After bank regulators ordered an alien bank to cease all U.S. operations, do its wind-down and loan-servicing activities through an agent subsidiary still make it 'doing business' and taxable under Article 32?
Plain-English summary
The Daiwa Bank, Limited, a Japanese banking corporation, had been taxed under Article 32 (the bank franchise tax). In November 1995, U.S. and state bank regulators ordered Daiwa to cease all banking operations in the United States and cooperate with investigations. Daiwa surrendered its New York branch license in February 1996 and stopped conducting any banking business in the state. It kept a service subsidiary to administer required books and records, deal with regulators and tax authorities, defend or prosecute proceedings, and wind down the U.S. operations -- and gave two of the subsidiary's employees a limited power of attorney, creating an agency relationship. Daiwa asked whether it was still "doing business" in New York under 20 NYCRR 16-2.7 and taxable under Article 32.
The Department analogized Daiwa's situation to a dissolved corporation. Under 20 NYCRR 16-2.2, a dissolved bank that limits itself to liquidating its business, disposing of assets, and distributing proceeds is not taxable. So, to the extent the subsidiary's activities are limited to winding up Daiwa's affairs after regulators forced it to cease banking, those activities do not amount to doing business.
But the subsidiary also acts as a liaison on Daiwa's loan-servicing agreement with a purchaser and helps monitor, service, and liquidate loans (and may assist in foreclosures). Those activities may go beyond winding up and rise to doing business under 16-2.7 -- particularly absent a concerted, regular, continuous effort to dispose of the held assets (evidenced by periodic sales). Whether the totality of the subsidiary's agency activities is enough to make Daiwa "doing business," and whether Daiwa has an agency relationship with the loan purchaser (it pays an arm's-length fee and holds only bare legal title, suggesting no agency), are questions of fact the opinion cannot decide. If Daiwa is doing business, it is taxable under Article 32 for those years unless the business is de minimis.
What this means for you
Pure wind-down is not "doing business"
Activities limited to liquidating affairs, disposing of assets, and distributing proceeds -- even by an agent -- mirror a dissolved corporation and do not create Article 32 tax.
Ongoing loan servicing can cross the line
Servicing, monitoring, and liquidating loans, or acting as a liaison on a servicing agreement, may exceed winding up and amount to doing business, especially without a steady effort to sell off the assets.
Agency and degree are factual
Whether the agent's total activity, and whether an agency relationship with a loan purchaser, rise to doing business cannot be resolved in an advisory opinion; bare legal title plus an arm's-length fee points away from agency.
Common questions
Q: Daiwa was forced to stop -- why might it still be taxable?
A: Because activities beyond winding up (active loan servicing and liquidation) can themselves constitute doing business under Article 32.
Q: Does holding bare legal title to loans create an agency relationship?
A: It points against agency where Daiwa also pays an arm's-length servicing fee, but the question is ultimately factual.
Q: If Daiwa is doing business, for which years is it taxed?
A: For the years in which it is doing business, unless the New York business is de minimis.
Citations and references
Statutes, regulations, and authorities:
- Tax Law section 1451 (franchise tax on banking corporations)
- 20 NYCRR 16-2.2 (dissolved corporation winding up not doing business)
- 20 NYCRR 16-2.7 (doing business under Article 32)
- Tax Law section 171.Twenty-fourth (advisory opinion applies law to specified facts)
- The Daiwa Bank, Limited, TSB-A-98(1)C (Feb. 2, 1998)
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1998.htm
- Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a98_1c.pdf
Original ruling text
New York State Department of Taxation and Finance
Taxpayer Services Division
Technical Services Bureau
TSB-A-98(1)C
Corporation Tax
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. C961105E
On November 5, 1996, a Petition for Advisory Opinion was received from The
Daiwa Bank, Limited, 2-1, Bingomachi 2-Chome, Chuo-Ku, Osaka, Japan 541.
The issue raised by Petitioner, The Daiwa Bank, Limited, is whether it is
doing business pursuant to section 16-2.7(a) and (b) of the Franchise Tax on
Banking Corporations Regulations ("Article 32 Regulations") and taxable under
Article 32 of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner was a banking corporation subject to Article 32 of the Tax Law.
By Order of the Board of Governors of the Federal Reserve System, the
Superintendent of Banks of New York State and the state banking departments and
commissions of the States of California, Illinois, Massachusetts, Florida and
Georgia on November 1, 1995 (the "Order"), Petitioner was required to cease
operations in the United States and to cooperate with the investigations of
federal and state bank regulators into its affairs.
The Order required that Petitioner, no later than February 2, 1996,
terminate completely all the banking operations it conducted through its
branches, agencies and representative offices in the United States.
The
termination was to be conducted under the supervision of the Board of Governors
and, with respect to the New York branches, the New York State Superintendent of
Banks. The Order permitted Petitioner to establish and maintain one or more
offices, liquidating entities, or service subsidiaries in the United States, at
which no banking or other business is conducted, solely for the purposes of (a)
administering any books and records that it may be required to maintain in the
United States pursuant to the order or pursuant to any other judicial or legal
requirement applicable to Petitioner or its institution-affiliated parties or
insiders, (b) administering its ongoing affairs with federal, state and local
taxing authorities and regulatory bodies, (c) defending or prosecuting any
criminal or civil action, inquiry or investigation to which Petitioner or any of
its institution-affiliated parties or insiders may become a party, and (d)
administering the orderly termination of Petitioner's banking operations in the
United States. After termination of its banking operations in the United States
by February 2, 1996, Petitioner was required to surrender the licenses of its
branches, agencies and representative offices to the New York State
Superintendent of Banks and to the other states' appropriate state supervisory
authorities.
Petitioner has a wholly-owned subsidiary ("Subsidiary") which performs
services on behalf of Petitioner which are necessary or appropriate to resolve
any matters relating to, or arising from, the termination of banking activities
and the closing of offices in New York State by Petitioner. The Order requires
that no other business be conducted by the Subsidiary.
Essentially, the
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Subsidiary is responsible for taking care of all of Petitioner's outstanding
obligations that are unrelated to banking. Petitioner has executed a Power of
Attorney granting two employees of the Subsidiary limited authority to act on
Petitioner's behalf in performing the services set forth above to wind up
Petitioner's affairs. Petitioner does not have direct control over the manner
in which the Subsidiary performs these activities. The Subsidiary and Petitioner
operate independently of each other. There are no common officers or directors
and no overlap of personnel between the entities. Petitioner and Subsidiary hold
themselves out to the public as separate and distinct businesses, each conducting
business under its own name.
Since it ceased operations in New York, Petitioner has not had an office
in New York and does not conduct any banking business in New York. Upon ceasing
operations in New York, Petitioner assigned its leased office space to the
Subsidiary.
As a condition of the landlord's approval of the assignment,
Petitioner was required to guarantee the lease.
For a short period of time after the termination of Petitioner's
operations, Petitioner maintained a few employees in New York in order to respond
to inquiries by the bank regulatory agencies as contemplated by the orders issued
by the New York State Banking Department and the Federal Reserve Board. The
employees were not in New York to conduct any activities for profit.
The majority of Petitioner's business assets were sold to an unrelated
third party ("Purchaser"). Petitioner also entered into a servicing agreement
with the Purchaser to service certain loans Petitioner was unable to sell. The
Purchaser has contracted with Petitioner to service Petitioner's outstanding
loans at an arm's length price.
This Advisory Opinion does not address the taxability of the Subsidiary or
the Purchaser under Article 9-A of the Tax Law.
The specific activities at issue are:
1. The Subsidiary's performance of non-banking activities on behalf
of Petitioner, as follows: administering any books and records
required by bank regulatory agencies; administering ongoing affairs
and other matters with federal, state and local tax authorities and
regulatory bodies; fulfilling all obligations contained in the
leases and other agreements assigned to it by Petitioner; and paying
all liabilities and obligations assigned to it by Petitioner.
2. Executing a Power of Attorney granting limited authority to two
employees of the Subsidiary.
3. Assigning leased office space to the Subsidiary in New York
State.
4. Guaranteeing a lease assigned to the Subsidiary in New York
State.
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- Having temporary employees in New York solely to answer questions
as required by bank regulatory agencies. - The Purchaser's performance of the following activities, at an
arm's length price, on behalf of Petitioner: collecting interest,
principal, premiums, penalties, charges, fees and other payments on
Petitioner's outstanding loans; disbursing funds to borrowers,
agents and other persons; and arranging sales of the loans, if
requested to do so by Petitioner's head office (where Petitioner
receives the interest income collected on the loans).
With respect to this servicing agreement, the Subsidiary acts as a
liaison between the Purchaser and Petitioner. It also assists in
monitoring, servicing, and liquidating the loans, and may assist in
foreclosure or other actions to protect the interests of Petitioner.
Petitioner ultimately receives the interest income that the
Purchaser collects on the loans.
Discussion
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)(2) of the Tax Law provides that
"every corporation or association organized under the laws of any other state or
country which is doing a banking business" is a banking corporation.
Section 16-2.7 of the Article 32 Regulations states that:
(a) The term doing business is used in a comprehensive sense and
includes all activities which occupy the time or labor of people for
profit. Every corporation organized for profit and carrying out any
of the purposes of its organization is deemed to be doing business
for purposes of the tax. In determining whether a corporation is
doing business, it is immaterial whether its activities actually
result in a profit or loss.
(b) Whether a corporation is doing business in New York State is
determined by the facts in each case. Consideration is given to
such factors as:
(1) the nature, continuity, frequency and regularity of the
activities of the corporation in New York State;
(2) the purposes for which the corporation was organized;
(3) the location of its offices and other places of business;
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(4) the employment in New York State of agents, officers, and
employees; and
(5) the location of the actual seat of management or control
of the corporation.
(c) Examples of activities of a corporation which would constitute
doing business in New York State include the following:
(1) operating a branch in New York State;
(2) operating a loan production office in New York State;
(3) operating a representative office in New York State; or
(4) operating a bona fide office in New York State.
(d) A corporation will not be deemed to be doing business in New
York State because of:
(1) the maintenance of cash balances with banks or trust
companies in New York State;
(2) the ownership of shares of stock or securities kept in New
York State in a safe deposit box, safe, vault or other receptacle
rented for this purpose, or if pledged as collateral security, or if
deposited in safekeeping or custody accounts with one or more banks
or trust companies, or brokers who are members of a recognized
securities exchange;
(3) the taking of any action by any such bank or trust company
or broker, which is incidental to the rendering of safekeeping or
custodian service to such corporation;
(4) the maintenance of an office in New York State by one or
more officers or directors of the corporation who are not employees
of the corporation if the corporation is not otherwise doing
business in New York State;
(5) the keeping of books or records of a corporation in New
York State, if such books or records are not kept by employees of
such corporation and such corporation does not otherwise do business
in New York State; or
(6) any combination of the foregoing activities....
In Bleakley Platt & Schmidt, Adv Op Comm of T & F, December 13, 1990, TSBA-90(25)C, it was held that a foreign bank that had no employees, offices or
agents in New York was not subject to tax under Article 32 if its contacts with
the state were limited to security interests in property located in New York.
The bank made loans to New York residents and businesses which were accepted,
processed, approved and serviced at the corporation's Connecticut office. The
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fact that the bank acquired a security interest in property within New York and
acquired title to property located in New York through foreclosure of security
interests did not, by itself, deem the bank to be doing business in New York.
Also, the hiring of independent contractors located in New York did not
constitute doing business in New York. However, the bank could be subject to
franchise tax if corporate officers regularly visited New York to negotiate the
loans or if an agency relationship existed between the corporation and a person
or entity conducting business in New York. Furthermore, the closing of loans in
New York might constitute doing business in New York. In all cases, the totality
of circumstances determined the bank's taxable status.
For purposes of Article 9-A of the Tax Law, the definition of doing
business contained in section 1-3.2(b) of the Business Corporation Franchise Tax
Regulations is identical to the definition of doing business for purposes of
section 16-2.7(a) of the Article 32 Regulations. In GEF Funding Corp, Adv Op
Comm T & F, January 26, 1988, TSB-A-88(2)C, it was held that for purposes of
Article 9-A of the Tax Law, the activities of a corporation do not constitute
doing business in New York State where the corporation is engaging in mortgage
loan activities when the loans are secured by real property located in New York
State but the acceptance of application, processing, approval and servicing of
the loans are conducted at the corporation's office outside New York State.
However, it was also held that a corporation could be subject to tax if it is
determined that an agency relationship exists between such corporation and a
person or entity and the agent is conducting the corporation's business in New
York State.
To ascertain the existence of an agency relationship, the relationship of
the parties must be examined.
"An agency is a fiduciary relationship which
results from a manifestation of consent by one person to another that the other
shall act on his behalf and subject to his control, and the consent by the other
to act." Custom Management Corp v NY St Tax Commn, 148 AD2d 919, 920, citing
Meese v Miller, 79 AD2d 237, 241. (emphasis added) Generally, the existence of
an agency relationship is a question of fact not susceptible of determination in
an Advisory Opinion. However, a Power of Attorney is a written authorization to
an agent to perform specified acts in behalf of his principal, which acts, when
performed, shall have a binding effect upon the principal. It is an instrument
by which the authority of one person to act in the place and stead of another as
attorney in fact is set forth. It is a mere contract of agency, that is, an
authorization by a principal for the accomplishment on his behalf of a particular
purpose or the performance of a particular act. (2 NY Jur 2d Agency §62)
In this case, Petitioner, a bank organized outside of the United States,
was a banking corporation subject to tax under Article 32 of the Tax Law. After
Petitioner was required to cease its operations in New York State by the New York
State Superintendent of Banks and the Board of Governors of the Federal Reserve
System, Petitioner surrendered its New York banking license to maintain a branch
in New York City on February 2, 1996. Since then, Petitioner has not conducted
a banking business in New York State or operated a branch, agency, loan
production office, representative office or bona fide office in New York State.
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However, Petitioner continues to be a banking corporation (because of its
activities in Japan) and may continue to be subject to tax under Article 32 if
it is considered to be doing business in New York State, pursuant to section 16
2.7 of the Article 32 Regulations, after it ceased its banking operations in New
York.
It appears that pursuant to the Order, the sole business of the Subsidiary
is limited to administering the books and records required by bank regulatory
agencies, administering the ongoing affairs and other matters with federal, state
and local tax authorities and regulatory bodies, defending or prosecuting any
action, inquiry or investigation to which Petitioner may become a party, and
administering the orderly termination of Petitioner's banking operations in the
United States.
To accomplish this, Petitioner executed a Power of Attorney
granting limited authority to two employees of the Subsidiary. Accordingly, an
agency relationship exists between Petitioner and the Subsidiary.
Section 16-2.2 of the Article 32 Regulations provides that a corporation
that continues to do business after it has been dissolved by the filing of a
certificate of dissolution, by proclamation or otherwise is subject to tax under
Article 32 of the Tax Law.
However, where the activities of a dissolved
corporation are limited to the liquidation of its business and affairs, the
disposition of its assets (other than in the regular course of business), and the
distribution of proceeds, it is not taxable under Article 32.
In this case, Petitioner has not dissolved.
However, Petitioner was
required by banking regulatory authorities to cease all of its banking activities
in the United States and surrender its certificate of authority to do a banking
business in New York State.
The circumstances in this particular case are
similar to the dissolution of a corporation. Therefore, to the extent that the
activities conducted by the Subsidiary on behalf of Petitioner are limited to
winding up Petitioner's business and affairs after it ceased its banking
business, as directed by banking regulatory authorities, these activities would
not rise to the level of doing business by Petitioner under section 16-2.7 of the
Article 32 Regulations.
However, the activities of the Subsidiary include acting as a liaison
between the Petitioner and Purchaser with respect to Petitioner's servicing
agreement with the Purchaser. In addition, the Subsidiary assists in monitoring,
servicing and liquidating the loans and may assist in foreclosure or other
actions to protect the interests of Petitioner. These activities may go beyond
activities conducted in winding up the affairs of Petitioner and rise to the
level of doing business under section 16-2.7 of the Article 32 Regulations.
Therefore, in the absence of a concerted effort on a regular and continuous basis
to dispose of the held assets as may be evidenced by periodic sales of the
assets, these activities could make Petitioner subject to tax under Article 32
of the Tax Law.
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The determination of whether the totality of the Subsidiary's activities
as agent for Petitioner are sufficient to deem Petitioner to be doing business
in New York is a question of fact that is not susceptible of determination in an
Advisory Opinion. An Advisory Opinion merely sets forth the applicability of
pertinent statutory and regulatory provisions to "a specified set of facts." Tax
Law, §171.Twenty-fourth; 20 NYCRR 2376.1(a).
It must also be determined whether an agency relationship exists between
Petitioner and the Purchaser. Petitioner may have an agency relationship with
the Purchaser because of its agreement to service Petitioner's outstanding loans
that were not sold and, when instructed by Petitioner's head office, its
arrangement for the sale of Petitioner's loans. However, Petitioner pays the
Purchaser an arm's length fee for these services and Petitioner holds only bare
legal title to the loans. Therefore, it appears that Petitioner does not have
an agency relationship with the Purchaser, but the existence of an agency
relationship in this case is a question of fact that is not susceptible of
determination in an Advisory Opinion.
If Petitioner is considered to be doing business in New York State as
contemplated in section 16-2.7 of the Article 32 Regulations, Petitioner is
subject to tax under Article 32 of the Tax Law for those years that it is doing
business, unless the extent of the business conducted in New York is considered
to be de minimis.
DATED: February 2, 1998
NOTE:
/s/
John W. Bartlett
Deputy Director
Technical Services Bureau
The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.