Under three different levels of New York contact -- no NY presence at all, an agency-like arrangement with an unrelated NY bank, and an actual NY office -- when does a mortgage banking company that packages and sells loans as FNMA/GNMA certificates become subject to New York corporate franchise tax, and how is its income sourced?

Plain-English summary

GEF Funding Corp., a Delaware mortgage banking company, asked the Department to analyze three alternative levels of New York contact for the same basic business model: making/buying mortgage loans, packaging them (with non-New York loans) into FNMA/GNMA certificates, and selling the certificates through New York brokers.

Alternative #1 — GEF has no New York office, doesn't originate New York-secured loans, and its only New York contact is an unrelated bank that, as its agent, delivers certificates to buyers and collects payment in New York. The Department found this insufficient for nexus: no doing business, employing capital, or owning/leasing property in New York.

Alternative #2 — GEF also accepts New York borrowers' loan applications by phone/mail from outside New York, then arranges for an unrelated New York bank to actually extend the credit before GEF purchases the loan. This turns on whether the bank is legally GEF's agent — the Department called that "a question of fact not susceptible of determination in an Advisory Opinion," and separately flagged that if the New York lender were instead a controlled or affiliated entity, that parent/subsidiary domination could independently create nexus under an alter-ego theory (citing Franklin Mint Corp. v. Tully and Aldens, Inc. v. Tully), or could trigger mandatory inclusion in a combined report.

Alternative #3 — GEF maintains an actual New York office and originates New York-secured loans directly. Here, GEF IS subject to Article 9-A tax. For sourcing, only the gain (not the gross sale proceeds) on FNMA/GNMA certificate sales counts as a business receipt, and whether that gain (along with origination and servicing fees) is New York-sourced turns on the same cost-of-performance test as CIT Financial and Walter E. Heller — where was the underlying loan work (solicitation, negotiation, approval, servicing) actually performed — a fact question the Department again declined to quantify.

What this means for you

Mortgage bankers and secondary-market originators structuring their New York contact

This ruling is the foundational reference point cited in numerous later NY corporate tax opinions (including TSB-A-88(13)C and TSB-A-88(21)C) for exactly how much New York contact triggers nexus for a mortgage banking business. Passive, purely mechanical bank contact (Alternative #1) stays outside nexus; an unrelated bank acting as your agent, or an affiliated bank under your control, can create nexus (Alternative #2); and an actual New York office/origination presence clearly does (Alternative #3).

Accountants and tax professionals

Note the internal cross-reference: TSB-A-88(13)C (HCI) later distinguished ITS facts from THIS ruling's Alternative #1 — HCI's chief operating officer regularly traveled into New York to negotiate purchases, unlike GEF's Alternative #1 where GEF's only NY contact was a bank merely delivering certificates and collecting payment. Also watch the alter-ego/combined-report angle in Alternative #2: even without direct nexus, a controlled or affiliated in-state lender can pull a foreign parent into New York tax exposure, or trigger a discretionary combined-report requirement under § 6-2.5, if the relationship involves substantial intercorporate transactions or an arrangement that improperly reflects a taxpayer's activity.

Common questions

Q: Does merely having a bank deliver securities and collect payment in New York create nexus?
A: No — under Alternative #1's facts, that kind of passive, purely mechanical New York contact is insufficient for doing-business, employing-capital, or property nexus.

Q: If I use an unrelated New York bank to fund loans I later purchase, am I automatically taxable in New York?
A: Not automatically — it depends on whether the bank is legally your agent, which the Department treats as an unresolved fact question, not something an advisory opinion decides.

Q: What if the New York lender is my own subsidiary or affiliate rather than an unrelated bank?
A: That's a materially different and riskier situation — control or domination by a parent/affiliate can create nexus for the whole group under an alter-ego theory, independent of any agency analysis.

Q: Can another mortgage banking company rely on this specific analysis?
A: No. This opinion binds the Department only for GEF Funding Corp.'s three specific fact patterns; other companies should map their own facts against each alternative carefully.

Citations and references

Statutes and regulations:

• Tax Law § 209.1 (Article 9-A nexus bases)
• Franchise Tax Regulation 20 NYCRR § 1-3.2(b), (c), (d) (doing business; employing capital; owning/leasing property)
• Franchise Tax Regulation 20 NYCRR § 6-2.2, § 6-2.5 (combined reports)
• Tax Law § 210.3(a)(2)(D); Business Corporation Franchise Tax Regulations § 4-2.2(c), § 4-4.1, § 4-4.3
• TSB-A-83(7)C, CIT Financial Corporation; TSB-H-80(29)C, Walter E. Heller & Co.
• Franklin Mint Corp. v. Tully, 94 A.D.2d 877, aff'd 61 N.Y.2d 980; Aldens, Inc. v. Tully, 49 N.Y.2d 525

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a88_2c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88 (2)C
Corporation Tax
January 26, 1988

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C870603B

On June 3, 1987, a Petition for Advisory Opinion was received from GEF Funding Corp.,
c/o Thacher Proffitt & Wood, Two World Trade Center, New York, New York 10048.
The issue raised is the New York State franchise tax treatment of Petitioner's activities if it
engages in the mortgage loan origination and resale activities described in the three alternative sets
of facts presented below.
Alternative #1
Facts
Petitioner, incorporated under the Laws of the State of Delaware, engages in the business of
making and servicing mortgage loans, many of which are insured by the Federal Housing
Administration ("FHA") or guaranteed by the Veterans Administration ("VA"). Petitioner does not
originate (make) loans in New York, does not own loans secured by real property situated in New
York, and has no office in New York. To avoid the financial risks associated with a substantial
investment in mortgage loans, Petitioner packages the loans, exchanges them for certificates issued
by the Federal National Mortgage Association ("FNMA") or the Government National Mortgage
Association ("GNMA"), and sells the FNMA and GNMA certificates through New York brokers.
Substantially all steps in the FNMA and GNMA sale negotiation process (which consists primarily
of telephone negotiations) occur outside of New York. However, a New York bank, acting as agent
for Petitioner, delivers the certificates to the buyers and receives payment for the certificates in New
York.
Question
Would Petitioner be "doing business," "employing capital," or "owning or leasing property,"
as those terms are used in New York State Business Corporation Franchise Tax Regulation ("Article
9-A regulations") section 1-3.2, and therefore be subject to the business corporation franchise tax
imposed by Article 9-A of the Tax Law?
Discussion
The business corporation franchise tax imposed by section 209.1 of Article 9-A of the Tax
Law is imposed on every foreign corporation, unless specifically exempt, for the privilege of doing
business, or of employing capital, or of owning or leasing property in New York State in a corporate
or organized capacity, or of maintaining an office in New York State.
Section 1-3.2(b) of the Article 9-A regulations provides that:

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

FRANK J. PUCCIA, DIRECTOR

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER

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Corporation Tax
January 26, 1988

(1) [t]he term doing business is used in a comprehensive sense and includes all activities
which occupy the time or labor of men for profit. Regardless of the nature of its activities, every
corporation organized for profit and carrying out any of the purposes of its organization is deemed
to be "doing business" for the purposes of the tax. In determining whether a corporation is doing
business, it is immaterial whether its activities actually result in a profit or a loss.
(2) Whether a corporation is doing business in New York State is determined by the facts
in each case. Consideration is given to such factors
as:
(i) the nature, continuity, frequency, and regularity of the activities of the corporation
in New York State, compared with the nature, continuity, frequency, and regularity of its
activities elsewhere;
(ii) the purposes for which the corporation was organized, compared with its
activities in New York State;
(iii) the location of its offices and other places of business;
(iv) the income of the corporation and the portion thereof derived from activities in
New York State;
(v)

the employment in New York State of agents, officers, and employees; and

(vi) the location of the actual seat of management or control of the corporation. 20
NYCRR 1-3.2(b)
Section 1-3.2(c) of the Article 9-A regulations provides that:
[t]he term "employing capital" is used in a comprehensive sense. Any of a large variety of
uses, which may overlap other activities, may give rise to taxable status. In general, the use of assets
in maintaining or aiding the corporate enterprise or activity in New York State will make the
corporation subject to tax. Employing capital includes such activities as:
(1) maintaining stockpiles of raw materials or inventories; or
(2) owning materials and equipment assembled for construction. 20 NYCRR 1-3.2(c)
Section 1-3.2(d) of the Article 9-A regulations provides that:
[t]he owning or leasing of real or personal property within New York State constitutes an
activity which subjects a foreign corporation to tax. Property owned by or held for the taxpayer in
New York State, whether or not used in the taxpayer's business, is sufficient to make the corporation
subject to tax.

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TSB-A-88 (2)C
Corporation Tax
January 26, 1988

Property held, stored, or warehoused in New York State creates taxable status. Property held as a
nominee for the benefit of others creates taxable status. 20 NYCRR 1-3.2 (d)
Under this Alternative, Petitioner does not originate loans in New York State, does not own
loans secured by real property in New York State, nor does it have an office in New York State. The
process of exchanging loans for FNMA and GNMA certificates is conducted by Petitioner outside
New York State. The negotiations for the sale of the certificates is also conducted by Petitioner
outside New York State. Petitioner's only contact with New York State is with the New York bank
which delivers the FNMA and GNMA certificates to the buyers and receives payment for the
certificates in New York State. Based on the above definitions of doing business, employing capital
and owning or leasing property, it is apparent that the activities of Petitioner in New York State
under this Alternative are insufficient to make Petitioner subject to tax under Article 9-A of the Tax
Law.
Alternative #2
Facts
In addition to the activities described in Alternative #1, Petitioner, from its office outside
New York, accepts applications over the telephone for home mortgage loans from New York
borrowers secured by real property situated in New York. The applications are processed and
approved outside of New York, all communications between Petitioner and potential borrowers are
conducted by mail or telephone. Once approval has been granted on an application, Petitioner
arranges for an unrelated New York bank to extend credit to the New York borrower. The New York
bank is engaged in a general banking business and is not the exclusive agent of Petitioner. After the
loan has been made by the New York bank, Petitioner purchases the loan from the New York bank
and holds the New York bank harmless from any loss which may occur due to interest rate changes.
The loans are then serviced by Petitioner from outside New York. (Servicing requires no New York
activities except in the occasional case of foreclosure.) The New York loans are then packaged,
exchanged and sold in the manner described in Alternative #1, above.
Questions
(1) As a result of the activities described above and in Alternative #1, would Petitioner be
"doing business," "employing capital," or "owning or leasing property," as those terms are used in
Article 9-A regulation section 1-3.2, and therefore be subject to tax under Article 9-A of the Tax
Law?
(2) Would the answer to question (1), above, be different if the loans to the New York
borrowers were made in New York by an entity controlled by or affiliated with Petitioner?
As described in this Alternative, Petitioner's activities, including acceptance of application,
processing, approval and servicing of a mortgage loan secured by real property located in New York

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TSB-A-88 (2)C
Corporation Tax
January 26, 1988

State, are conducted at Petitioner's office outside New York State. Accordingly, these activities do
not constitute doing business in New York State.
Petitioner has an arrangement with an unrelated bank whereby Petitioner does all of the work
regarding a loan but does not extend the funds. The unrelated bank actually makes the loan (extends
the funds) to the borrower. Subsequently, Petitioner purchases the loan from the bank.
If Petitioner's arrangement with the unrelated bank does not create an agency relationship
with the bank, then these activities do not create a taxable status for Petitioner since it is not doing
business, employing capital, owning or leasing property in New York State or maintaining an office
in New York State.
However, if the unrelated bank is found to be the agent of Petitioner, Petitioner could be
found to be doing business, employing capital, owning or leasing property or maintaining an office
in New York through its agent. The totality of Petitioner's circumstances and its relationship with
the bank will determine Petitioner's taxable status in such a case.
Additionally, if the credit extended to the New York borrowers is extended by a New York
bank controlled by or affiliated with Petitioner such control or affiliation could create a taxable status
for Petitioner.
It has been held that if the affairs of a subsidiary or affiliated corporation are so dominated
and controlled by its parent or affiliate that the dominated and controlled corporation is the alter ego
of the other, then the nexus of one with New York State for tax jurisdiction purposes will provide
sufficient nexus with New York State for the other. CIT Fin. Services Consumer Co. v. Director,
Div. of Taxation, supra; Minnesota Tribune Co. v. Commissioner of Taxation, 37 NW2d 737;
Franklin Mint Corp. v. Tully, 94 AD2d 877, aff'd, 61 NY2d 980.
(Other cases supporting a finding
of nexus premised on a parent/subsidiary relationship include Aldens, Inc. v. Tully, 49 NY2d 525;
Reader's Digest Association, Inc. v. Mahin, 44 Ill. 2d 354, 255 NE2d 458, appeal dismissed, 399 US
919).
Alternatively, section 6-2.5 of the Article 9-A regulations provides that where a foreign
corporation is not subject to tax, it will not be required to be included in a combined report unless
the requirements described in section 6-2.2 of such regulations have been met and the Department
of Taxation and Finance determines that inclusion is necessary to properly reflect the tax liability of
one or more taxpayers included in the group because of:
(1) substantial intercorporate transactions; or
(2) some agreement, understanding, arrangement or transaction whereby the activity,
business, income or capital of any taxpayer is improperly or inaccurately reflected. (See
Subpart 6-2 of the Article 9-A regulations Combined Reports.)

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Corporation Tax
January 26, 1988

Note that the existence of alter ego or agency status and the need to file a combined report
are all questions of fact not susceptible of determination in an advisory opinion. An advisory opinion
merely sets forth the applicability of pertinent statutory and regulatory provisions to "a specified set
of facts". Tax Law, § 171, subd. twenty-fourth; 20 NYCRR 901.1(a).
Alternative #3
Facts
Petitioner conducts a mortgage banking business and maintains an office and employees in
New York. Petitioner originates mortgage loans secured by New York real property, packages these
loans together with non-New York mortgage loans and exchanges them for FNMA and GNMA
certificates, in the manner described in Alternative #1, above. An out-of-state office of Petitioner
then sells the FNMA and GNMA certificates, and services the loans from outside New York in the
manner described in Alternatives #1 and #2, above. Petitioner's income consists of origination fees
paid by mortgagors, servicing fees, gain realized on the sale of the FNMA and GNMA certificates,
and interest on retained loans and certificates. (For federal income tax purposes, income is not
realized on the exchange of loans for FNMA and GNMA certificates. Rev. Rul. 70-544, 1970-2 C.B.
6; Rev. Rul. 70-545, 1970-2 C.B. 7; Rev. Rul. 84-10 1984-1C.B. 155.) The gross proceeds from the
sales of certificates greatly exceeds the profit, if any, realized on such sales. For example, the sale
of a $50,000,000 GNMA certificate typically would generate a profit of $50,000 to $100,000.In
some cases, losses are incurred on the sale of certificates.
Questions
(1) Assuming that Petitioner is subject to tax under Article 9-A of the Tax Law, would any
of the above described sales be considered to be a New York business receipt?
(2) Assuming that Petitioner is subject to tax under Article 9-A of the Tax Law, would the
receipts from the sales of the FNMA and GNMA certificates as described above be considered "New
York State business receipts" for purposes of determining Petitioner's business allocation
percentage?
(3) Would the gross proceeds or only the net gain, if any, realized upon the sale of the
certificates be included in the computation of Petitioner's "business receipts."
(4) If the gross proceeds realized upon the sale of the certificates are included in the
computation of Petitioner's business receipts, would the Tax Commission, in the circumstances
described above and pursuant to Article 9-A regulation section 4-2.2(c), adjust Petitioner's business
allocation percentage to more properly reflect Petitioner's New York activity and income?

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TSB-A-88 (2)C
Corporation Tax
January 26, 1988

Discussion
The conducting of a mortgage banking business and the maintenance of an office in New
York State would make Petitioner subject to the franchise tax under Article 9-A of the Tax Law.
Section 210.1 of the Tax Law provides that, except in the case of a small business taxpayer,
the tax imposed by section 209.1 of the Tax Law is the sum of the highest of the amounts prescribed
by the entire net income base, the capital base, the minimum taxable income base and the fixed
dollar minimum, plus the amount prescribed by the subsidiary capital base.
When computing the entire net income base, a taxpayer must determine the portion of entire
net income to be allocated within New York State. Generally, business income is allocated by the
business allocation percentage as provided in section 210.3(a) of the Tax Law. Subpart 4-4 of the
Article 9-A regulations provides the rules for determining the receipts factor of such percentage.
Section 4-4.1 of the Article 9-A regulations provides that the term business receipts means
gross income received in the regular course of the taxpayer's business, provided such receipts are
includible in the computation of the taxpayer's entire net income for the taxable year. All business
receipts for the period covered by the report must be taken into account.
Section 210.3(a)(2)(D) of the Tax Law provides that the numerator of the receipts factor
includes "other business receipts" (e.g., other than from sales of tangible personal property, the
performance of services, and from rents and royalties) "earned within the state." The income here
in question (origination fees, servicing fees, gain realized on the sale of FNMA and GNMA
certificates and interest on retained loans and certificates) falls within the category of "other business
receipts."
In CIT Financial Corporation, State Tax Commission Advisory Opinion, March 8, 1983,
TSB-A-83(7)C, it was determined that the precise portion of interest income from a loan that is to
be included in the numerator of the receipts factor is a question of fact not susceptible of
determination in an Advisory Opinion. An Advisory Opinion merely sets forth the applicability of
pertinent statutory and regulatory provisions to "a specified set of facts." Tax Law, § 171, subd.
twenty-fourth; 20 NYCRR 901.1(a). However, the opinion does give guidance in making such
determination by stating that where the labor needed to establish and maintain (make and service)
a loan is performed at more than a minimal level, in both New York and another state, the interest
income derived from such loan is "earned within" both New York and such other state. To determine
what portion of the income is attributable to New York, consideration should be given to such
activities as solicitation, investigation, negotiation, approval and administration. The activity of loan
approval can be of negligible import; as where it is merely pro forma, or of the highest importance,
depending upon the circumstances of any given loan transaction. As stated in Walter E. Heller &
Co., Decision of the State Tax Commission, September 19, 1980, TSB-H-80(29)C, "[i]t is the situs

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TSB-A-88 (2)C
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January 26, 1988

where...the financing...[is] performed which is determinative of whether the receipts are includible
in the numerator of the receipts factor .... "
Accordingly, where the activities conducted in connection with a loan transaction were
performed both within and without New York State, the portion of the interest income and the loan
origination fees attributable to such loan that is to be included in the numerator of the receipts factor
is a matter of fact and is determined by applying the above guidelines to the circumstances of the
particular loan.
Section 4-4.1 of the Article 9-A regulations provides that business receipts means gross
income. With regard to the sale of a FNMA or GNMA certificate, only the gain on such sale is
included within gross income. Accordingly, only the gain on such sale is included in the receipts
factor.
In determining when the gain on the sale of a FNMA or GNMA certificate should be
included in the numerator of the receipts factor, the rationale of CIT Financial and Walter E. Heller
should be followed. That is, when activities attributable to the sale of the certificate are performed
in New York State. Again, this is a question of fact and the precise portion of the gain to be included
in the numerator of the receipts factor is not susceptible of determination in an Advisory Opinion.
It must be determined based on the circumstances of sale of the particular certificate.
The servicing fees received from contractual agreements to service loans or securities that
have been sold (i.e. FNMA and GNMA certificates) should be allocated to New York State and
included in the numerator of the receipts factor if the services were performed in New York State,
pursuant to section 4-4.3 of the Article 9-A regulations.

DATED: January 26, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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