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(§ 11-641(f) and (k), Administrative Code)
(a) The adjusted eligible net income of the IBF is allowed as a deduction in computing the taxpayer's entire net income, to the extent not deductible in determining Federal taxable income. This deduction is taken before the taxpayer allocates its entire net income within and without New York City. The adjusted eligible net income of the IBF is determined by subtracting from the eligible net income of the IBF the ineligible funding amount (See: 19 RCNY § 15-10, infra – Ineligible Funding Amount) and the floor amount (See: 19 RCNY § 15-11, infra – Floor Amount). The eligible net income of the IBF is the amount remaining after subtracting from the eligible gross income of the IBF (See: 19 RCNY § 15-04, infra – Eligible gross income) the expenses applicable to such gross income (See: 19 RCNY § 15-05, infra – Direct expenses of the IBF, 19 RCNY § 15-06, infra – Interest Expense of the IBF, 19 RCNY § 15-07, infra – Bad Debt Deduction of the IBF, and 19 RCNY § 15-08, infra – Indirect Expenses of the IBF, including Head Office Expenses). When the IBF has eligible gross income and ineligible gross income for the taxable year, eligible net income of the IBF is computed by reducing eligible gross income by those expenses which are apportioned to eligible gross income pursuant to 19 RCNY § 15-09, infra.
(b) The eligible gross income of the IBF is the amount of gross income (including gross income from interoffice transactions) derived from the activities described in 19 RCNY § 15-04, infra, that would be includible in the computation of the IBF's entire net income for the taxable year, as if the IBF were a separate corporation.
(c) Expenses applicable to the eligible gross income of the IBF are those expenses or other deductions (including expenses or other deductions from interoffice transactions) described in 19 RCNY §§ 15-05, 15-06, 15-07, and 15-08, infra, that are directly or indirectly attributable to the eligible gross income of the IBF.
(d) The Commissioner of Finance may, whenever necessary in order to properly reflect the adjusted eligible net income or the entire net income of the taxpayer, determine the taxable year in which any item of income or deduction shall be included without regard to the method of accounting used by the taxpayer.
(§ 11-641(f)(2), Administrative Code)
(a) Eligible gross income includes gross income derived from making, arranging for, placing, or servicing loans to foreign persons, except that such gross income derived from those foreign persons described in 19 RCNY § 15-04(b) is eligible gross income only when substantially all the proceeds of the loan are for use outside the United States. Eligible gross income includes fees, such as arrangement, commitment, and letter of credit fees received from foreign persons regardless of when or whether the loans are made, and management fees from servicing loans to foreign persons. Eligible gross income includes interest income received from a loan made to or a deposit placed with a foreign person which was purchased without recourse as against any prior owner and meets the restrictions set forth in 12 C.F.R. § 204.122. Eligible gross income does not include income received from the purchasing or selling of assets from or to third parties, such as loans (including loan participations), securities, certificates of deposits, and bankers' acceptances.
(b) Gross income derived from making, arranging for, placing, or servicing a loan to a foreign person which is:
(1) a nonresident individual;
(2) a foreign branch of a domestic corporation (other than a foreign branch of a domestic bank);
(3) a foreign corporation which is 80 percent or more owned or controlled, either directly or indirectly, by one or more domestic corporations (except corporations which are banks), domestic partnerships, or resident individuals; or
(4) a foreign partnership which is 80 percent or more owned or controlled, either directly or indirectly, by one or more domestic corporations (except corporations which are banks), domestic partnerships, or resident individuals; is eligible gross income only when substantially all the proceeds of the loan re for use outside the United States. For purposes of this subdivision, "substantially all the proceeds of the loan are for use outside of the United States" means that at least 95 percent of the proceeds of the loan must be used outside the United States to finance the operations of the borrower or its affiliates located outside the United States. An affiliate is a corporation or partnership which is 80 percent or more owned or controlled, either directly or indirectly, by the borrower. The use of proceeds requirement for New York City tax purposes is deemed to be satisfied based on the stated purpose of the loan and a written statement of the foreign person to whom a loan is made stating that such foreign person, or another foreign person that is affiliated with such foreign person, will use the proceeds of the loan outside the United States. The written statement may be in the form of a representation or covenant in any agreement relating to the loan or a separate certificate or other written statement of the foreign person, such as the model statement set forth by the Federal Reserve Board. If the taxpayer is unable to obtain such a written statement, the Commissioner of Finance will consider other evidence that the proceeds of the loan are for use outside the United States. For purposes of this subdivision, the term "owned or controlled, either directly or indirectly" means, in the case of a corporation, the power to direct or cause the direction of the management and policies of [a corporation, whether through the ownership of at least 80 percent of the voting stock of such corporation or through the ownership of at least 80 percent of the voting stock of any other corporation which possesses such power, or, in the case of a partnership, the power to direct or cause the direction of the management and policies of] the partnership, or ownership of at least 80 percent of the profits interest or at least 80 percent of capital interest of such partnership.
(c) Eligible gross income includes gross income derived from making or placing deposits, if the related asset is recorded in the financial accounts of the IBF, with foreign persons which are:
(1) banks;
(2) foreign branches of a bank, including foreign branches of the taxpayer;
(3) foreign banks which are subsidiaries of a bank, including foreign banks which are subsidiaries of the taxpayer; or
(4) other IBFs. The term "deposit" as used in this subdivision means the amount of money received or held by such foreign person for which it has given or is obligated to give credit, either conditionally or unconditionally, to a deposit liability account, including interest credited to such account, or which is evidenced by such foreign person's certificate of deposit.
(d) Eligible gross income includes gross income derived from foreign exchange trading or hedging transactions that are solely entered into for or directly traceable to any of the transactions described in 19 RCNY § 15-04(a), (b) and (c). Gross income from foreign exchange trading or hedging transactions related to a deposit (as defined in 19 RCNY § 15-01, "deposit" supra) from a foreign person, is eligible gross income when such deposit can be traced directly to a transaction described in 19 RCNY § 15-04(a), (b) and (c). A foreign exchange trading or hedging transaction is not solely entered into for or directly traceable to any of the transactions described in 19 RCNY §§ 15-04(a), (b) and (c) unless the foreign exchange trading or hedging transaction is recorded in the financial accounts of the IBF. The term "foreign exchange trading or hedging transaction" as used in this subdivision means:
(1) the purchase, sale, or exchange of foreign currency; or
(2) the acquisition, disposition, or performance of any contract to purchase, sell, or exchange foreign currency at a future date under terms fixed in the contract if the contract hedges a foreign currency denominated loan or deposit. A forward contract hedges such foreign currency denominated loan or deposit if the effect of a change in the value of the foreign currency on the United States dollar value of the forward contract, either alone or in combination with other such contracts, offsets the effect of the change on the United States dollar value of such foreign currency denominated loan or deposit. A hedging relationship may be established by reference to particular facts and circumstances (for example, the amount of the forward contract, particular currency, initial date, and maturity) indicating a hedging purpose, or by designating a contract as being intended for the purpose of hedging a loan or deposit.
(§ 11-641(f)(3), Administrative Code)
(a) Expenses or other deductions which can be specifically identified with the gross income, gains, losses, deductions, assets, liabilities, or other activities of the IBF are direct expenses, regardless of where such expenses or other deductions are recorded. Direct expenses may include such items as interest, bad debts, rents, depreciation, taxes, insurance, supplies, compensation of officers, salaries, wages, travel expenses, pension plans, charitable contributions, training, servicing, etc.
(b) Employee expenses incurred at places other than the IBF are allocated to the IBF when the employee is regularly connected with or working out of the IBF regardless of where the services of such employee were actually performed.
(c) The IBF may incur certain expenses as a result of performing a service for one or more places of business of the taxpayer. These expenses must be directly allocated to the place or places of business of the taxpayer which received the benefit for which the service was performed.
(d) Head office expenses that can be specifically identified with the gross income, gains, losses, deductions, assets, liabilities, or other activities of the IBF are directly allocated to the IBF.
(e) If a portion of an expense can be specifically identified with the IBF, that portion of the expense must be directly allocated to the IBF. The portion of such expense that cannot be directly allocated to one or more places of business of the taxpayer must be indirectly allocated to the IBF pursuant to 19 RCNY § 15-08, infra.
(§ 11-641(f)(3), Administrative Code)
(a) Interest expense of the IBF includes interest paid or accrued on funds borrowed by the IBF and/or interest paid or accrued on deposits recorded on the books as IBF liabilities. A taxpayer that determines its interest expense deduction for Federal income tax purposes pursuant to Section 1.882-5 of the Federal income tax regulations (26 C.F.R. § 1.882-5) must compute the interest expense of the IBF for New York City tax purposes as described in 19 RCNY § 15-06(c). Every other taxpayer must compute the interest expense of the IBF for New York City tax purposes as described in 19 RCNY § 15-06(b).
(b) The interest expense of the IBF is the sum of the amount of interest expense determined in paragraph (1) of this subdivision and the total deemed interest expense determined in paragraph (2) of this subdivision.
(1) Interest expense on borrowings and deposits from other than a branch, agency, or other office of the bank which established the IBF is the interest expense deduction on such borrowings and deposits for Federal income tax purposes.
(2) Each deposit with the IBF by a branch, agency, or other office of the bank which established the IBF (for purposes of this paragraph called the "lending office") and each borrowing from such lending office shall be deemed to bear interest computed by using one of the following applicable rates:
(i) a rate of interest representing the interest cost of the lending office on borrowings made to obtain funds from arm's length transactions which were loaned to, deposited in, or placed with the IBF; or
(ii) the average rate of interest incurred by the lending office, which is equal to the ratio of the total amount of interest expense from arm's length transactions recorded in the financial accounts of the lending office for the taxable year, to the average amount of liabilities from borrowings and deposits owed from such arm's length transactions recorded in the financial accounts of the lending office for the taxable year averaged on a quarterly or more frequent basis; or
(iii) any other rate which the taxpayer establishes to the Commissioner of Finance as a more appropriate rate.
(c) (1) A taxpayer that determines its interest expense deduction for Federal income tax purposes pursuant to Section 1.882-5 of the Federal income tax regulations (26 C.F.R. § 1.882-5) must compute its interest expense of the IBF for New York City tax purposes in the same manner, using the same liabilities-to-assets ratio, the same method (branch book/dollar pool or separate currency pools), the same interest rate or rates, and the same method of valuation it actually used in the computation of its Federal interest expense deduction for the taxable year. In determining the IBF's interest expense for New York City tax purposes, the three-step process described in Section 1.882-5 of the Federal income tax regulations (26 C.F.R. § 1.882-5) is applied using the rules set forth in this subdivision.
(i) The term "inter office" means the activities between the IBF and the separate branches, agencies, or offices of the taxpayer.
(ii) The classification of items as assets or liabilities must be on a consistent basis from year to year and determined according to U.S. tax principles.
(iii) The average total value of IBF assets must be stated in U.S. dollars and valued by the same method (book or fair market) used for Federal income tax purposes. The actual value used in the Federal computation must be used in the asset determination for New York City tax purposes.
(iv) The average total value of assets and the average total amount of liabilities is determined by using the same interval (daily, weekly, etc.) actually used for Federal income tax purposes.
(v) A particular asset value or liability amount that is denominated in one currency is translated into U.S. dollars at the exchange rate for the date the value or amount is determined for purposes of this subdivision. An interest expense amount shown on the books is translated at the exchange rate from a qualified source for the date the amount is paid or accrued. Qualified sources of exchange rates must be determined under the rules of Section 1.964-1(d)(5) of the Federal income tax regulations (26 C.F.R. § 1.964-1(d)(5)).
(2) The asset determination in Step 1 of the Federal three-step process is the average total value of all of the IBF assets (including interoffice) shown on the books that generate, have generated, or could reasonably have been or be expected to generate income, gain, or loss for the taxable year, or portion thereof.
(3) The liability determination in Step 2 of the Federal three-step process is the amount of IBF-connected liabilities for the taxable year, or portion thereof, determined by multiplying the average total value of assets determined in paragraph (2) of this subdivision by the same percentage actually used for Federal income tax purposes for the taxable year.
(4) If the taxpayer used, for Federal income tax purposes, the separate currency pools method in Step 3 of the Federal three-step process, the IBF interest expense for New York City tax purposes is the sum of the separate interest expenses for each currency in which the IBF has borrowed. If the IBF borrowed in a currency for which it did not compute an interest expense for Federal income tax purposes, it must compute its IBF interest expense for that currency as if it actually had an interest expense for such currency for Federal income tax purposes. The interest expense for each currency is determined as follows:
(i) the amount of IBF-connected liabilities determined in paragraph (3) of this subdivision multiplied by
(ii) the ratio, stated in the same currency used for Federal income tax purposes, of
(A) the average total amount of IBF liabilities denominated in the particular currency shown on the books (including interoffice) for the taxable year, or portion thereof, to
(B) the average total amount of all IBF liabilities shown on the books (including interoffice) for the taxable year, or portion thereof, multiplied by
(iii) the average worldwide interest rate actually used for Federal income tax purposes in computing that particular currency.
(5) If the taxpayer used, for Federal income tax purposes, the branch book/dollar pool method in Step 3 of the Federal three-step process and Section 1.882-5(b)(3)(i)(A) of the Federal income tax regulations applied, the IBF interest expense for New York City tax purposes is determined by multiplying the IBF-connected liabilities, determined in paragraph (3) of this subdivision by the same average U.S.-connected interest rate actually used for Federal income tax purposes.
(6) If the taxpayer used, for Federal income tax purposes, the branch book/dollar pool method in Step 3 of the Federal three-step process and Section 1.882-5(b)(3)(i)(B) of the Federal income tax regulations applied and the IBF-connected liabilities exceed the average total amount of IBF liabilities shown on the books (excluding interoffice), the IBF interest expense for New York City tax purposes is determined by adding
(i) the amount of IBF interest expense (stated in U.S. dollars) shown on the books (excluding interoffice) for the taxable year, or portion thereof, and
(ii) the amount determined by multiplying the excess of IBF-connected liabilities, determined in paragraph (3) of this subdivision, over the average total amount of IBF liabilities (stated in U.S. dollars) shown on the books (excluding interoffice) for the taxable year, or portion thereof, by the average interest rate on U.S. dollar liabilities actually used for Federal income tax purposes.
(7) If the taxpayer used, for Federal income tax purposes, the branch book/dollar pool method in Step 3 of the Federal three-step process and Section 1.882-5(b)(3)(i)(B) of the Federal income tax regulations applied and the IBF-connected liabilities do not exceed the average total amount of IBF liabilities shown on the books (excluding interoffice), the IBF interest expense for New York City tax purposes is determined by subtracting
(i) the amount determined by multiplying the difference between the average total amount of IBF liabilities (stated in U.S. dollars) shown on the books (excluding interoffice) for the taxable year, or portion thereof, and the IBF-connected liabilities, determined in paragraph (3) of this subdivision, by the average interest rate on U.S. dollar liabilities actually used for Federal income tax purposes, from
(ii) the amount of IBF interest expense (stated in U.S. dollars) shown on the books (including interoffice) for the taxable year, or portion thereof. If the amount determined in this paragraph results in a negative amount, the taxpayer must determine the interest expense of the IBF for New York City tax purposes by multiplying the IBF-connected liabilities, determined in paragraph (3) of this subdivision, by the average IBF-connected interest rate. The average IBF-connected interest rate is the ratio, stated in U.S. dollars, of the total amount of IBF interest expense shown on the books (excluding interoffice) for the taxable year, or portion thereof, to the average total amount of IBF liabilities shown on the books (excluding interoffice) for the taxable year, or portion thereof.
(§ 11-641(f)(3), Administrative Code)
(a) In computing direct expenses pursuant to 19 RCNY § 15-05, supra, the IBF of a taxpayer must compute its bad debt deduction by using the same method the taxpayer used for Federal income tax purposes. A taxpayer which uses the direct charge-off method to compute its bad debt deduction for Federal income tax purposes, in accordance with subsection (a) of Section 166 of the Internal Revenue Code, will have as its IBF bad debt deduction the aggregate of those specific bad debts of the IBF from loans which produce eligible gross income (hereinafter "IBF loans") which were included in the bad debt deduction for Federal income tax purposes. A bank which maintains a reserve for losses on loans for Federal income tax purposes, in accordance with Section 585 of the Internal Revenue Code, must compute its IBF bad debt deduction and its maximum addition to the reserve balance for losses on loans for purposes of this section by using the same reserve method it used for Federal income tax purposes, that is, either the experience method or the percentage method. When computing the maximum addition to the reserve balance for losses on loans, only the amount of IBF loans that were included in the computation for Federal income tax purposes may be used in the computation for purposes of this section. If the actual bad debt deduction taken for Federal income tax purposes is less than the allowable maximum addition for Federal income tax purposes, the bad debt deduction for purposes of this section is limited to the IBF maximum addition to the reserve balance multiplied by a fraction, the numerator of which is the actual bad debt deduction taken for Federal income tax purposes and the denominator of which is the Federal maximum addition to the reserve balance.
(b) When loans are transferred to the IBF, the taxpayer should transfer to the IBF the portion of the reserve for bad debts maintained by the taxpayer in accordance with the Internal Revenue Code with respect to such loans transferred to the IBF. The portion is transferred as of the date such loans are transferred.
(§ 11-641(f)(3), Administrative Code)
(a) Expenses of the taxpayer, including head office expenses, which cannot be specifically identified with the gross income, gains, losses, deductions, assets, liabilities, or other activities of the IBF or a place of business of the taxpayer, are indirect expenses and must be allocated on an indirect basis. Indirect expenses, including head office expenses, may include such items as compensation of officers, salaries, wages, travel expenses, pension plans, rents, taxes, depreciation, insurance, advertising, accounting, legal, charitable contributions, financing, operation supervision, technical, research, training, physical facilities, servicing, etc.
(b) Expenses that cannot be specifically identified with the IBF or any particular place of business of the taxpayer but are indirectly related to the gross income, gains, losses, deductions, assets, liabilities, or other activities of the IBF, must be allocated by the method that properly reflects the allocation of such expenses to the IBF. Generally, the amount of indirect expenses allocable to the IBF is determined by multiplying such expenses by a fraction computed by either the gross asset method as described in paragraph (1) of this subdivision, or the gross income method as described in paragraph (2) of this subdivision.
(1) Gross asset method. In the gross asset method the numerator of the fraction is the average of all gross assets, except interoffice gross assets and goodwill, of the IBF of the taxpayer, and the denominator is the average of all gross assets, except interoffice gross assets and goodwill, of the taxpayer. Where the numerator determined in the preceding sentence is zero, the numerator and denominator must be computed by including gross assets from interoffice transactions. In the case of a taxpayer which is a foreign corporation, "all gross assets" means such taxpayer's assets located in the United States and its other assets used in connection with its trade or business in the United States. The average of all gross assets must be computed on a quarterly basis or, at the option of the taxpayer, on a more frequent basis such as monthly, weekly, or daily. Loans and deposits are to be included on an average daily balance basis. When the taxpayer's usual accounting practice does not permit a quarterly or more frequent computation of the average of all gross assets, a semi-annual or annual computation will be allowed when it appears to the Commissioner of Finance that no distortion of the average of all gross assets will result. Different periods of averaging may be used for different classes of assets. If, because of variations in the amount or value of any class of assets, it appears to the Commissioner of Finance that averaging on an annual, semi-annual, or quarterly basis does not properly reflect the average of all gross assets, the Commissioner of Finance may require averaging on a more frequent basis. The method used to determine the average of all gross assets must be consistent and may not be changed on any subsequent return without the written consent of the Commissioner of Finance. Gross assets are valued at original cost. The term "original cost" means, if:
(i) the property was obtained for cash, the amount paid for the property in cash;
(ii) the property was obtained for cash plus property, the amount paid in cash plus the fair market value at the time of the exchange of the property exchanged;
(iii) the property was obtained in exchange for other property without any cash consideration, the fair market value at the time of the exchange of the property exchanged; or
(iv) none of the consideration for the property is cash or other property, the fair market value of the property acquired by the taxpayer as of the date of the acquisition by the taxpayer.
(2) Gross income method. In the gross income method the numerator of the fraction is the gross income (excluding gross income from interoffice transactions) of the IBF of the taxpayer includible in the computation of entire net income for the taxable year, and the denominator is the gross income (excluding gross income from interoffice transactions) of the taxpayer includible in the computation of entire net income for the taxable year. Where the numerator determined in the preceding sentence is zero, the numerator and denominator must be computed by including gross income from interoffice trans- actions.
(3) Other method. Any other method that the taxpayer establishes to the Commissioner of Finance as a more appropriate method.
(c) Expenses that can be identified with the IBF and one or more places of business of the taxpayer, but not all places of business of the taxpayer, must be allocated by the method that properly reflects the allocation of such expenses to the IBF. The amount of such expenses allocable to the IBF is determined by multiplying such expenses by a fraction computed as described in 19 RCNY § 15-08(b). However, in computing such fraction, the denominator is limited to the IBF and those places of business identified with such expenses.
(d) A taxpayer must use the same method in allocating all indirect expenses. The method a taxpayer uses in computing the allocation of indirect expenses as described in 19 RCNY § 15-08(b) may not be changed in subsequent years without the written consent of the Commissioner of Finance. If the Commissioner of Finance determines that the method used in allocating expenses, including head office expenses, does not properly reflect the expenses of the IBF, the Commissioner of Finance may require the taxpayer to allocate expenses by a different method.
(§ 11-641(f), Administrative Code)
When the IBF has eligible gross income and ineligible gross income, the expenses that are applicable to eligible gross income shall be the sum of the following amounts:
(b) an amount computed by multiplying the sum of direct expenses of the IBF (as determined in 19 RCNY §§ 15-05 and 15-06(b)(1), supra) for the taxable year that are not specifically identified with either the eligible gross income or the ineligible gross income of the IBF and all indirect expenses of the IBF (as determined in 19 RCNY §§ 15-06 and 15-08, supra) for the taxable year by a fraction, the numerator of which is the eligible gross income of the IBF for the taxable year and the denominator of which is the gross income of the IBF for the taxable year.
(§ 11-641(f)(5), Administrative Code)
(a) The ineligible funding amount of the IBF is determined by multiplying eligible net income (See: 19 RCNY § 15-03(a), supra) by the following fraction:
(1) The numerator of the fraction is the average aggregate amount of all liabilities and other sources of funds of the IBF for the taxable year which were not owed to or received from foreign persons (the term "foreign person" is defined in 19 RCNY § 15-01, supra).
(2) The denominator of the fraction is the average aggregate amount of all liabilities and other sources of funds of the IBF for the taxable year.
(b) "All liabilities and other sources of funds of the IBF" includes deposits, advances from the head office or other places of business of the taxpayer, accounts payable, notes and bonds payable, accrued expenses, deferred income, contingent liabilities, taxes payable, appropriated retained earnings (such as reserve for deferred taxes, dividends payable, etc.), unappropriated retained earnings, etc. Certain liabilities that are determined not to be sources of funds may be excluded with the permission of the Commissioner of Finance. The average aggregate amount of all liabilities and other sources of funds of the IBF for the taxable year must be computed on a quarterly basis or, at the option of the taxpayer, on a more frequent basis such as monthly, weekly, or daily. When the taxpayer's usual accounting practice does not permit a quarterly or more frequent computation of the average aggregate amount of all liabilities and other sources of funds, a semi-annual or annual computation may be allowed when it appears that no distortion of the average aggregate amount of all liabilities and other sources of funds will result. Different periods of averaging may be used for different classes of liabilities. If, because of variations in the amount or value of any class of liabilities or other sources of funds, it appears to the Commissioner of Finance that averaging on an annual, semi-annual, or quarterly basis does not properly reflect the average aggregate amount of all liabilities and other sources of funds, the Commissioner of Finance may require averaging on a more frequent basis. The method of determining the average aggregate amount of all liabilities and other sources of funds must be consistent and may not be changed on any subsequent return without the written consent of the Commissioner of Finance.
(c) The principles of separate accounting must be applied in determining the amount of liabilities and other sources of funds, including retained earnings, which were not owed to or received from foreign persons. Unless the taxpayer can substantiate that liabilities and other sources of funds, including retained earnings, were owed to or received from foreign persons, they are deemed to be owed to or received from other than foreign persons and included in the numerator described in 19 RCNY § 15-10(a)(1).
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