A bank holding company wants to form a new subsidiary to hold stock in out-of-state banks and to own financial-service subsidiaries (finance, leasing, real estate credit) that its own New York national bank isn't authorized to own directly. Can that new subsidiary be included in the bank holding company's Article 32 consolidated franchise tax return?

Plain-English summary

Marine Midland Banks, Inc. is a bank holding company registered under the federal Bank Holding Company Act, and files a consolidated Article 32 franchise tax return that includes its principal New York subsidiary, Marine Midland Bank, N.A. ("MMB"). Petitioner planned to form a new wholly owned Delaware subsidiary, Marine Midland National Corporation ("National"), to (1) hold the stock of certain banks NOT conducting business in New York, and (2) form additional subsidiaries engaged in out-of-state financial-service businesses -- a finance company, a leasing company, and a real estate credit corporation -- all of which would borrow or obtain funds for their own lending activities, with National itself headquartered and staffed in New York to manage and oversee them.

Tax Law § 1462(f) allows a bank holding company to file a consolidated Article 32 return with an affiliated corporation, but only if that affiliate qualifies as a "banking corporation" under § 1452(a)(9) -- which, for a bank holding company's subsidiary, turns on whether the subsidiary is "principally engaged in business which might be lawfully conducted" by the bank holding company's own qualifying bank (here, MMB). That phrase covers business the bank could conduct either without any special regulatory authorization, or WITH authorization the bank has actually obtained.

The Department worked through National's two categories of planned activity. First, holding stock in out-of-state banks: federal banking law strictly limits what stock a national bank may own for its own account (12 U.S.C. § 24, ¶ 7 covers only banks serving other depository institutions; the Federal Reserve Act covers only banks principally engaged in foreign banking) -- and National's planned bank-stock holdings fell into neither protected category. Second, owning financial-service operating subsidiaries: national banks may only own such subsidiaries with specific regulatory authorization (12 CFR § 7.7376), and MMB had not in fact received that authorization. Since National's entire planned business fell outside what MMB itself could lawfully do -- either because no federal authorization exists for that activity, or because MMB hadn't obtained authorization it would otherwise need -- National could not be "principally engaged in business which might be lawfully conducted" by MMB, and therefore did not qualify to be included in Petitioner's Article 32 consolidated return.

What this means for you

Bank holding companies structuring new non-bank subsidiaries

Before assuming a new subsidiary can join your consolidated Article 32 return, confirm your own bank subsidiary is itself authorized (by statute or by an actual regulatory approval it has obtained) to conduct the SAME line of business -- a subsidiary engaged in activities your bank couldn't lawfully do itself won't qualify for consolidation, no matter how closely it's managed or overseen by group personnel.

Financial-service diversification through holding company subsidiaries

Diversifying into finance, leasing, or real estate credit businesses through a holding-company-level (rather than bank-level) subsidiary can be a sound business structure, but it has this specific New York consolidated-filing consequence -- confirm the tax treatment before assuming consolidated filing will be available.

Common questions

Q: Can any subsidiary of a bank holding company join its Article 32 consolidated return?
A: No -- only a subsidiary "principally engaged in business which might be lawfully conducted" by the holding company's own qualifying bank, meaning business the bank could conduct without special authorization or with authorization it has actually received.

Q: Does it matter that the new subsidiary is headquartered and managed from New York?
A: No -- the test looks to whether the SUBSTANCE of the subsidiary's business could lawfully be conducted by the affiliated bank, not to where the subsidiary is managed or staffed.

Q: What if our bank later obtains the authorization it currently lacks?
A: The Opinion's reasoning turns on authorization actually received -- if the bank later obtains authorization for the relevant activity, the analysis could change, but that's a different fact pattern from the one presented here.

Q: Can another bank holding company rely on this specific ruling?
A: No. It binds the Department only as to Marine Midland's own facts and can't be relied upon by other bank holding companies, even those planning similar subsidiary structures.

Citations and references

Statutes and regulations:

• Tax Law § 1462(f), § 1451, § 1452(a)(9)
• 12 U.S.C. § 24, ¶ 7
• Federal Reserve Act § 25, 12 U.S.C. § 601
• 12 CFR § 7.7376

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1984.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a84_1c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-84 (1) C
Corporation Tax
May 10, 1984

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C820324A

On March 24, 1982 a Petition for Advisory Opinion was filed by Marine Midland Banks,
Inc., One Marine Midland Center, Buffalo, New York 14203.
The issue raised herein is whether a certain subsidiary of Petitioner, a bank holding company,
would qualify to be included by Petitioner on a consolidated return filed under Article 32 of the Tax
Law.
Petitioner is a bank holding company registered under the Federal Bank Holding Company
Act of 1956, as amended, and is the parent of a group of corporations of which Marine Midland
Bank, N.A. (hereinafter "MMB") is the principal subsidiary. MMB is the only bank located in New
York which Petitioner owns. Petitioner files a consolidated return under Article 32 of the Tax Law,
which imposes the Franchise Tax on Banking Corporations, including MMB thereon.
Petitioner has formed a new wholly-owned subsidiary called Marine Midland National
Corporation ("National"), which was incorporated under the laws of Delaware. National was formed
to hold the stock of certain banks not conducting business in New York. In addition, National
proposes to form subsidiaries to engage in financial service businesses in states other than New
York. These businesses may include a finance company, a leasing company and a real estate credit
corporation.
The proposed financial service 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. All of the
proposed subsidiaries will borrow or otherwise obtain funds for their lending activities. National will
have its principal offices in New York and will have staff in New York which will manage, oversee
and provide administrative services to the proposed subsidiaries.
Section 1462(f) of the Tax Law provides for the filing of consolidated returns by a bank
holding company and an affiliated corporation taxable under Article 32 of the Tax Law. Section
1451 of the Tax Law, contained in Article 32 thereof, imposes a franchise tax on banking
corporations. The term banking corporation is defined, in relevant part, as including "any corporation
eighty per cent or more of whose voting stock is beneficially owned by a corporation...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 [Tax Law, §1462(f)] .... 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." Tax Law, § 1452(a)(9). In the case of a subsidiary of a bank holding company, the
dispositive question under section 1452(a)(9) is whether such subsidiary is doing business which

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

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

-2­
TSB-A-84 (1) C
Corporation Tax
May 10, 1984

might be lawfully conducted, with regard both to its nature and location, by any bank owned by the
bank holding company, which bank (1) is either a corporation subject to Article 3 of the Banking
Law or a national bank whose principal place of business is in New York, and (2) which bank makes
a consolidated return with the bank holding company. The phrase "business which might be lawfully
conducted" means business which may be conducted absent any specific grant of authorization by
the appropriate regulatory authorities, or business which may be conducted with such authorization
where such bank has in fact received such authorization. Thus, if such a bank has in fact received
permission to perform certain activities requiring such permission, but such business activities are
instead performed by its subsidiary or a subsidiary of a bank holding company owning such bank,
such subsidiary would be doing business "which might be lawfully conducted" by the bank. In the
present instance, then, the critical issue to be determined is whether National is or will be doing
business which might be lawfully conducted by MMB.
One portion of the business of National will be the holding of the stock of banks located
outside New York. The type of stock which a national bank may purchase for its own account is
limited by Federal statute. 12 U.S.C. § 24, ¶7. As to the stock of banks, thus, a national bank may
own stock in certain banks owned exclusively by depository institutions and engaged exclusively in
the provision of services to other depository institutions and their officers, directors and employees.
Ibid. In addition, national banks may own the stock of certain banks principally engaged in a foreign
banking business. Federal Reserve Act, §25 (12 U.S.C. 601). However, there is no such statutory
authorization for bank stock ownership of the type described herein, which falls within neither of
the categories just described.
In addition to the stock of banks, National will also own the stock of subsidiary financial
service corporations. National banks are permitted to own operations subsidiaries only upon the
receipt of authorization therefor. 12 CFR § 7.7376. MMB has in fact not received authorization to
own the subsidiaries in question.
Accordingly, inasmuch as National is and will be wholly engaged in activities which may not
be engaged in by a national bank without authorization of the appropriate regulatory authorities, and
as MMB has in fact not received such authorization, National is and will not be "principally engaged
in business which might be lawfully conducted" by MMB, within the meaning and intent of section
1452(a)(9) of the Tax Law. It follows that National is not and will not be permitted or required to
be included in a consolidated return with Petitioner.

DATED: February 6, 1984

s/FRANK J. PUCCIA
Director
Technical Services Bureau