Does New York's rule requiring interest paid to a more-than-5%-stockholder to be added back to income also reach interest a corporation pays directly to its 'grandparent' corporation -- the parent of its direct parent?

Plain-English summary

Commercial Credit Business Services, Inc., a New York corporation subject to Article 9-A tax, was wholly owned by Commercial Credit Business Loans, Inc., which was itself wholly owned by Commercial Credit Company. Rather than borrowing from its direct parent, Petitioner borrowed money from Commercial Credit Company -- its "grandparent," two tiers up the ownership chain -- and paid interest on those loans directly to Commercial Credit Company.

Tax Law Section 208.9(b)(5) requires interest paid on debt owed to a stockholder owning more than 5% of the taxpayer's own capital stock, or to a subsidiary of such a stockholder, to be added back to federal taxable income when computing New York entire net income. The Department held that Commercial Credit Company, as Petitioner's grandparent rather than its direct stockholder, isn't described by that language -- so Petitioner's interest payments to it weren't payments to an entity covered by Section 208.9(b)(5), and no add-back was required. The Department cited its own prior Ore and Chemical Corporation ruling for the same conclusion.

This is one of three near-identical grandparent-interest rulings issued the same day, July 8, 1985. Its companion TSB-A-85(10)C involves a sibling subsidiary in the same Commercial Credit corporate family (Commercial Credit Financial Services, which had switched from borrowing through its direct parent to borrowing directly from the same grandparent), and TSB-A-85(12)C applies the identical reasoning to an unrelated corporate family (Fleet Credit Corporation of New York). See TSB-A-85(12)C for the fuller citation trail, including the Department's earlier Hooker Chemical ruling, and the later TSB-A-86(14)C (Mitsui), which extends this same doctrine and adds a "nephew corporation" variant.

Even earlier precedent recovered: a five-ruling same-day batch from May-June 1984 -- TSB-A-84(4)C through TSB-A-84(8)C -- predates this ruling by about 13 months and involves the SAME Commercial Credit Company corporate family. All five 1984 rulings cite the identical TSB-A-82(15)C precedent this ruling relies on.

What this means for you

Multi-tier corporate groups with internal financing arrangements

If your subsidiary borrows directly from a "grandparent" entity -- two or more tiers up the ownership chain, not its direct parent or shareholder -- the interest it pays is outside New York's Section 208.9(b)(5) add-back, regardless of which entity within the family actually originates the loan.

Corporate treasury functions restructuring intercompany lending

Note that in the companion TSB-A-85(10)C, the taxpayer had recently SWITCHED from borrowing through its direct parent to borrowing directly from the grandparent -- and the Department confirmed the same "no add-back" result applies either way, as long as the actual lender is the grandparent rather than the direct stockholder or the stockholder's own subsidiary.

Common questions

Q: Does it matter whether the interest is paid to the grandparent directly, or routed through the direct parent?
A: This ruling addresses interest paid DIRECTLY to the grandparent. Either way, what matters under Section 208.9(b)(5) is which entity is the actual creditor -- a direct 5%-plus stockholder or its own subsidiary triggers the add-back; a grandparent does not.

Q: Can another multi-tier corporate group rely on this Opinion?
A: No. It binds the Department only as to Commercial Credit Business Services' 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 multiple 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-85(10)C -- sibling subsidiary in the same Commercial Credit family, same doctrine, same day
• TSB-A-85(12)C -- Fleet Credit Corporation of New York, unrelated corporate family, same doctrine, same day, fuller citation trail
• TSB-A-86(14)C -- Mitsui, extends this holding and adds a "nephew corporation" variant
• TSB-A-84(4)C through TSB-A-84(8)C -- an earlier (May-June 1984) five-ruling batch from the same Commercial Credit Company family, predating this ruling by about 13 months

Date note: The document header reads "July 8, 1985," while the sign-off line reads "DATED: July 1, 1985" -- a seven-day gap consistent with internal signing before the header/publication date; issued_date uses the header date without correction.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1985.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a85_11c.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-85 (11) C
Corporation Tax
July 8, 1985

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

PETITION NO. C841003B

On October 3, 1984 a Petition for Advisory Opinion was received from Commercial Credit
Business Services, Inc., 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 New York corporation subject to tax under Article 9-A of the Tax Law, is a
wholly owned subsidiary of Commercial Credit Business Loans, Inc., which is in turn a wholly
owned subsidiary of Commercial Credit Company. Commercial Credit Company makes loans to
Petitioner, its second tier subsidiary and Petitioner pays interest on such loans directly to Commercial
Credit Company. Petitioner maintains that the interest paid on such loans from Commercial Credit
Company is not required to be added to Federal entire taxable income pursuant to Tax Law section
208.9(b)(5).
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 section 208.9(b)(5). The Ore and Chemical Corporation, State Tax Commission
Advisory Opinion, October 14, 1982, TSB-A-82(15)C.

DATED: July 1, 1985

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth herein.
RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

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