. The company
did not incur franchise tax liability under Article 33 because it did not have
a certificate of authority from the Superintendent of Insurance and had no
taxable premiums under section 1510 of the Tax Law. Therefore, the corporation's
tax liability was zero because of the cap computed pursuant to section 1505 of
the Tax Law.
In this case, Petitioner will obtain a certificate of authority to conduct
business in New York State, but will not have a certificate of authority from the
Superintendent of Insurance to conduct an insurance business in New York State.
Petitioner will occasionally send employees into New York who will contact
potential borrowers, existing borrowers, or mortgage brokers, will gather market
information, will perform due diligence and will negotiate and monitor the
closing of the Loans (although the Loans will be executed outside New York
State). Petitioner's directors, officers and employees may also come into New

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Corporation Tax

York to take part in seminars, visit rating agencies, and attend closings of
purchases and sales of securities (other than Loans).
Petitioner may on
occasion, foreclose or otherwise take title to property in New York in
satisfaction of a defaulted Loan and manage the property until an opportune time
for reselling it.
The totality of Petitioner's proposed activities in New York State would
constitute doing business in New York State and Petitioner would be subject to
the tax imposed under section 1501 of the Tax Law. However, since Petitioner
will not have a certificate of authority from the Superintendent of Insurance to
conduct an insurance business in New York State, Petitioner will not have taxable
premiums under section 1510 of the Tax Law. Therefore, pursuant to section 1505
of the Tax Law, Petitioner's tax liability under Article 33 of the Tax Law would
be zero. Further, as in Mound, Cotton & Wollan, supra, Petitioner would not be
subject to tax under Article 9-A of the Tax Law because it is a corporation
taxable under Article 33 of the Tax Law.

DATED: September 3, 1997

NOTE:

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

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