Does New York's related-party interest add-back rule reach interest a second-tier subsidiary pays, at an arm's-length rate, directly to its corporate 'grandparent' holding company?

Plain-English summary

Fleet Factors Corporation, a Rhode Island corporation, is wholly owned by Fleet Commercial Finance Corporation (also Rhode Island, a holding company with investments in commercial financing companies), which is itself wholly owned by Fleet Financial Corporation, a Rhode Island holding company. That makes Fleet Financial Corporation Petitioner's corporate "grandparent" -- two ownership tiers up. Petitioner borrows funds from Fleet Financial Corporation and pays interest on those borrowings at an arm's-length rate.

Tax Law § 208.9(b)(5) requires adding back to Federal taxable income interest paid on debt owed "directly or indirectly" to a stockholder owning more than 5% of the taxpayer's OWN issued capital stock, or to a SUBSIDIARY of such a stockholder. The Department held that Fleet Financial Corporation, as Petitioner's grandparent rather than its direct stockholder (Fleet Commercial Finance Corporation holds that role) or a subsidiary of that direct stockholder, doesn't fit the statutory description. Accordingly, the interest is not required to be added back -- citing both the Department's Hooker Chemical & Plastics Corp. ruling (1981) and The Ore and Chemical Corporation ruling (1982), the two precedents on which this entire doctrine line rests.

Filed about a week before the five-ruling Commercial Credit family batch. This ruling (petition received April 10, 1984, signed May 15, 1984) is a distinct, unrelated corporate family (Fleet, not Commercial Credit) reaching the identical result on the identical statute, filed just before the TSB-A-84(4)C through TSB-A-84(8)C same-day batch (petitions filed May 9, 1984). Notably, the "Fleet" corporate family resurfaces over a year later in TSB-A-85(12)C (Fleet Credit Corporation of New York, borrowing from grandparent Fleet National Bank) -- a different specific entity within the same broader Fleet organization, asking the identical question a second time. This ruling, together with the Commercial Credit quintet, was for a time the earliest instance of the "grandparent interest" doctrine line recovered in this corpus -- since surpassed by TSB-A-83(8)C (Chase Manhattan, signed July 8, 1983), which is now the earliest-signed instance recovered (all ultimately citing back to TSB-A-82(15)C, The Ore and Chemical Corporation, October 1982 -- now recovered and confirmed as the doctrine's origin ruling).

What this means for you

Multi-tier financial holding companies with captive finance subsidiaries

Charging an arm's-length interest rate on grandparent-to-subsidiary loans doesn't change the section 208.9(b)(5) analysis -- what matters is the corporate relationship (grandparent, not direct stockholder or its subsidiary), not whether the rate reflects fair market terms.

Recognizing this doctrine across different corporate families

The Department reached the identical "no add-back" conclusion for both the Commercial Credit family (five subsidiaries) and the Fleet family (at least two subsidiaries, a year apart) -- this is a well-established, consistently-applied reading of section 208.9(b)(5), not a one-off accommodation.

Common questions

Q: Does charging an arm's-length interest rate matter to whether the grandparent-interest add-back applies?
A: No -- the Department's analysis turns entirely on the corporate relationship between payor and payee, not on whether the interest rate reflects fair market terms.

Q: Can another multi-tier corporate group rely on this Opinion?
A: No. It binds the Department only as to Fleet Factors Corporation's own facts and cannot be relied upon by other taxpayers, even in an identical corporate structure -- though the Department has reached the same result in numerous companion rulings across different corporate families.

Citations and references

Statutes and prior rulings:

• Tax Law § 208.9(b)(5)
• Hooker Chemical & Plastics Corp., TSB-H-81(37)C (June 1, 1981)
• The Ore and Chemical Corporation, TSB-A-82(15)C (October 12, 1982)

Related rulings:

• TSB-A-84(4)C through TSB-A-84(8)C -- the Commercial Credit family's five-ruling same-day batch, filed about a week later
• TSB-A-85(10)C, TSB-A-85(11)C, TSB-A-85(12)C -- a July 1985 triplet; TSB-A-85(12)C involves a different subsidiary within the same broader Fleet corporate family
• TSB-A-86(14)C -- Mitsui, extends this holding and adds a "nephew corporation" variant

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_3c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-84 (3) C
Corporation Tax
May 23, 1984

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C840410A

On April 10, 1984 a Petition for Advisory Opinion was received from Fleet Factors Corp.,
1450 Broadway, New York, New York 10018.
The issue raised is whether interest paid by a second tier subsidiary to its "grandparent"
corporation would be required to be added to Federal entire taxable income by the subsidiary in
computing its entire net income under section 208.9(b)(5) of the Tax Law, contained in Article 9-A
thereof.
Petitioner presents the following statement of facts: Fleet Financial Corporation, a Rhode
Island corporation, is a holding company and owns 100% of Fleet Commercial Finance Corporation.
Fleet Commercial Finance Corporation, a Rhode Island corporation, is a holding company with
investment in commercial financing companies and owns 100% of Fleet Factors Corporation. Fleet
Factors Corporation, a Rhode Island corporation, borrows funds from Fleet Financial Corporation
on which it pays interest at an arm's length rate.
Section 208.9(b)(5) of the Tax Law provides, in pertinent part, that in arriving at entire net
income for franchise tax purposes, an addition to Federal entire taxable income must be made in the
amount of interest paid on indebtedness directly or indirectly owed to any stockholder or shareholder
owning more than five per cent of the taxpayer's issued capital stock, or to a subsidiary of such
corporate stockholder or shareholder.
Inasmuch as Petitioner's interest payments to Fleet Finance Corporation are not payments to
an entity described in section 208.9(b)(5), the amount of such payments is not required to be added
to Federal entire taxable income pursuant to Tax Law, § 208.9(b)(5). Hooker Chemical & Plastics
Corp., State Tax Commission Advisory Opinion, June 1, 1981, TSB-H-81(37)C; The Ore and
Chemical Corporation, State Tax Commission Advisory Opinion, October 12, 1982, TSB-A­
82(15)C.

DATED: May 15, 1984

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.

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

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