§ 15-07 Bad Debt Deduction of the IBF.

(§ 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.

§ 15-08 Indirect Expenses of the IBF, Including Head Office Expenses.

(§ 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.

§ 15-09 Apportionment of Expenses of the IBF.

(§ 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:

   (a)   the amount of direct expenses of the IBF (as determined in 19 RCNY §§ 15-05, 15-06(b)(1) and 15-07, supra) for the taxable year that are specifically identified with eligible gross income, and

   (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.