Does an out-of-state bank owe New York Article 32 franchise tax just because it makes mortgage loans secured by New York real estate, when the loan closings, appraisers, or construction-loan inspectors variously touch New York?

Plain-English summary

Bleakley Platt & Schmidt posed four fact patterns for a Connecticut-incorporated bank with no New York employees, office, or agents, that makes loans to New York borrowers secured by New York real or personal property (and may acquire title through foreclosure). All loan commitments and negotiations happen at the Bank's Connecticut offices; loans may originate through New York or Connecticut brokers (paid by the borrower) or through participation in a New York bank's originated credits; Bank officers may visit New York property for inspection; appraisers from either state may be retained.

• Alternative I: Loans are closed by New York attorneys in New York.
• Alternative II: Same as I, but loans are closed in Connecticut by Connecticut attorneys (who may also be New York-admitted).
• Alternative III: Same as I, plus construction loans requiring New York-licensed architects/engineers to inspect and approve advance requisitions.
• Alternative IV: Same as II, plus the same construction-loan inspection arrangement.

A foreign bank doing a banking business anywhere is automatically a "banking corporation" under section 1452(a)(2) -- the only question is whether it's "doing business" in New York under Article 32's multi-factor test (continuity/frequency of activity, purpose of the corporation, location of offices, employment of agents, and seat of management). Regulations section 16-2.7(e) creates specific safe harbors: merely acquiring a security interest in New York property, merely acquiring title through foreclosure, or merely holding board meetings in New York does NOT, by itself, constitute doing business -- consistent with the Department's own prior Article 9-A rulings (Peat, Marwick, Mitchell & Co., TSB-A-87(8)C; GEF Funding Corp., TSB-A-88(2)C) applying an identical "doing business" definition. Retaining independent contractors (brokers, appraisers, architects, engineers, attorneys) in New York likewise does not, by itself, create nexus.

But three things can tip the balance: (1) an agency relationship between the Bank and its New York brokers, appraisers, architects, engineers, or attorneys (as found in Cuddy & Feder, TSB-A-88(13)C, where a corporation's chief operating officer regularly came into New York to negotiate loan purchases and a New York agent regularly negotiated on the corporation's behalf); (2) the Bank's own officers or employees regularly coming into New York; or (3) closing loans in New York State. None of the four alternatives could be conclusively resolved because whether an agency relationship exists is a fact question outside the scope of an advisory opinion -- the Department could only identify which factors point toward or away from nexus, leaving the ultimate "totality of the circumstances" call to be made on the Bank's actual facts.

What this means for you

Out-of-state banks and lenders originating loans secured by New York property

Simply taking a New York mortgage or foreclosing on New York collateral, without more, won't by itself create Article 32 nexus. But closing loans in New York, sending your own officers/employees into the state regularly, or having a true agency (not merely independent-contractor) relationship with New York-based brokers, appraisers, or attorneys can tip you into taxable status -- and the safest structural choice, per this ruling's own alternatives, is closing loans out of state with out-of-state counsel.

Accountants and tax professionals

The critical, fact-intensive line is agency vs. independent contractor. A broker, appraiser, architect, or attorney who is genuinely independent (paid by the borrower, retained for a discrete transaction, not directing the Bank's business) shouldn't create nexus on its own -- but a regular, ongoing relationship where those professionals effectively act on the Bank's behalf can. Document the independence of these relationships carefully if you want to preserve a no-nexus position.

Common questions

Q: Does taking a mortgage on New York property automatically make an out-of-state bank taxable in New York?
A: No. Merely acquiring a security interest in, or foreclosing on, New York property is a specific regulatory safe harbor and doesn't by itself constitute doing business.

Q: Does hiring a New York attorney, appraiser, or architect create nexus for an out-of-state lender?
A: Not by itself, if they're genuine independent contractors. But if an agency relationship exists -- where they effectively act on the bank's behalf on a regular basis -- that can create nexus.

Q: Which of the four alternatives in this ruling is safest for avoiding New York tax?
A: The ruling doesn't declare a winner -- it identifies the relevant factors (closing location, agency vs. independent-contractor status, frequency of officer visits) without resolving any alternative definitively, since agency is a fact question. Alternative II (Connecticut closing, Connecticut attorneys, no construction loans) has the fewest New York touchpoints among the four.

Citations and references

Statutes and regulations:

• Tax Law section 1451 (Article 32 franchise tax on banking corporations)
• Tax Law section 1452(a)(2) (out-of-state banking corporation definition)
• Franchise Tax on Banking Corporations Regulations section 16-2.7(a), (b) (doing-business multi-factor test)
• Franchise Tax on Banking Corporations Regulations section 16-2.7(e), as amended July 30, 1990 (safe harbors: security interests, foreclosure title, board meetings)

Prior opinions cited:

• Peat, Marwick, Mitchell & Co., Adv Op St Tax Comm, April 16, 1987, TSB-A-87(8)C
• GEF Funding Corp., Adv Op Comm T&F, January 26, 1988, TSB-A-88(2)C
• Cuddy & Feder, Adv Op Comm T&F, June 1, 1988, TSB-A-88(13)C

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a90_25c.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-90(25)C
Corporation Tax
December 13, 1990

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C900419B

On April 19, 1990, a Petition for Advisory Opinion was received from Bleakley Platt &
Schmidt, P.O. Box 5056, 1 North Lexington Avenue, White Plains, New York 10602.
The issue raised by Petitioner, Bleakley Platt & Schmidt, is whether a foreign bank is subject
to the franchise tax on banking corporations imposed by Article 32 of the Tax Law when it has
activities and contacts with New York State as set forth in the following four alternatives.
Alternative I

1. The foreign bank (hereinafter referred to as the "Bank") is incorporated under the laws of
   Connecticut.
2. The Bank has no employees, no office and no agent working in New York State.
3. The Bank makes loans to New York residents, corporations, partnerships, trusts and other
   organizations, and because of such loans it may acquire a security interest in real or personal property
   located in New York State.
4. The Bank may acquire title to property located in New York State through the foreclosure
   of security interests held by the Bank on New York State real estate.
5. All commitments for its loans are issued from the Bank's offices in Connecticut.
6. Loans may originate from direct applications to the Bank from the borrower or through
   a broker, who may be either from New York or Connecticut and whose fee will be paid by the
   borrower, or the Bank may be a participant in credits originated by a New York bank.
7. All negotiations for loan commitments made by the Bank will be conducted at the Bank's
   offices in Connecticut.
8. Bank officers and employees may visit property located in New York State on which
   security interests may be acquired.
9. Appraisers from either Connecticut or New York may be retained by the Bank to determine
   the value of New York property on which the Bank will acquire a security interest.
10. Bank loans will be closed by New York attorneys in New York.
    TP-9 (9/88)

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Alternative II

1. The same facts as set forth in 1 through 9 of Alternative I.
2. Bank loans will be closed in Connecticut by Connecticut attorneys. The Connecticut
   attorneys may also be admitted to practice in New York.
   Alternative III
3. The same facts as set forth in Alternative I.
4. The Bank may make construction loans on New York State real estate. If construction
   loans are made, the Bank will hire architects or engineers to make inspections and approve the
   borrower's requisition for advances. The architects or engineers may be licensed in New York.
   Alternative IV
5. The same facts as set forth in Alternative II.
6. The Bank may make construction loans on New York State real estate. If construction
   loans are made, the Bank will hire architects or engineers to make inspections and approve the
   borrower's requisition for advances. The architects or engineers may be licensed in New York.
   Section 1451 of the Tax Law imposes, annually, a franchise tax on banking corporations for
   the privilege of doing business in New York State in a corporate or organized capacity.
   Section 1452(a)(2) of the Tax Law provides that every corporation or association organized
   under the laws of any other state or country which is doing a banking business, anywhere, is a
   banking corporation.
   Section 16-2.7 of the Franchise Tax on Banking Corporations Regulations (hereinafter
   "Regulations") defines "doing business" as follows:
   (a) The term "doing business" is used in a comprehensive
   sense and includes all activities which occupy the time or labor of
   people for profit. Every corporation organized for profit and carrying
   out any of the purposes of its organization is deemed to be doing
   business for 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.
   (b) 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:
   (1) the nature, continuity, frequency and
   regularity of the activities of the corporation in New
   York State;

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(2) the purposes for which the corporation was
organized;
(3) the location of its offices and other places
of business;
(4) the employment in New York State of
agents, officers and employees; and
(5) the location of the actual seat of
management or control of the corporation.
Section 16-2.7(e) of the Regulations as amended July 30, 1990 provides that:
A corporation will not be deemed to be doing business in New York State if its
activities in New York State are limited to such things as:
(1) the mere acquisition of one or more
security interests in real or personal property located
in New York State without otherwise doing business;
(2) the mere acquisition of title to property
located in New York State through the foreclosure of
a security interest without otherwise doing business;
or
(3) the mere holding of meetings of the board
of directors in New York State.
Section 16-2.7(e) of the Regulations provides that a corporation would not be deemed to be
doing business in New York State when the corporation, that has no other contact with New York
State, merely acquires, outside New York State, security interests in property located in New York
State, regardless of the frequency of the transactions.
The rationale of the policy expressed in said regulations is consistent with the Advisory
Opinions issued in Peat, Marwick, Mitchell & Co., Adv Op St Tax Comm, April 16, 1987, TSB-A­
87(8)C and in GEF Funding Corp. Adv Op Comm of T&F, January 26, 1988, TSB-A-88(2)C, an
interpretation of Article 9-A under similar circumstances. In Peat, Marwick, it was held that, under
Article 32 of the Tax Law, the activity of a national banking association as a trustee for New York
State industrial development bonds where all of the services are provided outside New York State,
except for the signing of the trust agreement and the delivery of the securities to the underwriter in
New York, was not sufficient to constitute doing business in New York State.
For purposes of Article 9-A of the Tax Law, the definition of doing business contained in
section 1-3.2(b) of the Business Corporation Franchise Tax Regulations is identical to the definition
of doing business for purposes of section 16-2.7(a) of the Regulations. In GEF Funding Corp., it was
determined that for purposes of Article 9-A of the Tax Law, the activities of a corporation do not
constitute doing business in New York State where the corporation is engaging in mortgage

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loan activities when the loans are secured by real property located in New York State but the
acceptance of application, processing, approval and servicing of the loans are conducted at the
corporation's office outside New York State. However, it was also determined in GEF Funding
Corp., that a corporation could be subject to tax if it is determined that an agency relationship exists
between such corporation and a person or entity conducting business in New York State.
It should be noted, that under Article 32 of the Tax Law where a corporation acquires security
interests in property located in New York State and such corporation conducts activities in New
York State, such corporation could be deemed to be doing business in New York State. For instance,
in Cuddy & Feder, Adv Op Comm T&F, June 1, 1988, TSB-A-88(13)C, it was determined that, for
purposes of Article 32 of the Tax Law, where a corporation's chief operating officer comes into New
York on a regular basis to negotiate mortgage loan purchases secured by New York residential
property, and the corporation's agent in New York, on a regular basis, negotiates mortgage loan
purchases for the corporation that are secured by New York residential property, the corporation was
deemed to be doing business in New York State.
Herein, the Bank is a banking corporation pursuant to section 1452(a)(2) of the Tax Law, and
is subject to the Franchise Tax on Banking Corporations imposed by Article 32 of the Tax Law if
it is doing business within New York State.
When determining whether the Bank is doing business in New York State, many factors must
be considered. The fact that the Bank acquires a security interest in real or personal property in New
York State and acquires title to property located in New York State through foreclosure of security
interests is not sufficient activity, by itself, to constitute "doing business" in New York. The
retaining of independent contractors located in New York State would not constitute doing business
in New York. However if an agency relationship exists between Bank and the brokers, appraisers,
architects, engineers or attorneys, the Bank may be considered to be doing business as a result of
such relationship. When Bank's officers and/or employees come into New York, such activity may
constitute doing business as in GEF Funding Corp., supra. Likewise, the closing of loans in New
York State may constitute doing business in New York. The totality of Bank's circumstances would
determine Bank's taxable status.
The existence of an agency relationship is a question of fact not susceptible of determination
in an Advisory Opinion. An Advisory Opinion merely sets forth the applicability

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of pertinent statutory and regulatory provisions to "a specified set of facts." Tax Law, §171, subd.
twenty-fourth; 20 NYCRR 901.1(a).

DATED: December 13, 1990

PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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