Does New York's related-party interest add-back rule reach interest a second-tier subsidiary pays directly to its corporate 'grandparent'?

Plain-English summary

Commercial Credit Equipment Corp., a Delaware corporation subject to Article 9-A tax, is a wholly owned subsidiary of Auto Fleet Leasing Corporation, which is itself a wholly owned subsidiary of Commercial Credit Company -- making Commercial Credit Company Petitioner's corporate "grandparent." Commercial Credit Company lends money directly to Petitioner, and Petitioner pays interest on those loans.

Tax Law § 208.9(b)(5) requires adding back to Federal taxable income interest paid on debt owed to a stockholder owning more than 5% of the taxpayer's own stock, or to a subsidiary of such a stockholder. Since Commercial Credit Company is Petitioner's grandparent rather than its direct stockholder (Auto Fleet Leasing Corporation) or that stockholder's subsidiary, it doesn't fit the statutory description, and the interest need not be added back -- citing the Department's prior Ore and Chemical Corporation ruling, TSB-A-82(15)C (October 14, 1982).

This is one of five identical same-day rulings issued June 1, 1984 for five second-tier subsidiaries of the Auto Fleet Leasing Corporation/Commercial Credit Company family. See TSB-A-84(4)C for the fuller writeup and the full list of companion rulings (TSB-A-84(6)C, TSB-A-84(7)C, TSB-A-84(8)C), plus the later 1985-1986 rulings extending the same doctrine (TSB-A-85(10)C, TSB-A-85(11)C, TSB-A-85(12)C, TSB-A-86(14)C).

What this means for you

Multi-tier corporate groups with a captive finance/leasing subsidiary family

If several subsidiaries in your group are commonly owned through an intermediate holding company and all borrow directly from the ultimate parent two tiers up, none of that interest is subject to New York's related-party add-back.

Common questions

Q: Does New York's related-party interest add-back reach payments to a corporate grandparent?
A: No -- section 208.9(b)(5) only reaches interest paid to a direct 5%-plus stockholder or that stockholder's own subsidiary; a grandparent falls outside both categories.

Q: Can another multi-tier corporate group rely on this Opinion?
A: No. It binds the Department only as to Commercial Credit Equipment Corp.'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.

Citations and references

Statutes and prior rulings:

• Tax Law § 208.9(b)(5)
• The Ore and Chemical Corporation, TSB-A-82(15)C (October 14, 1982)

Related rulings:

• TSB-A-84(4)C -- sibling subsidiary, same doctrine, same day (fuller writeup and full companion list)
• TSB-A-84(6)C, TSB-A-84(7)C, TSB-A-84(8)C -- other sibling subsidiaries, same doctrine, same day

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_5c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-84 (5) C
Corporation Tax
June 1, 1984

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C840509A

On May 9, 1984 a Petition for Advisory Opinion was received from Commercial Credit
Equipment Corp., 300 St. Paul Place, Baltimore, Maryland 21202.
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, a Delaware corporation subject to Article 9-A of the Tax Law, is a wholly owned
subsidiary of Auto Fleet Leasing Corporation, which is in turn a wholly owned subsidiary of
Commercial Credit Company. The latter makes loans to Petitioner, its second tier subsidiary.
Petitioner pays interest on such loans.
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 Commercial Credit Company, its corporate
grandparent, are not payments to an entity described in section 208.9(b)(5) of the Tax Law, the
amount of such interest expense is not required to be added to Federal entire taxable income pursuant
to Tax Law, § 208.9(b)(5). The Ore and Chemical Corportion, State Tax Commission Advisory
Opinion, October 14, 1982, TSB-A-82(15)C.

DATED: May 29, 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