A New York-based finance conduit borrows money by selling short-term commercial paper (or drawing on a bank credit line) and relends the proceeds to an out-of-state utility subsidiary to finance fuel purchases, earning only a nominal fee. Is that enough to make it subject to New York's Article 9-A franchise tax, and if so, can its short-term borrowings be deducted from its assets in figuring its taxable business capital?

Plain-English summary

Clipper Oil Corporation, a foreign corporation authorized to do business in New York, described its only activities as (1) borrowing by selling short-term commercial paper notes (maturities of 270 days or less) or drawing on a bank line of credit, and (2) relending those proceeds -- up to $100 million -- to a "Fuel Owner" subsidiary of an out-of-state southern utility, whenever the Fuel Owner purchased fuel for the utility's use. The loans were secured by the Fuel Owner's fuel inventory and receivables. Clipper repaid maturing commercial paper from the Fuel Owner's principal payments, from selling new commercial paper, or by drawing on its credit line if paper couldn't be sold. Its financing agreement with the Fuel Owner was set to terminate on May 28, 1981 unless extended.

Interest Clipper charged the Fuel Owner was calibrated to exactly match the discount/interest on Clipper's own commercial paper and credit-line borrowings, plus enough to cover its other expenses -- plus a nominal administrative fee. Because of that pass-through structure, Clipper's only real taxable income for federal purposes was the nominal fee. Since its borrowings were all commercial paper and short-term credit-line draws, Clipper anticipated all of its liabilities would mature in under a year, though it would maintain a substantial amount of outstanding borrowing at all times. Aside from the statutorily excluded activities listed in Tax Law § 209.2, Clipper's only New York activities were the borrowing and relending described above.

Article 9-A taxes foreign corporations "doing business" in New York (Tax Law § 209.1), a term used "in a comprehensive sense" per the regulations (20 NYCRR § 1-3.2(b)(1)), assessed under six factors including the nature/location of activities, organizational purpose, offices, income source, and management seat (20 NYCRR § 1-3.2(b)(2)). The Department held that because Clipper's described activities constituted the entirety of its operations -- doing there, and nowhere else, exactly what it was formed to do -- and its income could fairly be said to derive entirely from New York activities, Clipper was "doing business" and subject to the Article 9-A franchise tax.

On Clipper's second question -- whether its liabilities could be deducted from its assets in figuring its taxable "business capital" -- Tax Law § 208.7 defines business capital as all assets other than subsidiary capital, investment capital, and issued stock, MINUS liabilities not already deducted from subsidiary/investment capital that are payable on demand or within a year (excluding loans outstanding more than a year at any point in the reporting year). The Department confirmed that so long as all of Clipper's liabilities matured in under a year by their terms, and none were renewed past the one-year mark within any covered reporting year, they were properly deductible from Clipper's assets in computing business capital.

What this means for you

A pure pass-through financing conduit operating entirely in New York is doing business there

Even though Clipper's economic role was simply to pass borrowed funds through to an out-of-state utility affiliate at cost (plus a nominal fee), the fact that ALL its activity -- borrowing and relending -- happened in New York was enough to establish Article 9-A nexus.

Short-term commercial paper and credit-line draws reduce taxable business capital

If your New York-taxable entity finances itself with commercial paper or credit-line borrowings that genuinely mature in under a year and aren't renewed past that mark within the reporting year, those liabilities are deductible from assets under Tax Law § 208.7 -- lowering the business-capital base for the Article 9-A tax.

Common questions

Q: Does earning only a nominal fee on a pass-through financing arrangement avoid New York nexus?
A: No -- the ruling looked at where the activity itself (borrowing and relending) took place, not the size of the taxable income it generated; performing that activity entirely in New York established doing-business nexus.

Q: Can short-term commercial paper always be deducted from assets when computing business capital?
A: Only if the borrowings by their terms mature in under a year AND are not renewed so as to stay outstanding more than a year as of any date within the covered reporting year, per Tax Law § 208.7.

Citations and references

Statutes and guidance:

• Tax Law § 209.1
• Tax Law § 208.7
• 20 NYCRR § 1-3.2(b)(1)
• 20 NYCRR § 1-3.2(b)(2)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/h81_4c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-H-81(4)C
Corporation Tax
January 8, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C800716B

On July 16, 1980 a Petition for Advisory Opinion was received from Clipper
Oil Corporation, 20 Exchange Place, New York, New York 10005.
The issue raised is whether Petitioner's activities in New York, described
below, render it subject to the Franchise Tax on Business Corporations imposed
under Article 9-A of the Tax Law. Petitioner also inquires whether, should it be
held subject to such tax, its short-term borrowings would be deductible from its
assets in determining its business capital within the meaning of section 208.7
of the Tax Law.
Petitioner is a foreign corporation authorized to do business in New York.
As described in the Petition for Advisory Opinion its "only activities will be
(1) to borrow by selling its promissory notes, known as commercial paper notes,
of maturities of 270 days or less or by drawing on a bank line of credit and (2)
to lend the proceeds of these borrowings to a subsidiary (the "Fuel Owner") of
a utility located outside New York in the southern United States (the "Utility").
The loans will be secured by a security interest in fuel owned from time to time
by the Fuel Owner and in accounts receivable therefor.
"Clipper will lend funds to the Fuel Owner, up to a maximum of
$100,000,000, whenever the Fuel Owner purchases fuel for use by the Utility. To
finance this loan, Clipper will sell its commercial paper notes or, if commercial
paper notes cannot be sold, will draw on a line of credit with a bank. The
borrowing under the line of credit will be repaid by selling commercial paper
notes when commercial paper notes can again be sold. The financing agreement
between Clipper and the Fuel Owner will terminate on May 28, 1981, unless
extended at that time.
"Clipper will pay the principal amount of its maturing commercial paper
notes in one of three ways. First, the Fuel Owner will make periodic principal
payments on Clipper's loan to it. These principal payments will be applied to
paying maturing commercial paper notes. If the Fuel Owner has not repaid
sufficient principal, Clipper will sell additional commercial paper notes, using
the proceeds to redeem the maturing commercial paper notes. If commercial paper
notes cannot be sold at the time, Clipper will draw on its line of credit until
such time as commercial paper can be sold.
"Interest payments on the loans from Clipper to the Fuel Owner will be in
an amount equal to the discount or interest payable on Clipper's outstanding
commercial paper notes and borrowings on the line of credit, if any, plus amounts
necessary to defray other expenses of Clipper. Clipper will also receive a
nominal administrative fee. Because the interest payments from the Fuel Owner to
Clipper are directly tied to the interest and other expenses of Clipper, Clipper
will have a taxable income for federal income tax purposes equal to the nominal
administrative fee paid to it.
"Because Clipper's borrowings will be by sale of commercial paper notes and
temporary drawings under the line of credit, it is anticipated that all of its
liabilities by their terms will have a maturity of less than one year. At all
times Clipper will have a substantial amount of outstanding borrowings.

JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-H-81(4)C
Corporation Tax
January 8, 1981

"Clipper's only activities carried on in New York State, other than those
listed in Section 209.2 of the Tax Law, will be borrowing money as described
above and relending it to the Fuel Owner."
Article 9-A of the Tax Law imposes a tax on foreign corporations "doing
business" in New York in a corporate or organized capacity. Tax Law, §209.1. The
Franchise Tax Regulations, noting that the term "doing business" is used in the
statute in "a comprehensive sense," provides that "...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" imposed under Article 9-A. 20
NYCRR §1-3.2(b)(1). Whether a corporation is doing business in New York is a
matter determined on a case by case approach, giving due consideration to the
following factors:
"(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)(2)
The statement of facts contained in the Petition for Advisory Opinion
indicates that the activities therein described constitute all of Petitioner's
activities. That is, Petitioner performs all of its corporate activities in New
York, doing there and nowhere else that which it was formed to do. Thus, for
example, all of its income may fairly be said to "be derived from activities in
New York State." Giving due consideration to the factors set forth in Section 1­
3.2(b)(2) of the Franchise Tax Regulations, and viewing Petitioner's activities
in a comprehensive sense, it is hereby determined that such activities constitute
"doing business" within the meaning of section 209.1 of the Tax Law and that
Petitioner is therefore subject to the Franchise Tax on Business Corporations.
Petitioner's second question is whether its liabilities may be deducted
from its assets in determining its business capital. Section 208.7 of the Tax Law
defines the term "business capital," one of the factors utilized in determining
the tax due under Article 9-A, as "...all assets, other than subsidiary capital,
investment capital and stock issued by the taxpayer, less liabilities not
deducted from subsidiary or investment capital which are payable by their terms
on demand or within one year from the date incurred, other than loans or advances
outstanding for more than a year as of any date during the year covered by the
report .... " Accordingly, so long as all of Petitioner's liabilities by their
terms will have a maturity of less than one year, and so long as none of these
liabilities will be renewed so as to be outstanding for more than one year as of
any date occurring within the year covered by the report, the Petitioner's
liabilities may properly be deductible from its assets in determining its
business capital.

DATED:

December 24, 1980

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau