If a foreign government's central bank opens a small New York trading office to buy U.S. Treasury securities and trade currencies -- but has no federal taxable income because its activities aren't a U.S. trade or business -- is its New York State bank franchise tax liability capped at the $250 minimum?

Plain-English summary

Bank Negara Malaysia is Malaysia's central bank -- created by special act of the Malaysian legislature, wholly owned and controlled by the Malaysian government, with no capital stock and a board appointed by Malaysia's constitutional head. It functions much like the U.S. Federal Reserve: issuing currency and managing Malaysia's banking system, monetary policy, and reserves. Its net earnings are either kept for its own account or distributed to the Malaysian government, with no private person benefiting, and its assets would revert to the government if it were dissolved.

As part of managing Malaysia's reserves, Bank Negara invests in U.S. Treasury bills, bonds, and notes and trades spot currency/precious-metals contracts. To facilitate this, it planned to open a small New York office that would gather market information and execute trades as directed by its Kuala Lumpur head office -- with discretionary authority limited to instructions from Malaysia, no control over settlement funds (all settlements occur in Malaysia), and no accounting records kept locally. The office would not engage in commercial banking. Bank Negara had applied for (but not yet received) an IRS ruling that its traded foreign currencies would count as "commodities" under IRC section 864(b)(2)(B), which -- if granted -- would mean it isn't engaged in a U.S. trade or business and has no federal taxable income.

New York's Article 32 bank franchise tax starts its entire-net-income calculation from the taxpayer's federal taxable income. Since Bank Negara assumed (pending the IRS ruling) that it would have no U.S. trade or business and thus no effectively-connected income under IRC section 864(c), none of the Tax Law's modification provisions would apply, leaving entire net income, alternative entire net income, and taxable assets all at zero. The Department agreed: assuming Bank Negara truly isn't engaged in a U.S. trade or business and has no effectively connected income, its New York tax liability under section 1455 would be just the $250 statutory alternative minimum tax -- but only "for each taxable year such assumptions are accurate," making this ruling explicitly conditional on the IRS actually granting the anticipated ruling. It later did, as confirmed in the follow-up modified opinion, TSB-A-86(23.1)C.

What this means for you

Foreign governments and central banks with U.S. investment offices

A foreign sovereign entity's New York franchise tax exposure tracks its FEDERAL tax treatment -- if your U.S. activities don't rise to a "trade or business" under IRC section 864(b) (for example, because they're limited to trading in exempt investment instruments through a non-discretionary local office), your New York entire net income can be zero, leaving only the flat $250 minimum tax.

Rulings issued on assumed future facts

When a ruling like this one is expressly conditioned on a still-pending federal determination ("assuming Petitioner is not engaged in a trade or business..."), don't rely on the favorable result until that underlying federal ruling actually issues -- the state ruling is only as good as the assumption holds.

Common questions

Q: Why would a foreign central bank owe any New York tax at all if it has zero net income?
A: New York's Article 32 has a flat $250 alternative minimum tax as one of three possible tax bases -- that floor applies even to a corporation with zero entire net income, zero alternative entire net income, and zero taxable assets.

Q: What made this ruling conditional rather than final?
A: It explicitly rested on Bank Negara's own (not-yet-confirmed) assumption that its traded currencies would qualify as "commodities" under IRC section 864(b)(2)(B) and that its IRS ruling application would be granted.

Q: Did the IRS ultimately grant that ruling?
A: Yes -- confirmed in the June 1987 modified opinion, TSB-A-86(23.1)C, which appended the actual IRS ruling to this opinion without changing the result.

Q: Can another foreign government agency rely on this specific ruling?
A: No. It binds the Department only for this petitioner's specific facts and can't be relied upon by other foreign sovereign entities, even ones with similar U.S. trading offices.

Citations and references

Statutes and regulations:

• Tax Law § 1453(a), § 1453(b)-(i), § 1453-A(a) (entire net income and modifications)
• Tax Law § 1455(b)(1)(v)(A), § 1455 (taxable assets; alternative minimum tax)
• Franchise Tax on Banking Corporations Regulations §§ 18-2.3, 18-2.4, 18-2.5
• Internal Revenue Code § 864(b), § 864(c) (U.S. trade or business; effectively connected income)

Related rulings:

• TSB-A-86(23.1)C -- the June 1987 modified opinion confirming this result once the IRS ruling issued

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1986.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a86_23c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-86 (23) C
Corporation Tax
December 6, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C861002A

On October 2, 1986, a Petition for Advisory Opinion was received from Bank Negara
Malaysia, P.O. Box 10922, Jalan Kuching, 50929 Kuala Lampur, Malaysia.
The issue raised is whether Petitioner's tax liability for purposes of the New York State
Franchise Tax on Banking Corporations, Article 32 of the Tax Law, will be limited to $250 per year
because Petitioner will not have any taxable income for federal income tax purposes.
Petitioner is a corporation formed under the laws of Malaysia by special act of the Malaysian
legislature. It is wholly owned and controlled by the Malaysian government and has no issued and
outstanding capital stock. All of the members of the board of directors of Petitioner are appointed
by the constitutional head of Malaysia and approved by the Malaysian legislature. Petitioner is the
central bank of Malaysia, and as such is the principal authority responsible for issuing currency and
managing the banking system and monetary policy and reserves of Malaysia. Petitioner thus
functions in a manner comparable to the Federal Reserve Bank of the United States. Its net earnings
are credited to its own account or are distributed to the Malaysian government, with no portion of
its income inuring to the benefit of any private person. In the event that Petitioner were dissolved,
its assets would vest in the Malaysian government.
As a part of its duties in managing the monetary reserves of Malaysia, Petitioner invests in
United States treasury bills, bonds and notes, and trades in spot contracts for foreign currencies and
precious metals on recognized commodities markets. It does not now trade in forward or futures
contracts for foreign currencies or precious metals, although it may do so in the future. In order to
facilitate these transactions, Petitioner intends to open an office in New York City. The purpose of
the New York office will be to gather information regarding the relevant financial markets, and to
execute transactions as directed by Petitioner's head office in Malaysia. Petitioner will not engage
in commercial banking functions in the United States.
The New York office will have discretionary authority to buy and sell currencies and precious
metals on behalf of Petitioner, but only within the limits prescribed by its head office in Malaysia.
Further, all transaction settlements will occur in Malaysia rather than in New York. The New York
office will not, therefore, have control of any actual funds, nor will it maintain the accounting records
of the transactions it undertakes. In essence, the New York office will act as an extended trading arm
for Petitioner in Kuala Lumpur.

RODERICK G. W. CHU, COMMISSIONER
GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (3/83)

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TSB-A-86 (23) C
Corporation Tax
December 6, 1986

Petitioner has applied for a ruling from the Internal Revenue Service that the foreign
currencies traded by Petitioner through its New York office will constitute commodities for purposes
of Internal Revenue Code section 864(b)(2)(B). For purposes of this petition, Petitioner assumes that
the foreign currencies will constitute commodities for purposes of Internal Revenue Code section
864(b)(2)(B). As a result, Petitioner contends that it will not be engaged in a trade or business in the
United States, and therefore it will have no taxable income for federal income tax purposes.
Petitioner contends that its entire net income, alternative entire net income and taxable assets for
New York State franchise tax purposes will be zero, and that its New York State franchise tax
liability will be the $250 alternative minimum tax.
Section 1455 of the Tax Law provides that the basic tax is measured by the taxpayer's entire
net income, or portion thereof allocated to New York State and that the alternative minimum tax is
measured by the largest of three bases. The bases are: (1) the taxpayer's alternative entire net income
or portion thereof allocated to New York State; (2) the taxpayer's taxable assets or portion thereof
allocated to New York State; and (3) the minimum tax of $250.
Section 1453(a) of the Tax Law 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, except as hereinafter provided."
Section 1453(b) through (i) of the Tax Law and sections 18-2.3, 18-2.4 and 18-2.5 of the
Franchise Tax on Banking Corporations Regulations, promulgated thereunder on December 2, 1985,
provide for the modifications required by section 1453 (a).
Section 1453-A(a) of the Tax Law defines "alternative entire net income" as entire net
income as determined pursuant to section 1453 of the Tax Law, except that certain deductions are
not allowed.
Section 1455(b)(1)(v)(A) of the Tax Law defines "taxable assets" as the average total value
of those assets which are properly reflected on a balance sheet the income or expenses of which are
properly reflected in the computation of alternative entire net income for the taxable year or in the
computation of the eligible net income of the taxpayer's international banking facility for the taxable
year.
For purposes of section 1453(a) of the Tax Law, the starting point for computing a taxpayer's
entire net income is its federal taxable income. The federal taxable income of a corporation
organized outside the United States is its taxable income which is effectively connected with the
conduct of a trade or business within the United States.
If a corporation is not engaged in a trade or business within the United States as defined in
section 864(b) of the Internal Revenue Code, the corporation will not have effectively connected
income as defined in section 864(c) of the Internal Revenue Code except as provided in section
882(d) or (e) of the Internal Revenue Code.

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TSB-A-86 (23) C
Corporation Tax
December 6, 1986

Where a taxpayer is not engaged in a trade or business in the United States and does not have
effectively connected income for federal income tax purposes and the modifications pursuant to
section 1453(b) through (i) of the Tax Law are not applicable, the taxpayer would not have any entire
net income. In addition, such taxpayer would not have any alternative entire net income as defined
in section 1453-A(a) of the Tax Law or taxable assets as defined in section 1455 (b) (1) (v) (A) of
the Tax Law.
Accordingly, assuming that (1) Petitioner is not engaged in a trade or business within the
United States, and (2) Petitioner does not have effectively connected income pursuant to section
864(c) of the Internal Revenue Code and (3) none of the modifications required by section 1453(b)
through (i) of the Tax Law are applicable to Petitioner, entire net income, alternate entire net income
and taxable assets would all be zero and the tax liability of Petitioner pursuant to section 1455 of the
Tax Law would be the $250 alternative minimum tax for each taxable year such assumptions are
accurate.

DATED: December 4, 1986

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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