Must a corporation add back 90% of the interest it pays on a loan from a 'nephew' corporation -- a second-tier subsidiary of its ultimate parent, not a direct shareholder or a shareholder's own subsidiary -- when computing New York entire net income?

Plain-English summary

Konica Business Machines, U.S.A., Inc., a wholly-owned subsidiary of the Japanese company Konishiroku Photo Industry Co., borrowed money from and pays interest to Konica Corporation-1 ("KCC-1"). KCC-1 is itself a wholly-owned subsidiary of Fotomat Corporation, which in turn is a wholly-owned subsidiary of Konishiroku — making KCC-1 a "nephew" of Konica (both are grandchildren of Konishiroku through different intermediate parents, not a parent-subsidiary relationship to each other). Konica asked whether it must add back 90% of that interest to its federal taxable income when computing New York entire net income, under a rule aimed at related-party interest.

The Department agreed with Konica: the addback rule in § 208.9(b)(5) (in effect for tax years before 1989, later repealed) only applies to interest paid to a stockholder owning more than 5% of the taxpayer's stock, or to a subsidiary of such a shareholder. KCC-1 is neither — it isn't a direct shareholder of Konica, and it isn't a subsidiary of one (it's a subsidiary of a different subsidiary of Konica's ultimate parent, i.e., Konica's corporate "nephew," not its parent's own subsidiary in the relevant sense). Citing a prior 1986 opinion involving a similarly structured "nephew" relationship (Mitsui & Co.), the Department confirmed none of the interest paid to KCC-1 needs to be added back.

What this means for you

Multinational corporate groups with layered, related but non-parent-subsidiary financing entities

Not every intercompany loan within a corporate family triggers the § 208.9(b)(5) addback (for pre-1989 tax years) — the statute is narrowly targeted at a direct >5% shareholder or that shareholder's own subsidiary. A "nephew" or "cousin" entity elsewhere in the ownership chain, even if commonly controlled by the same ultimate parent, falls outside the addback's scope.

Accountants and tax professionals

Remember this provision was repealed for taxable years beginning on or after January 1, 1989 — this ruling and its 1986 predecessor (TSB-A-86(14)C, Mitsui & Co.) are relevant only to pre-1989 tax years or to understanding the historical scope of the rule.

Common questions

Q: Does this rule still apply today?
A: No — § 208.9(b)(5) was repealed for taxable years beginning on or after January 1, 1989. This ruling only matters for tax years before that repeal.

Q: Would the answer differ if KCC-1 were a direct subsidiary of Konica's parent, Konishiroku, rather than a subsidiary of a sibling company?
A: Potentially — the statute specifically reaches a subsidiary of a >5% shareholder. A direct subsidiary of Konica's own parent could implicate the addback differently than a subsidiary of a separate sibling corporation; consult the statute and related opinions for that structure.

Q: Can another corporation with a similar "nephew" financing structure rely on this ruling?
A: No. This opinion binds the Department only for Konica's specific facts; other taxpayers should independently confirm their own corporate structure against the statute.

Citations and references

Statutes:

• Tax Law § 208.9(b)(5) (related-party interest addback, repealed for years beginning on/after 1989)
• TSB-A-86(14)C, Mitsui & Co. (USA), Inc. (July 3, 1986)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1987.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a87_33c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-87 (33) C
Corporation Tax
December 18, 1987

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO: C871020A

On October 20, 1987, a Petition for Advisory Opinion was received from Konica Business
Machines, U.S.A., Inc., 500 Day Hill Road, Windsor, Connecticut 06095.
The issue raised is whether, pursuant to section 208.9(b)(5) of Article 9-A of the Tax Law,
interest paid by a corporation to a second-tier subsidiary (grandchild) of a greater than five percent
shareholder is required to be added to federal entire taxable income by the corporation in computing
its entire net income.
Konica Business Machines, U.S.A., Inc. ("Konica"), a wholly owned subsidiary of
Konishiroku Photo Industry Co. ("Konishiroku"), incurred indebtedness and is currently paying
interest to Konica Corporation-1 ("KCC-I"). KCC-1 is a wholly owned subsidiary of Fotomat
Corporation which in turn is a wholly owned subsidiary of Konishiroku.
Konica contends that all of the interest paid by Konica to KCC-1 is deductible in arriving at
Konica's New York taxable income because KCC-1 is neither a greater than five percent shareholder
of Konica nor a subsidiary of a five percent shareholder.
For taxable years beginning before January 1, 1989, 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 90 percent of the interest paid on
indebtedness directly or indirectly owed to any stockholder or shareholder owning more than five
percent of the taxpayer's issued capital stock, or to a subsidiary of such corporate stockholder or
shareholder.
For taxable years beginning on or after January 1, 1989, section 208.9(b)(5) is repealed.
Interest payments to a nephew corporation, KCC-1, the second-tier subsidiary of Konica's
parent corporation, Konishiroku, are not payments to an entity described in section 208.9(b)(5).

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

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

-2­
TSB-A-87 (33) C
Corporation Tax
December 18, 1987

Mitsui & Co. (USA), Inc., Advisory Opinion of the State Tax Commission, July 3, 1986, TSB-A­
86(14)C. Therefore, 90 percent of the amount of such interest payments is not required to be added
to Konica's federal entire taxable income when Konica computes its entire net income under section
208.9.

DATED: December 18, 1987

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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