Did grantor trusts formed by a bank subsidiary qualify for Washington's B&O exemption for securitization entities formed by a bank holding company?

Plain-English summary

The Washington Department of Revenue denied a B&O-tax exemption to student-loan securitization trusts because the trusts did not establish that they were created by a bank holding company.

The grantor trusts acquired and managed student loans, issued notes, made payments, and entered swap agreements. A corporation formed the trusts. That corporation was a subsidiary of a bank, and the bank was itself owned within a larger financial-services structure. The trusts argued that this chain was enough because a bank holding company indirectly stood above their creator.

RCW 82.04.650 begins its securitization-entity definition with a threshold requirement: the entity must be created by a bank holding company. The trusts supplied no evidence that the corporation that actually formed them controlled a bank or otherwise qualified as a bank holding company under 12 U.S.C. § 1841. Because that first condition failed, the Department did not need to analyze the exemption's remaining requirements. The petition was denied.

What this means for you

Securitization vehicles

Trace and document the legal creator of each entity. An indirect relationship to a bank holding company may not satisfy a statute requiring that the entity be created by one.

Financial groups

Federal disregarded-entity treatment does not necessarily collapse separate entities for Washington excise tax. The audit registered the trusts separately while crediting income previously reported by the related corporation.

Tax professionals

Test exemption elements in order. If a threshold formation requirement fails, evidence about employees, profit motive, assets, conduit activity, receivable pools, or investors will not cure it.

Common questions

Q: Why did the ownership chain not satisfy the exemption?

A: The trusts were formed by a corporation, and they did not show that corporation was a bank holding company. Being a subsidiary within a broader banking group was not the same as being created by the qualifying company.

Q: Did the Department decide whether the trusts met the other securitization criteria?

A: No. It stopped after the trusts failed the formation requirement.

Q: Did federal grantor-trust or disregarded treatment make the trusts nontaxable in Washington?

A: No. The determination states that each separate entity remained taxable for Washington purposes unless a specific exemption applied.

Q: What income was involved?

A: The trusts earned interest on student loans from borrowers in multiple states, including Washington, and sought the exemption for amounts received from cash and securities.

Citations and references

• RCW 82.04.650(1) and (2)(c)-(d) (securitization exemption and definitions)
• 12 U.S.C. § 1841(a) (bank holding company and control)
• RCW 82.04.080, .090, .140, and .220 (B&O-tax base)
• Simpson Investment Co. v. Department of Revenue, 141 Wn.2d 139, 3 P.3d 741 (2000)
• Pilcher v. Department of Revenue, 112 Wn. App. 428, 49 P.3d 947 (2002)

Source

• Landing page: Washington Tax Decisions ZIP files
• Original PDF: 45WTD104.pdf
• Source archive: Volume 45 ZIP (member wtdvol45/45WTD104.pdf)

Original ruling text

Det. No. 22-0198, 45 WTD 104 (June 9, 2026)

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Cite as Det. No. 22-0198, 45 WTD 104 (2026)
BEFORE THE ADMINISTRATIVE REVIEW AND HEARINGS DIVISION
DEPARTMENT OF REVENUE
STATE OF WASHINGTON
In the Matter of the Petition for Correction of )
Assessment of
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DETERMINATION
No. 22-0198
Registration Nos. . . .
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RCW 82.04.650; B&O TAX – EXEMPTIONS – INVESTMENT CONDUITS
AND SECURITIZATION ENTITIES. A taxpayer seeking exemption as a securitization entity has not established that it was directly formed by a bank holding company; absent such a showing, the Department properly declined to consider the additional criteria required for the exemption. Headnotes are provided as a convenience for the reader and are not in any way a part of the decision or in any way to be used in construing or interpreting this Determination. McCormick, T.R.O. – A group of grantor’s trusts that were formed by the subsidiary of a bank holding company disputes the Department’s tax assessment because the group asserts it qualifies for the securitization entity exemption from business and occupation (B&O) tax. Because the group has not established that it was formed by a bank holding company, we deny the petition. 1 ISSUE Whether, under RCW 82.04.650, members of a group of grantor’s trusts that were formed by the subsidiary of a bank holding company qualify as securitization entities and are therefore exempt from B&O tax. FINDINGS OF FACT
[Trust 1], [Trust 2], and [Trust 3] (collectively, Taxpayer) are grantor’s trusts formed by . . . (Corporation). The purpose of the trusts is to issue and sell notes receivables. Taxpayer earns interest income on student loans from borrowers in various states, including Washington. Corporation was formed as a subsidiary of [Bank], which operates as a bank. 2 [Bank] is a subsidiary of [Financial Services Corporation] and is not a bank holding company under 12 U.S.C.
§ 1841. In 2010, . . . acquired ownership of Corporation and Taxpayer. Corporation provides private student loans to pay for college and graduate school. Taxpayer as “[t]he issuing entity is a
. . . statutory trust created under a trust agreement dated as of December 8, 2006. . . . [Taxpayer’s 1 2

Identifying details regarding the taxpayer and the assessment have been redacted pursuant to RCW 82.32.410.
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only activities are that it acquires, owns, and manages the trust loans and other trust assets. Taxpayer also issues payments on the notes and enters into swap agreements, under which it makes payments, and other related activities.]” Taxpayer Final Offering Memorandum at 5. While conducting a review of Corporation’s business activities, the Department’s Audit Division (Audit) discovered that Corporation reported income Taxpayer received on Corporation’s excise tax returns. As a result, Audit conducted a review of Taxpayer’s business activities for the period of January 1, 2016, through December 31, 2019. Throughout the review period, Taxpayer was not registered with the Department. All of the Taxpayer trusts are considered disregarded entities for federal income tax purposes. However, because each separate entity is taxable in Washington, Audit credited Corporation for Taxpayer’s income it reported, registered Taxpayer with the Department, and issued notices of balance due (Assessments) to Taxpayer. 3 The Assessments remain unpaid. Taxpayer petitioned for administrative review of the Assessments. Taxpayer asserts Audit incorrectly issued the Assessments because Taxpayer is a qualifying securitization entity and is exempt from B&O tax. Taxpayer asserts that Audit incorrectly interprets the statutory requirement of being formed by a bank holding company as requiring a qualifying securitization entity to be directly formed by a bank holding company. Taxpayer asserts that because it was formed by Corporation, which was a subsidiary of a bank holding company, it satisfies the statutory requirement. Taxpayer argues, “The formation structure and purpose is consistent with the meaning of securitization entity, an entity used as a conduit holding discreet pool of credit, i.e. student loans. . . . The receivables are transferred to [Taxpayer] as collateral for the trust securities.” Petition at 5. Taxpayer asserts that because it was formed by a bank holding company and satisfies the additional requirements to qualify for the exemption, Taxpayer’s income qualifies for the securitization entity exemption. In support of its petition, Taxpayer submitted a Prospectus Supplement to Prospectus for each of Taxpayer’s entities and a Participant List for [Trust 2] listing . . . as the only investor. 4 ANALYSIS Washington’s B&O tax is imposed on every person “for the act or privilege of engaging in business activities” and applies to the gross income of the business. RCW 82.04.220. “Business” for B&O tax purposes includes “all activities engaged in with the object of gain, benefit, or advantage to the taxpayer or to another person or class, directly or indirectly.” RCW 82.04.140. “Gross income of the business” is broadly defined and means:
[T]he value proceeding or accruing by reason of the transaction of the business engaged in and includes gross proceeds of sales, compensation for the rendition of 3
[Letter 1], issued October 7, 2021, includes $. . . in service and other activities B&O tax, $. . . in unregistered business penalty, $. . . in delinquent penalty, and $. . . in interest. [Letter 2], issued October 5, 2021, includes $. . . in service and other activities B&O tax, $. . . in unregistered business penalty, $. . . in delinquent penalty, and $. . . in interest.
[Letter 3], issued on September 30, 2021, includes $. . . in service and other activities B&O tax and $. . . in interest. 4 Taxpayer did not provide a participant list for either [Trust 1] or [Trust 3], stating the information was not readily available.

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services, gains realized from trading in stocks, bonds, or other evidences of indebtedness, interest, discount, rents, royalties, fees, commissions, dividends, and other emoluments however designated, all without any deduction on account of the cost of tangible property sold, the cost of materials used, labor costs, interest, discount, delivery costs, taxes, or any other expense whatsoever paid or accrued and without any deduction on account of losses. RCW 82.04.080. The phrase “value proceeding or accruing” is defined as “the consideration, whether money, credits, rights, or other property expressed in terms of money, actually received or accrued.” RCW 82.04.090. Under this broad definition, a service provider may not deduct any of its costs of doing business from its gross income. See Pilcher v. Dep’t of Revenue, 112 Wn. App. 428, 49 P.3d 947 (2002) (citing Rho Co. Inc. v. Dep’t of Revenue, 113 Wn.2d 561, 570, 782 P.2d 986 (1989)). Thus, unless a specific exemption, deduction, or exclusion applies, all of Taxpayer’s gross income is subject to B&O tax without any deduction for overhead or other expenses. The Legislature “intended to impose the business and occupation tax upon virtually all business activities carried on within the state.” Simpson Inv. Co. v. Dep’t of Revenue, 141 Wn.2d 139, 149, 3 P.3d 741 (2000) (quoting Time Oil Co. v. State, 79 Wn.2d 143, 146, 483 P.2d 628 (1971)). Here, Taxpayer received income during the review period, which was reported on Corporation’s excise tax returns. Thus, Taxpayer’s gross income is subject to B&O tax unless a specific exemption applies. Taxpayer asserts that the income it received qualifies for the securitization entity exemption under RCW 82.04.650. RCW 82.04.650 relevantly provides: Exemptions – Investment conduits and securitization entities. (1) This chapter does not apply to amounts received by . . . securitization entities from cash and securities. (2) For purposes of this section, the following definitions apply:
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(c) “Securitization entity” means an entity created by a bank holding company if the entity created: (i) Has no employees; (ii) Has no direct profit-making motive; (iii) Owns no tangible assets, other than cash, fixed or revolving discrete pools of credit or charge card receivable originated by a financial institution, or securities; (iv) Acts solely as a conduit, allocating its income to holders of its ownership interest; and (v) Has as its sole business activities the: (A) Acquisition of such discrete pools of credit or charge card receivables; and (B) Issuance or causing the issuance of securities primarily to persons not affiliated with the entity.

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(d) “Bank holding company” has the same meaning as provided in the bank holding company act of 1956, as existing on June 1, 2010, or such subsequent date as may be provided by the department by rule, consistent with the purposes of this section.
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(Bold in original, italics ours.) Thus, to qualify for the securitization entity exemption, the entity must first have been created by a bank holding company, then satisfy all of the additional statutory requirements. The Bank Holding Company Act of 1956 is found in 12 U.S.C. § 1841, et seq. The version of 12 U.S.C. § 1841 that was in effect on June 1, 2010, relevantly provides: (a)(1) Except as provided in paragraph (5) of this subsection, “bank holding company” means any company which has control over any bank or over any company that is or becomes a bank holding company by virtue of this chapter. (2) Any company has control over a bank or over any company if— (A) the company directly or indirectly or acting through one or more other persons owns, controls, or has power to vote 25 per centum or more of any class of voting securities of the bank or company; (B) the company controls in any manner the election of a majority of the directors or trustees of the bank or company; or (C) the Board determines, after notice and opportunity for hearing, that the company directly or indirectly exercises a controlling influence over the management or policies of the bank or company.
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12 U.S.C. § 1841 (effective October 13, 2006, through July 21, 2020) (bold in original, italics ours). Here, Taxpayer was formed by Corporation, which was a subsidiary of a bank holding company. Taxpayer asserts that because a bank holding company formed Corporation which then formed Taxpayer, Taxpayer meets the statutory requirement of having been created by a bank holding company. Taxpayer opines Audit’s interpretation of the requirement for Taxpayer to have been directly formed by a bank holding company in order to qualify for the exemption is incorrect. We disagree. The plain language of RCW 82.04.650 requires that a qualifying “securitization entity” be created by a bank holding company. RCW 82.04.650(2)(c). The term “‘bank holding company’ means any company which has control over any bank or over any company that is or becomes a bank holding company.” 12 U.S.C. § 1841(a)(1) (2006). The statutory requirements for the securitization entity exemption are clear. In order to qualify for the exemption, Taxpayer must first establish that it was created by a company that has control over any bank or bank holding company. Only after an entity

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establishes it was formed by a bank holding company must we consider whether each of the additional criteria are satisfied. Taxpayer does not assert and has provided no records that establish Corporation has control over any bank or any company that is or becomes a bank holding company. Thus, we are unable to conclude Corporation is a bank holding company for purposes of the exemption. Because Taxpayer has not established that it was formed by a bank holding company, we need not consider whether the additional required criteria under RCW 82.04.650(c)(i)-(v) have been met. We deny the petition. DECISION AND DISPOSITION Taxpayer’s petition is denied. Dated this 2nd day of November 2022.