Chase Manhattan Corporation wants to form a new, wholly owned financial-services subsidiary that will hold stock in out-of-state finance companies and 'industrial banks' making consumer and commercial loans across several states -- activities a New York bank or national bank could not itself conduct outside New York. Can that new subsidiary be included in Chase's existing consolidated Article 32 banking-corporation return?

Plain-English summary

Chase Manhattan Corporation (CMC), a Delaware bank holding company qualified to do business in New York and the parent of Chase Manhattan Bank, N.A., already filed a consolidated Article 32 return with its bank subsidiary under Tax Law § 1462(f). CMC proposed forming a new, wholly owned financial-services subsidiary (FSC) that would hold the stock of several finance companies to be organized under it -- including a Delaware finance company operating through branches in multiple states, and "industrial banks" chartered or licensed under various states' banking departments. These subsidiaries would make and acquire secured and unsecured loans, issue investment certificates functionally equivalent to bank time deposits, and borrow funds to finance their lending.

Only a "banking corporation" as defined in Tax Law § 1452(a)(8) may be included in a bank holding company's consolidated Article 32 return. That section treats a corporation as a banking corporation if 80% or more of its voting stock is owned by a bank holding company (or similar qualifying owner) filing a consolidated return, and the corporation is "principally engaged in business which might be lawfully conducted" by a New York state bank or national bank. CMC argued that while a New York bank headquartered in New York could conduct FSC's lending activities within New York, such a bank could not conduct -- or hold subsidiaries conducting -- those same activities in other states.

The Department agreed with that reading of the statute (derived from former § 219-p of Article 9-B, since superseded by Article 32) and its legislative history: consolidation is permitted only where the subsidiary's activities are ones a New York-headquartered bank or national bank could itself lawfully perform. Because FSC's actual business plan involved multistate lending through subsidiaries -- something a New York bank could not do outside New York -- FSC did not qualify as a "banking corporation" under § 1452(a)(8) and could not be included in CMC's consolidated Article 32 return.

What this means for you

The consolidation test looks at what the subsidiary actually does, not just its ownership

Even a wholly owned subsidiary of a bank holding company filing a consolidated Article 32 return won't automatically qualify -- the subsidiary's specific business activities must be ones a New York-headquartered bank or national bank could lawfully conduct itself. Compare this to TSB-H-81(14)C, where an equipment-leasing subsidiary DID qualify because a bank could lawfully lease equipment itself.

Interstate scope of the proposed activity is the dividing line here

The Department drew the line specifically at geography: activities a New York bank could conduct in New York don't count if the subsidiary would also conduct them in other states where a New York bank couldn't operate. A holding company structuring a multistate lending subsidiary under a bank affiliate should expect this geographic mismatch to defeat Article 32 consolidation.

Common questions

Q: Does 80%-plus ownership by a bank holding company automatically make a subsidiary an Article 32 "banking corporation"?
A: No -- ownership is only half the test. The subsidiary must also be principally engaged in a business a New York bank or national bank could lawfully conduct itself, per Tax Law § 1452(a)(8).

Q: Why did this multistate lending subsidiary fail that test when a leasing subsidiary (TSB-H-81(14)C) passed?
A: Because a New York bank or national bank headquartered in New York could not itself conduct lending activities -- or hold subsidiaries doing so -- in other states, while equipment leasing was something the bank could lawfully do itself.

Citations and references

Statutes and guidance:

• Tax Law § 1462(f)
• Tax Law § 1452(a)(8)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/h81_13c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-H-81(13)C
Corporation Tax
March 5, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C800828A

On August 28, 1980, a Petition for Advisory Opinion was received from the
Chase Manhattan Corporation, 1 Chase Manhattan Plaza, New York, New York 10081.
The issue raised in the petition is whether a newly formed financial
services subsidiary of Chase Manhattan Corporation may be included in a
consolidated return filed by Chase Manhattan Corporation under Article 32 of the
Tax Law.
The Chase Manhattan Corporation (hereinafter CMC), incorporated in
Delaware, is qualified to do business in New York. CMC is a bank holding company
and is the parent corporation of a group of banking corporations, of which the
Chase Manhattan Bank, N. A. (hereinafter CMB) is the principal subsidiary. CMC
files a consolidated return with these subsidiaries under authority of Section
1462(f) of the Tax Law.
The newly formed and wholly-owned subsidiary (hereinafter FSC) will be
incorporated in Delaware and qualified to do business in New York. It will have
its principal office in New York. FSC will hold all of the voting stock of
several companies to be formed by it to engage in a financial services business
and will have offices and staff in New York which will manage, oversee and
provide administrative services to such subsidiaries.
Subsidiaries of FSC will include a finance company established under the
laws of Delaware operating through branches in one or more states and finance
corporations commonly known as "industrial banks" which will be chartered or
licensed by the respective bank department of the State in which each is
incorporated. The subsidiaries will make and acquire, for their own account or
for the account of others, secured and unsecured loans and other extensions of
credit. Such subsidiaries will also provide other financially-related services
to their customers. The industrial bank and industrial loan company subsidiaries
will also issue investment certificates which are the functional equivalent of
time deposit accounts offered by New York State banks and national banks and all
of the subsidiaries will borrow or otherwise obtain funds for their lending
activities.
Since only "banking corporations" subject to tax under Article 32 may be
included in a consolidated return with an affiliated corporation subject to tax
under Article 32, pursuant to section 1462(f) of the Tax Law, the preliminary
question to be decided is whether the newly formed financial services subsidiary
is a "banking corporation" as defined by Section 1452 of the Tax Law.
Section 1452(a)(8) of the Tax Law includes within the definition of
"banking corporation" any corporation "... eighty percent or more of whose voting
stock is beneficially owned by a corporation or corporations subject to article
three-a of the banking law or registered under the federal bank holding company
act of nineteen hundred fifty-six, as amended, and which makes a consolidated
return under the provisions of subdivision (f) of section fourteen hundred sixty­
two, or by a corporation or corporations subject to article three of the banking
law or by a national banking association or associations, provided the
corporation whose voting stock is so owned is principally engaged in business
which might be lawfully conducted by a corporation subject to article three of
the banking law or a national banking association."
JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

2
TSB-H-81(13)C
Corporation Tax
March 5, 1981

Petitioner notes that while "...a New York bank or a national banking
association headquartered in New York may conduct the proposed lending activities
in New York, they cannot conduct such activities in other states or hold shares
of subsidiaries conducting such activities in other states .... "The statutory
provision quoted above was derived from section 219-p of the Tax Law, contained
in Article 9-B thereof, which has been superseded by Article 32. The legislative
history of section 219-p supports the view that consolidation is permissible
where the subsidiary is engaged in business activities which a New York state
bank or national banking association whose main office is in New York could
engage in. Therefore, since such a New York bank or national banking association
admittedly could not engage in the very activity in which FSC engages, FSC does
not constitute a banking corporation within the meaning of section 1452 of the
Tax Law. The purpose of the statutory language at issue is to permit operations
subsidiaries to be subjected to Article 32 of the Tax Law if their activities
could just as well have been performed by a New York bank or national banking
association subject to tax under Article 32. That is to say, it is the
subsidiary's activities themselves, and not the category within which such
activities could be included, which is determinative. See L. 1969,c. 1090; 1969
New York State Legislative Annual 450.
Accordingly, inasmuch as FSC does not come within the definition of
"banking corporation" contained in section 1452(a)(8) of the Tax Law, it may not
be included on a consolidated return filed by CMC.

DATED:

January 19, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau