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(§ 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).
(§ 11-641(f)(6), Administrative Code)
(1) The numerator is the amount determined in subparagraph (i) of this paragraph multiplied by the applicable percentage stated in subparagraph (ii) of this paragraph minus the amount determined in subparagraph (iii) of this paragraph.
(i) Determine the average aggregate amount of loans and deposits as described in 19 RCNY § 15-11(b) which were properly recorded in the financial accounts of the taxpayer's branches, agencies, and offices within New York State for taxable years beginning in 1975, 1976, and 1977. Loans and deposits related to net income reassigned to New York State by the New York State Tax Commission are not includible for purposes of this subparagraph. The average aggregate amount of such loans and deposits may be determined by reference to the monthly or quarterly reports of the taxpayer to the Federal Reserve Bank of New York, as appropriately modified.
(ii) The average aggregate amount determined in subparagraph (i) of this paragraph is multiplied by the following percentages:
(A) 100 percent for the first taxable year the taxpayer established the IBF and for the next succeeding four taxable years,
(B) 80 percent for the sixth taxable year,
(C) 60 percent for the seventh taxable year,
(D) 40 percent for the eighth taxable year,
(E) 20 percent for the ninth taxable year, and
(F) zero percent for the tenth taxable year and thereafter.
(iii) The product obtained in subparagraph (ii) of this paragraph is reduced by the average aggregate amount of loans and deposits as described in 19 RCNY § 15-11(b) which were properly recorded in the financial accounts of the taxpayer's branches, agencies, and offices within New York State (other than the IBF) for the current taxable year. If the amount determined in this subparagraph is greater than the amount determined in subparagraph (ii) of this paragraph, the numerator is zero.
(2) The denominator is the average aggregate amount of loans and deposits as described in 19 RCNY § 15-11(b) which were properly recorded in the financial accounts of the IBF for the taxable year.
(b) For purposes of this section, the average aggregate amount of the loans described in paragraph (1) of this subdivision and the average aggregate amount of deposits described in paragraph (2) of this subdivision 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 of such loans and such deposits, a semi-annual or annual computation may be allowed when it appears that no distortion of the average aggregate of such loans and such deposits will result. If, because of variations in the amount or value of such loans and such deposits, it appears to the Commissioner of Finance that averaging on an annual, semi-annual, or quarterly basis does not properly reflect the average aggregate of such loans and such deposits, the Commissioner of Finance may require averaging on a more frequent basis. Any method of determining the average aggregate of such loans and such deposits may not be changed on any subsequent return without the written consent of the Commissioner of Finance.
(1) Loans means loans to foreign persons. The term "foreign person" is defined in 19 RCNY § 15-01, supra.
(2) Deposits mean deposits with foreign persons which are:
(i) banks;
(ii) foreign branches of a bank, including foreign branches of the taxpayer; or
(iii) foreign banks which are subsidiaries of a bank, including foreign banks which are subsidiaries of the taxpayer.
(c) For purposes of this section, loans and deposits that were recorded in the financial accounts for a taxable year includes those loans which were issued during such taxable year and those deposits which were made or placed during such taxable year and any other loan or deposit in the financial accounts for such taxable year. If the IBF purchases or acquires loans or deposits that were recorded in the financial accounts within New York State of a related corporation for taxable years 1975, 1976, and 1977, such loans and deposits are deemed to be recorded in the financial accounts of the taxpayer's branches, agencies, and offices within New York State for taxable years beginning in 1975, 1976, and 1977 and must be included in the numerator when computing the floor amount. A corporation is related to another corporation when such corporation owns or controls, either directly or indirectly, more than 50 percent of the capital stock of the other corporation, or more than 50 percent of the capital stock of such corporation is owned or controlled, either directly or indirectly, by the other corporation, or more than 50 percent of the capital stock of both corporations is owned or controlled, either directly or indirectly, by the same interests. A taxpayer, which, pursuant to § 11-646 of the Administrative Code, made a consolidated return with corporations affiliated with it for any of the taxable years 1975, 1976 and 1977, or makes a consolidated return for the taxable year, shall compute the floor amount as if it had filed separate returns for the taxable years 1975, 1976 and 1977 and as if it were filing a separate return for the taxable year.
This regulation shall take effect immediately, and shall apply to all taxable years which end on or after March 25, 1982; provided, however, that where a taxable year begins prior to March 25, 1982 and ends on or after that date, this regulation shall only apply to the portion of the taxable year beginning on March 25, 1982.