After the Department's first ruling forced a Puerto Rico bank to allocate part of its home-office U.S. bond interest to New York using a special reserve/gross-income formula, did a reexamination change that result -- and can the bank instead use its existing separate-accounting method, which would allocate the interest entirely outside New York?

Plain-English summary

Three months after issuing TSB-A-86(5)C -- which held that Banco Popular de Puerto Rico's home-office U.S. Treasury bond interest (forced into federal effectively-connected income by IRC section 882(e) solely because the bank has a New York branch) must be included in New York entire net income, and set out a special two-step reserve/gross-income formula to allocate a New York-attributable share -- the Department reexamined the facts and issued this MODIFIED opinion, expressly ANNULLING the original allocation discussion and conclusion, and substituting a completely different methodology.

Under Article 32's predecessor regulations (Part 35 of the Articles 9-B/9-C bank regulations, which remained applicable in the absence of Article 32-specific rules for the years at issue), a bank operating both within and without New York State may allocate its net income by SEPARATE ACCOUNTING if it keeps books that, in the Tax Commission's opinion, properly reflect each office/branch's own income and expenses -- rather than the fallback gross-income-ratio method for banks that don't keep such separate records. Petitioner had already stated it allocates its entire net income using separate accounting across its Puerto Rico, New York, and California branches.

The Department held that this SAME separate-accounting approach -- not the bespoke formula from the original ruling -- governs the U.S.-obligation interest income too. Under separate accounting, each item of gross income is allocated to whichever branch it's attributable to, based on properly maintained books and records. Since the U.S. obligation interest income at issue is recorded on the PUERTO RICO branch's own books (not the New York or California branches, which had no involvement in acquiring, funding, or tracking the securities), the interest is allocated ENTIRELY OUTSIDE New York State under separate accounting -- a materially more favorable result for Petitioner than the original formula, which would have attributed some portion to New York regardless of where the income was actually booked.

The Department did NOT change its underlying conclusion that the interest must be included in entire net income at all (that federal-conformity holding survives from the original ruling) -- only the METHOD of allocating it between New York and elsewhere changed.

What this means for you

Multi-branch banks using separate accounting

If your bank already allocates its overall entire net income by separate accounting (properly maintained branch-level books), that same method should apply to special categories of income too -- like IRC section 882(e) interest that's forced into federal taxable income but isn't naturally booked to any particular U.S. branch. Don't assume the Department will improvise a special allocation formula for unusual income categories if your separate-accounting records can resolve the question directly.

When the Department "modifies" a prior advisory opinion

A modified opinion can completely reverse a specific piece of an earlier ruling's reasoning (here, the entire allocation methodology) while leaving other conclusions (here, that the interest is taxable at all) untouched. Always check whether a modified opinion exists and read it as controlling over the original on whatever point it addresses.

Common questions

Q: Does this modified opinion change whether the interest income is taxable in New York at all?
A: No -- the underlying conclusion that IRC section 882(e) interest must be included in entire net income is unchanged; only the allocation (how much, if any, is attributed to New York) changed.

Q: Why does separate accounting favor the taxpayer here?
A: Because the interest is recorded on the Puerto Rico branch's books, separate accounting allocates it entirely outside New York, unlike the original formula which would have attributed a New York-based share regardless of where the income was actually booked.

Q: Can another Puerto Rico or multi-branch bank rely on this specific ruling?
A: No. It binds the Department only for this petitioner's specific facts, including its use of separate accounting and the location of its books and records.

Citations and references

Statutes and regulations:

• Tax Law § 1454(a)
• Part 35 (§§ 35.1, 35.2, 35.3), Tax on State Banks, other Financial Corporations and National Banking Associations regulations
• TSB-M-78(23)C
• Internal Revenue Code § 882(e)

Related rulings:

• TSB-A-86(5)C -- the original January 1986 ruling, whose allocation methodology this opinion annuls and replaces

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_5_1c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-86 (5.1) C
Corporation Tax
April 30, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
MODIFIED ADVISORY OPINION

PETITION NO. C850520A

On January 30, 1986, an Advisory Opinion was issued to Banco Popular de Puerto Rico, Box
2708, G. P. O., San Juan, Puerto Rico 00936.
After reexamining the facts as presented by Petitioner, such Advisory Opinion is modified
by annulling the discussion and conclusion regarding the allocation of interest income from U.S.
obligations that is treated as income which is effectively connected with the conduct of a trade or
business within the U.S. pursuant to section 882(e) of the Internal Revenue Code, and substituting
the following discussion and conclusion.
For taxable years 1975 through 1980, the taxable years at issue, section 1454(a) of the Tax
Law provided that when entire net income is derived from business carried on both within and
without New York State, such entire net income may be allocated within and without New York
State under the rules and regulations prescribed by the Tax Commission. However, for the taxable
years at issue, there were no regulations promulgated in accordance with section 1454 of the Tax
Law regarding allocation methods. Therefore, the allocation methods described in Part 35 of the Tax
on State Banks, other Financial Corporations and National Banking Associations regulations issued
under Articles 9-B and 9-C (hereinafter Articles 9-B and 9-C regulations) of the Tax Law remain
applicable.
Section 35.1 of the Articles 9-B and 9-C regulations provides that a corporation which is
doing business or carries on its business through offices maintained both within and without New
York State must apportion its net income as provided in the regulations.
Section 35.2 of the Articles 9-B and 9-C regulations states:
"(a) A corporation or association is regarded as "doing business" or "carrying on
business" within or without the State when it occupies, has or maintains an office,
agency or branch where its functions are systematically and regularly carried on.
(b) In order to require an apportionment of the income from business carried on
within and without New York State, it is not necessary that the branch or agency
maintained without the State, in the case of a domestic corporation or association, or
within the State, in the case of a foreign corporation or association, shall necessarily
conduct all functions of the banking business of the corporation or association. It is
sufficient if the branch conducts some of the functions which the corporation or
association is authorized to exercise regularly and with a fair measure of permanency
and continuity."

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

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

-2­
TSB-A-86 (5.1) C
Corporation Tax
April 30, 1986

Technical Services Bureau memorandum TSB-M-78(23)C provides that a banking
corporation which is doing a banking business both within and without New York State may allocate
its entire net income within and without New York State when it is carrying on a full service banking
business both within and without New York State through its offices, branches and agencies. The
memorandum then defines an office, branch or agency as follows:
"...For purposes of Article 32, an office, branch or agency is a permanent place of
business which is regularly and systematically maintained, occupied and used by the
taxpayer to carry on a full service banking business. Such business must be
conducted through its own employees who are regularly in attendance at such place
of business during normal business hours. It is not necessary that the office, branch
or agency maintained without New York State conduct all the functions of a banking
business.
For an office, branch or agency to do a full service banking business, it must conduct
the following functions on a regular basis:
1.
2.

Approve loans and disburse the funds and
Accept loan repayments

plus conduct one or more of the other functions of a banking business on a regular
basis, such as:
1.
2.
3.
4.
5.
6.
7.
8.

Accept deposits
Pay withdrawals
Cash checks, drafts and other similar items
Issue cashier's checks, treasurer's checks, money orders and other
similar items
Buy, sell, pay or collect bills of exchange
Issue letters of credit
Receive money for transmission or transmitting the same by draft,
check, cable or otherwise
Exercise fiduciary powers

A bank which acts as an agent for another bank, is not an office, branch or agency of
such bank for New York State tax purposes."
Section 35.3 of the Articles 9-B and 9-C regulations provides that a corporation which is
doing business or carrying on business both within and without New York State and which keeps
accounts of the income and expenses of each office, branch or agency which in the opinion of the
Tax Commission actually reflect the net income from business carried on within New York State
of each office, branch or agency, may allocate its net income based on such accounts. Where the
corporation does not keep accounts of the income and expenses of each office, branch or agency
separately in such a way as to reflect accurately the net income from business carried on within New
York State, an allocation of net income is made based on the proportion that gross income derived
from business carried on within New York State bears to the gross income derived from all business
carried on both within and without New York State.

-3­
TSB-A-86 (5.1) C
Corporation Tax
April 30, 1986

For purposes of Article 32 of the Tax Law, a taxpayer which allocates its entire net income
by separate accounting allocates only items included in the computation of entire net income within
and without New York State. When allocating entire net income, each item of gross income, gain,
loss and deduction included in the computation of Federal taxable income and each adjustment or
modification required by subdivisions (b) through (h) of section 1453 of the Tax Law is allocated
to the office, branch or agency of the taxpayer to which such gross income, gain, loss, deduction,
adjustment or modification is attributable. The taxpayer must maintain separate books and records
that, in the opinion of the Tax Commission, properly reflect the gross income, gains, losses,
deductions, adjustments and modifications directly or indirectly attributable to its offices, branches
and agencies both within and without New York State.
Petitioner states that it has branches in Puerto Rico, New York and California and that for
the taxable years at issue it allocates entire net income within and without New York State using the
principles of separate accounting.
Accordingly, as stated in Petitioner's Advisory Opinion dated January 30, 1986, when
computing its tax pursuant to Article 32 of the Tax Law for taxable years 1975 through 1980,
Petitioner must include in entire net income the interest income from U.S. obligations that is treated
as income effectively connected with the conduct of a trade or business within the U.S. pursuant to
section 882(e) of the Internal Revenue Code. However, Petitioner may allocate entire net income
within and without New York State by the principles of separate accounting if, in the opinion of the
Tax Commission, such separate accounting records properly reflect the gross income, gains, losses,
deductions, adjustments and modifications directly or indirectly attributable to its offices, branches
and agencies both within and without New York State. In such case, interest income from U.S.
obligations that is treated as income effectively connected with the conduct of a trade or business
within the U.S pursuant to section 882(e) of the Internal Revenue Code is allocated without New
York State.

DATED: April 30, 1986

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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