A bank borrows funds and re-lends them to its own Article 9-A subsidiary at a markup. Because the subsidiary can't fully deduct that interest expense (due to the related-party interest add-back), the same spread effectively gets taxed twice within the corporate family. Can the bank exclude that spread from its own income to avoid the double taxation?

Plain-English summary

Kredietbank, N.V. is a banking corporation subject to New York's Article 32 franchise tax on banking corporations. It borrows funds and re-lends them to its own subsidiary, which is separately subject to Article 9-A tax (the ordinary business corporation franchise tax, not the banking tax). Petitioner sought to exclude from its own entire net income the SPREAD -- the excess of the interest it collects from its subsidiary over its own cost of borrowing the funds it re-lends.

Petitioner's argument was about double taxation: because Petitioner is a more-than-5% shareholder of its Article 9-A subsidiary, the subsidiary cannot fully deduct the interest it pays Petitioner -- Tax Law § 208.9(b)(5) requires the subsidiary to add back 90% of that interest expense to its own entire net income. Petitioner argued that, viewing the parent and subsidiary as effectively a single economic enterprise, this creates real double taxation: the subsidiary is taxed on income it used to pay interest it can't fully deduct, AND Petitioner is taxed again on that same interest as its own income.

The Department didn't dispute the underlying economics, but found no statutory basis for relief. Tax Law § 1453 defines Article 32 entire net income as the same as the taxpayer's federal taxable income, "with certain exceptions provided by statute." Since none of those specific statutory exceptions covered Petitioner's situation, the Department held Petitioner must include the interest-spread income in its own entire net income. The two corporations are taxed as separate entities under separate tax articles (Article 32 for the bank parent, Article 9-A for the subsidiary) -- New York's statutory scheme doesn't provide a combined, single-enterprise view that would eliminate this double taxation, however real it may be in economic substance.

What this means for you

Bank holding companies lending to Article 9-A subsidiaries

Be aware that lending to your own subsidiary, where you're a more-than-5% shareholder, can create real economic double taxation: the subsidiary loses 90% of its interest deduction under section 208.9(b)(5), while you as the lender must still include the full interest income (including your profit spread) in your own entire net income. New York's statute doesn't offer relief for this effect.

The limits of "single enterprise" arguments in state tax law

Economic-substance arguments that a parent and subsidiary should be viewed as one enterprise for tax purposes generally don't succeed absent a specific statutory mechanism (like an election to file combined) -- each entity is taxed separately under its own applicable Tax Law article unless a statute says otherwise.

Common questions

Q: If my bank subsidiary can't fully deduct interest it pays me due to the related-party add-back, can I exclude that income to avoid double taxation?
A: No -- absent a specific statutory exception, you must include the full interest income (including any profit spread) in your own entire net income, even though the same economic income is effectively taxed twice within the corporate family.

Q: Does it matter that the parent and subsidiary are effectively one business enterprise?
A: Not under this analysis -- New York taxes each corporation separately under its applicable Tax Law article; there's no general "single enterprise" exception absent a specific statutory combined-filing mechanism.

Q: Can another bank holding company with a similar intercompany lending arrangement rely on this Opinion?
A: No. It binds the Department only as to Kredietbank's own facts and can't be relied upon by other taxpayers, even those with similar bank-to-subsidiary lending structures.

Citations and references

Statutes:

• Tax Law § 1453
• Tax Law § 208.9(b)(5) (as applied to Petitioner's Article 9-A subsidiary)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1983.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a83_5c.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-83(5)C
Corporation Tax
November 2, 1983

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C820610A

On June 10, 1982 a Petition for Advisory Opinion was received from Kredietbank, N.V., 450
Park Avenue, New York, New York 10022.
Petitioner, a corporation subject to Article 32 of the Tax Law (Franchise Tax on Banking
Corporations), seeks to exclude from its entire net income the excess of interest received from its
subsidiary on loans made to such subsidiary over its own interest expenses incurred in borrowing
the funds necessary to make such loans to its subsidiary. Petitioner's subsidiary is subject to tax
under Article 9-A of the Tax Law (Franchise Tax on Business Corporations). Petitioner contends that
because its subsidiary is not allowed a deduction for its entire interest expense, pursuant to section
208.9(b)(5) of the Tax Law, contained in Article 9-A thereof, certain net income of the two
corporations (conceived of as single business entity) is taxed twice.
Section 1453 of the Tax Law, contained in Article 32 thereof, defines entire net income as
"total net income from all sources which shall be the same as the entire taxable income which the
taxpayer is required to report to the United States treasury department," with certain exceptions
provided by statute. Inasmuch as none of these statutory exceptions would provide Petitioner with
the relief requested, Petitioner must include the subject income in its entire net income.

DATED: October 31, 1983

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

s/FRANK J. PUCCIA
Director
Technical Services Bureau

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR