A special-purpose finance company was formed solely to buy and lease nuclear fuel to an out-of-state utility, funded by notes issued to a group of banks that include New York lenders. It has no office or employees of its own anywhere; a New York affiliate handles all its administration, books, and records for a nominal fee, and its loan documents were executed in New York at the lenders' insistence. Does that make it subject to New York's Article 9-A franchise tax, even though the nuclear fuel itself never sits in New York?

Plain-English summary

Wolverine Energy Company, a foreign corporation authorized to do business in New York, was formed solely to take title to nuclear fuel owned by Consumers Power Company (a Michigan public utility) and to serve as a financing vehicle for purchasing additional nuclear fuel for Consumers' use. All of Wolverine's stock was owned by a New York corporation (the "Service Corporation") affiliated with a New York investment banking firm. Wolverine's officers and directors were New York-based employees of either the investment bank or the Service Corporation, uncompensated by Wolverine itself. Wolverine had no employees, no payroll, and no office of its own anywhere -- the Service Corporation performed all necessary administrative services, including keeping all of Wolverine's books and records, in New York, for a nominal fee.

Wolverine financed its fuel purchases by issuing long-term notes to a group of five banks, including a major New York bank and the New York branches of two others. As security, Wolverine assigned the New York bank (acting as agent for all lenders) its rights to receive rents from Consumers under the lease. With borrowed proceeds, Wolverine bought title to nuclear fuel and simultaneously leased it to Consumers under a net lease requiring Consumers to maintain, insure, and pay taxes on the fuel -- though Wolverine never took physical possession, since the fuel stayed at Consumers' or a supplier's out-of-state plants. At lease end, title would pass to Consumers if all payments were current; Consumers could also terminate early and buy the fuel outright. At the New York lenders' insistence, all financing agreements were executed in New York specifically so New York law would govern and be enforceable there.

Article 9-A taxes foreign corporations "doing business" in New York in a corporate or organized capacity (Tax Law § 209.1), a term the regulations use "in a comprehensive sense" (20 NYCRR § 1-3.2(b)(1)), assessed case by case under six factors: the nature/continuity/frequency of New York activities versus elsewhere; organizational purpose versus New York activities; office location; the portion of income from New York activities; New York employment of agents/officers/employees; and the seat of management (20 NYCRR § 1-3.2(b)(2)). Wolverine argued its activities didn't rise to "doing business" because its only function was serving as a financing conduit for a Michigan utility. The Department disagreed: because Wolverine performed literally all of its corporate activities in New York -- doing there, and nowhere else, exactly what it was formed to do -- it satisfied the first and second factors, and its income could fairly be said to be entirely "derived from activities in New York." That was enough to establish doing-business nexus and subject Wolverine to the Article 9-A franchise tax.

What this means for you

A financing SPE with zero physical presence in the taxed asset's location can still owe New York tax

Wolverine never held or possessed the nuclear fuel in New York -- the fuel was always out of state. What mattered was where the CORPORATION's own activities (administration, financing, contracting) took place, not where the underlying asset sat.

Routing an SPE's administration and legal documents through New York for lender convenience has tax consequences

The New York lenders insisted on executing financing documents in New York to secure New York-law protection -- a sensible lending practice -- but the Department treated that choice, combined with New York-based administration, as concentrating "all" of the entity's activity in New York, defeating any argument that the entity's true business happened elsewhere.

Common questions

Q: If our special-purpose financing entity has no office, employees, or payroll of its own, can it avoid New York doing-business nexus?
A: Not if an affiliated New York service company performs all of its administrative work and keeps its books and records in New York, and its officers/directors are New York-based -- the Department will look at where the entity's actual activities happen, not whether it has its own payroll.

Q: Does it matter that the financed asset (here, nuclear fuel) is physically located outside New York the whole time?
A: Not decisively -- the ruling turned on where Wolverine's OWN corporate activities took place (administration, contracting, financing), which was entirely in New York, regardless of the fuel's location.

Citations and references

Statutes and guidance:

• Tax Law § 209.1
• 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_8c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-H-81(8)C
Corporation Tax
January 28, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C800827B

On August 27, 1980, a Petition for Advisory Opinion was received from
Wolverine Energy Company, c/o Broad Street Contract Services, Inc., 55 Broad
Street, New York, New York 10005.
The issue raised is whether the 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 is a foreign corporation authorized to do business in New York.
The facts, as stated in the petition for Advisory Opinion, are as follows:
"It was formed solely for the purpose of taking title to nuclear fuel owned by
Consumers Power Company ("Consumers") in connection with a financing transaction
and serving as a vehicle for financing the purchase of additional nuclear fuel
to be used by that company. Consumers is a Michigan corporation duly authorized
to carry on a public utility business in that state. It is engaged in both the
generation, transmission, distribution and sale of electric energy and in the
production, storage, transmission, distribution and sale of natural gas in the
State of Michigan.
"All of the Petitioner's outstanding capital stock is owned by a New York
corporation (the "Service Corporation") affiliated with a New York investment
banking firm.
The Petitioner's officers and directors are New York based
employees of either the investment banking firm or the Service Corporation and
the Petitioner does not compensate them for their services. The Petitioner has
no employees or payroll and has no actual office of its own in New York or in any
other state.
Instead, the Service Corporation performs all necessary
administrative services for the Petitioner for a nominal fee; those services,
which include the keeping of all of the Petitioner's books and records, are
performed by the Service Corporation in New York.
"As stated above, the Petitioner was organized to serve as a vehicle for
purchasing nuclear fuel to be used by Consumers. The Petitioner finances its
purchases by issuing long-term notes to a group of five banks, including a major
New York bank and the New York branches of two other banks. As security for the
notes, the Petitioner has assigned to the New York bank, as agent for all of the
lenders, all of Petitioner's rights to receive rents and other sums from
Consumers under the lease described below.
With the proceeds from its
borrowings, the Petitioner purchases title to various nuclear fuel from Consumers
and other processors and simultaneously leases it to Consumers. Although the
Petitioner acquires title to the fuel, it never obtains possession; the fuel is
always located outside of New York at plants of either Consumers or a supplier
of either nuclear fuel or services in connection with nuclear fuel.
"The lease between the Petitioner and Consumers is a net lease under which
the latter is responsible for maintaining, operating, repairing, replacing and
insuring the nuclear fuel and for paying all taxes and other costs arising out
of its ownership and possession.
Consumers' payments under the lease are
calculated to enable the Petitioner to make the payments of principal on its
notes (representing all costs of acquisition of the property) together with
interest thereon and to pay the nominal administrative fees to the Service
Corporation.
JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

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

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TSB-H-81(8)C
Corporation Tax
January 28, 1981

"At the conclusion of the lease term, if all required payments of rent have
been made when due and no event of default has occurred and is continuing
thereunder, title to the leased property passes to Consumers. The lease also
provides that upon five days notice, Consumers may terminate the lease without
penalty and purchase the nuclear fuel from the Petitioner by paying an amount
sufficient to enable the latter to prepay its notes.
"At the insistence of the New York lending banks, all agreements in the
above-described financing transaction were executed in New York to provide added
assurance that their terms would be governed by and enforceable in accordance
with New York law ....
"The Petitioner asserts that its activities do not rise to the level of
"doing business" within the meaning of Section 209 of the Tax Law; its only
function is to serve as a vehicle by which Consumers, a Michigan corporation, can
finance its purchases of nuclear fuel by borrowing money from a group of lenders
which includes a major New York bank and the New York branches of two other
banks."
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 to be determined on a case by case basis, 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 §l-3.2(b)(2)
The facts set forth in the Petition for Advisory Opinion indicate that
Wolverine was formed solely for the purpose of financing the purchase of nuclear
fuel for Consumers. All activities that Petitioner performs in furtherance of
this purpose are performed in New York. 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, consideration of the facts in light of 20 NYCRR §1-3.2(b)(2)
(i) and (ii) indicate that Wolverine is doing business in New York. It may also
fairly be said that all of its income is "derived from activities in New York
State," thus satisfying 20 NYCRR §l-3.2(b)(2)(iv).
The rest of the factors
listed above are not dispositive as applied to the facts stated in the petition.

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TSB-H-81(8)C
Corporation Tax
January 28, 1981

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 §209.1 of the Tax Law and that Petitioner
is therefore subject to the Franchise Tax on Business Corporations.

DATED:

January 22, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau