State Taxation of Banks and Financial Institutions (CA, IL, NY, TN) discusses the various methods used by states to tax banks and financial institutions. As federal restrictions on the taxation of national banks have been eased, the states have changed their schemes for taxing banks and financial institutions. Because each state has its own definition of the term “financial institution,” it is essential that practitioners have knowledge of the relevant statutes, regulations, and case law of each state. Written by Albin C. Koch, Esq., George J. Barry, Esq., Edward M. Griffith, Jr., Esq., Phillips Lytle LLP, John L. Coalson, Jr., Esq., and Michael T. Petrik, Esq., this Portfolio compiles, organizes, and analyzes the statutes, regulations, and case law that comprise the body of bank tax law in each of the states discussed.  

State Taxation of Banks and Financial Institutions (CA, IL, NY, TN) brings the current application of each state's tax on banks and financial institutions into sharper focus by tracing the history and evolution of each state's levy on such institutions, covering such issues as: 

• Corporations subject to tax,
• Computation of tax,
• Allocation of entire net income,
• Determining the deposits factor,
• Credits against tax,
• Special problems, and
• Treatment of bad debts. 

This Portfolio includes a discussion of federal and California law, written by Albin C. Koch, Horgan, Rosen, Beckham & Coren; a discussion of Illinois law, written by George J. Barry, a discussion of New York law, written by Edward M. Griffith, Jr., Phillips Lytle LLP, and a discussion of Tennessee law, written by Michael T. Petrik and John L. Coalson, Jr. 

State Taxation of Banks and Financial Institutions (CA, IL, NY, TN) allows you to benefit from: 

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area.
• Invaluable practice documents including tables, charts and lists.
• Plain-English guidance from world-class experts.
• Real-world and in-depth analysis that lets you explore various options.
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more.
• Alternative approaches to both common and unique tax scenarios.

This Portfolio is part of the Premier State Tax Library, a comprehensive series, which covers major state tax transactions and issues with expert, in-depth analysis, and offers commentary on a wide range of multi-state and state-specific taxation topics, including Sales and Use, Corporate Income, Individual Income, Property, Gross Receipts, Limitations on States' Authorities to Tax, Credits and Incentives, Electronic Commerce, Mergers and Acquisitions, Procedure and Administration, Special Industries, and more.

Detailed Analysis

1800.01. OVERVIEW OF ISSUES

A. Introduction

B. The Federal Tax Immunity Doctrine

C. The 1969 Congressional Legislation and Its Aftermath

D. Other Limitations on State Taxation of Federal Entities

E. Effects of the Permanent Amendment on State Taxation of Depositories

1. Introduction

2. Federal Legislative Efforts

3. Litigation Under Public Law 91–156

4. Regulatory and Legislative Action by the States and the Multistate Tax Commission

F. The Decline of the Shares Tax

G. In–depth Discussions of State Tax Systems

1800.02. NEW YORK FRANCHISE TAXATION OF BANKING CORPORATIONS

A. Introduction

B. History

C. Corporations Subject to Tax

1. In General

2. Banks

3. Doing a Banking Business

4. Nonbank Subsidiaries

a. Ownership Test

b. Business Activities Test

c. 1985 Changes Affecting Nonbank Subsidiaries

d. Election to Be Taxed As a General Business Corporation

e. Nonbank Subsidiaries Engaged in Business Covered by Other Franchise Tax Provisions

5. “Doing Business Requirement”

6. Application of Tax to Foreign Country Banks

7. Application of Tax to Edge Act or Agreement Corporations

8. Application of Tax to Branches of Edge Act Corporations

D. Computation of Tax

1. In General

2. Tax on Combined Returns

3. Correcting Distortion

4. Basic Tax––Computation of Entire Net Income

5. Additions––Dividends and Interest of Foreign Country Corporations

6. Additions––Dividends and Interest of Domestic Corporations

7. Additions––ACRS

8. Additions––Other

9. Subtractions

10. Adjustments for Bad Debts

11. Adjustment Relating to IBFs

a. Computation of Adjusted Eligible Net Income

(1) Eligible Gross Income

(2) IBF Expenses

(3) Ineligible Funding Amount

(4) Floor Amount

b. IBF Problem Areas

(1) Eligible Gross Income

(2) Indirect Expenses

(3) Ineligible Funding–Shell Branches

(4) Ineligible Funding–Retained Earnings

12. Computation of Entire Net Income on a Combined Return

E. Alternative Minimum Tax Measured by Alternative Entire Net Income

F. Alternative Minimum Tax Measured by Taxable Assets

1. In General

2. Eligibility for Reduced Rates

3. Definition and Valuation of Taxable Assets

G. Fixed $250 Minimum Tax

H. Allocation

1. In General

2. When Allocation Is Permitted

3. Method of Allocation

4. IBF Allocation Rules

5. Allocation on Combined Returns

6. Discretionary Adjustments

I. Allocation of Entire Net Income

1. Computing the Allocation Percentage

2. Determining the Allocation Factors

3. Adjustments Relating to IBFs

4. Allocation of Entire Net Income on Combined Returns

J. Allocation of Alternative Entire Net Income

K. IBF Adjustments Relating to Allocation of Entire Net Income and Alternative Entire Net Income

1. The IBF Modification

2. The IBF Formula Allocation Method

3. The IBF Formula Allocation Election

L. Allocation of Taxable Assets

M. Determining the Payroll Factor

1. In General

2. Employees Within New York State

3. Exclusion of General Executive Officers

N. Determining the Receipts Factor

1. In General

2. Income from Loans and Financing Leases

3. Loan Attribution––Income Producing Activity

a. Solicitation

b. Investigation

c. Negotiation

d. Final Approval

e. Administration

f. Record Keeping

4. Receipts from “True” Leases

5. Income from Credit Cards

6. Income from Trading and Investment Activities

7. Fees or Charges from Letters of Credit, Traveler's Checks, and Money Orders

8. Receipts for Services Performed

9. Royalties and Other Receipts

10. Receipts Factor on Combined Returns

O. Determining the Deposits Factor

1. In General

2. Maintained At a Branch

a. Deposits of Less Than $100,000

b. Deposits of $100,000 or More

P. Combined Return Rules

1. In General

2. Rules Applicable to 80 Percent Groups

3. Rules Applicable to 65 Percent Groups

4. Basic Combined Return Requirements

a. Stock Ownership Requirement

b. The Unitary Business Requirement

c. The Proper–Reflection–of–Tax–Liability Requirement

5. Combined Return Problem Areas

a. Exclusion of Taxpayer Corporations from Combined Returns

b. Inclusion of Nontaxpayer Corporations in Combined Returns-Background

c. Inclusion of Nontaxpayers Corporations in Combined Returns-Rules

d. Inclusion of Nontaxpayer Corporations in Combined Returns-Planning

6. Exclusion of Certain Corporations

a. Alien Corporations

b. Certain Thrift Institutions

c. Electing Article 9–A Corporations

Q. Credits Against Tax

1. Eligible Business Facility Credit

2. Mortgage Servicing Credit

3. Additional Mortgage Servicing Tax Credit

4. Economic Development Zone Credit

5. Ordering of Credits

1800.03. TENNESSEE TAXATION OF FINANCIAL INSTITUTIONS

A. General Introduction

B. Introduction––Excise (Income) Tax

1. Nexus

2. Multistate Division of Income

3. Combined and Consolidated Reporting

4. Net Operating Losses

5. Local Allocation

6. Returns

C. Introduction––Franchise Tax

1. Nexus

2. Apportionment

3. Combined Reporting

4. Returns

D. Other Taxes

1800.04. ILLINOIS TAXATION OF BANKS AND FINANCIALS

A. Introduction

1. Structure of the Illinois Income Tax Act

2. Basic Statutory Treatment of Financial Organizations

a. Apportionment

b. Definition of Financial Organization

3. Combined Apportionment for Financial Organizations: Statutory, Case Law, and Administrative History

4. Net Operating Loss Issues and Developments in Relation to Financial Organizations

5. Intergovernmental Immunity in the Taxation of Financial Organizations

6. Illinois Tax Accounting Issues for Financial Organizations

7. Legislation to Promote Business Development

B. Basic Topics Related to Taxation of Financial Organizations

C. Financial Organization Status For Illinois Income Tax Purposes

1. An Overview of the Statutory Definition of Financial Organization

2. Statutory Categories of Financial Organizations

a. Amendment to IITA 1501(a)(8)

(1) Definition of “Financial Organization.”

(2) Related Party Transactions

b. Private Letter Rulings Related to Statutory Categories of Financial Organizations

3. Investment Companies

a. Private Letter Rulings: The Former Shift From a Definitional Linkage With the Investment Company Act of 1940 to a Status Linkage

b. Other Analytical Approaches to the Investment Company Question

4. Persons Owned By a Bank or Bank Holding Company

a. In General

b. Regulatory Provisions Addressing Persons Owned by a Bank or Bank Holding Company

5. Prospective Issues Related To Financial Organization Status

D. Nexus/Jurisdiction

1. Overview

2. The Merging of Nexus and Apportionment Concepts

3. Summary and Conclusion

E. Allocation/Apportionment

1. Availability of Apportionment Limited to Multistate Taxpayers

2. The Basic Operation of the Apportionment Formula

3. Relief for International Banking Facilities

4. IITA 304(c)Numerator Issues: Rules for Sourcing Gross Receipts, Gross Profits, and Gross Income to Illinois

a. Overview of the Sourcing Rules

b. Interpretations of IITA 304(c)(1)(C)

(1) The Meaning of “Illinois Customer”

(2) The Meaning of Interest “Received”

c. Interpretations of IITA 304(c)(1)(E)

5. Application of IITA 304(f) to Financial Organizations

6. Trends in Illinois Income Tax Apportionment for Financial Organizations

a. Limiting Apportionment Benefits of Illinois–Based Banks and Financial Organizations with Slight Jurisdictional Contacts in Other States

b. Relief from IITA 304(c) Apportionment Under IITA 304(f)

c. Shifting nexus positions as a result of P.A. 87–478.

F. Combined Apportionment

1. Affiliated Investment Companies Treated As Financial Organizations Under IITA 1501(a)(8)

2. Affiliated Sales Finance Companies Treated As Financial Organizations Under IITA 1501(a)(8)

3. Combined Apportionment of Operating Banks and Their Holding Companies and Nonbank Subsidiaries

4. Summary of the Issues and Trends Related to Combined Apportionment of Financial Organizations

G. Income Tax Base

1. Net Operating Losses

a. Use of Federal Net Operating Losses (Pre–1986) Against Excess Addition Modifications in the Loss Year

b. Use of Federal Net Operating Losses (Pre–1986) Against Excess Addition Modifications in the Carryback or Carryover Year

c. Illinois–Specific Net Operating Loss Deductions

d. Defining the Carryback and Carryover Periods for Illinois Net Loss Deductions

2. Intergovernmental Immunity

a. Base Income: Contents of IITA 203(b)(2)(J)'s Subtraction Modification

(1) Illinois Department of Revenue Administrative Releases

(2) Illinois Case Law Interpreting 31 U.S.C. 3124

(3) Illinois Case Law Interpreting Specific Federal Statutory Exemptions

b. Effect of Intergovernmental Immunity Provisions on Apportionment Formula of IITA 304(c)

3. Illinois Tax Accounting Issues for Financial Organizations

a. Bond Premium Amortization

(1) Interest Subject to Addition Modification of IITA 203(b)(2)(A)

(2) Interest Eligible for Subtraction Modification of IITA 203(b)(2)(J)

b. Expenses Related to Addition Modification Under IITA 203(b)(2)(A) and Subtraction Modification Under IITA 203(b)(2)(J)

4. Legislation to Promote Business Development

1800.05. CALIFORNIA TAXATION OF BANKS AND FINANCIAL INSTITUTIONS

A. Introduction

1. Historical Background

2. Discussion of Constitutional and Statutory Rules

B. Early Industry Opposition to “In Lieu” Tax Structure and Resulting Litigation

1. The Personalty Issue

2. The Franchise Tax Issue

3. The Sales Tax Issue

C. Evolution of the Tax on Financial Corporations and Banks

1. The Definition of “Financial Corporation”

2. Tax Structure

3. The 1979 Legislative Revision of the Tax on Banks and Financial Corporations

a. Background

b. Changes Applicable to Banks

c. Changes Applicable to Financial Corporations

d. The “Home Rule” Dispute With Charter Cities

e. The Decision in California Fed. Sav. & Loan Assn. v. City Of Los Angeles

f. Calculation of the In–Lieu Rate As Revised by A.B. 66

g. Amendments to Cal. Rev. & Tax. Code 23186 After A.B. 66

(1) The 1981 Amendment

(2) The 1982 Amendment

(3) The 1986 Amendment

(4) The 1988 Amendment

(5) The 1990 Amendment

(6) The 1991 Amendment

(7) The Adjustment Factor

(8) Bank Tax Rate Proration

(9) The 1997 Amendment

D. Current Application of the Tax on Banks and Financial Corporations

1. Taxable Entities

2. Rate of Tax on Banks and Financial Corporations

3. Computation of Tax

E. The Expanded California Nexus Rule for Banks

F. The Property Tax Treatment of Bank Computers

1. The 1964 Bank of America Case

2. The Exchange Bank of Santa Rosa and Allstate Cases

3. Resolution by the Crocker Case

G. Prospects for the Bank Tax

H. The California Unitary Tax

1. In General

2. The Joyce/Finnigan Problem

I. Application of Unitary Doctrine to Financial Corporations

1. Domestic Institutions

2. Domestic International Banks

J. Positive and Negative Nexus Rules Governing Banks and Financial Corporations

1. The Bank Nexus Rule Contained in Cal. Rev. & Tax. Code 23181

2. The Nexus Rules for Financial Corporations Contained in Cal. Rev. & Tax. Code 23183

3. Case Law on “Doing Business”

4. The Negative Nexus Rules

5. FTB Audit Policy

K. The California Apportionment Rules Applicable to Banks and Financial Corporations

1. Income Years Beginning Before 1996

a. The Property Factor

b. The Sales Factor

2. Income Years Beginning on or After January 1, 1996

a. The Property Factor

b. The Receipts Factor

L. The Combination of General and Financial Corporations

1. The Scope of Reg. 25137–10

2. Property Factor Adjustments

3. Sales Factor Adjustments

4. Definitions and Operating Rules

M. Determination of Business Income Subject to Apportionment

1. Different Lines of Business

2. Joint Ventures

3. Nonbusiness Income

N. California Adjustments to Federal Taxable Income

1. Treatment of Dividends

2. Other Deductions

a. Income and Other Taxes

b. Net Operating Losses

c. Depreciation

3. Capital Gains and Losses

4. Interest

5. Treatment of Bad Debts

a. The Specific Charge–Off Method

b. The Reserve Method

(1) Financial Corporations Other Than Banks and Thrifts

(2) Banks and Thrifts

(a) Years Beginning After 1976 and Before 1985

(b) Years Beginning After December 31, 1984

c. The Black Motor Car Formula

d. Institutions Having Less Than Six Years Loss Experience

e. The Eligible Loan Base

f. Calculation of the Reserve After a Merger

g. Combined Reporting

h. Bond Losses

i. Foreclosure Losses

j. Change to Specific Bad Debt Method

k. Retroactive Additions to the Bad Debt Reserve

l. Taxability of Bad Debt Reserve Upon Cessation of Business

m. Negative Bad Debt Reserve Balance

6. Interest Allocable to Tax–Exempt Obligations

O. Alternative Minimum Tax

1. The Add–On Minimum Tax

2. The Current Alternative Minimum Tax

3. Alternative Minimum Taxable Income

4. Adjustments to Net Income

a. In General

b. Adjusted Current Earnings

5. Tax Preference Items

6. AMT Credits

P. The Water's–Edge Election

Q. Special Problems

1. Loan Production Offices

2. Edge Act Corporations

3. International Banking Facilities

4. Credit Unions

Working Papers

Item Description Sheet

Worksheet 1 Resolution Adopting Proposed Uniform Method For Allocation And Apportionment Of Net Income From Financial Institutions

Worksheet 2 Final Recommended Formula for the Apportionment and Allocation of Net Income of Financial Institutions

Worksheet 3 Welcome to the Brave New World of Financial Services: Unexpected State Tax Ramifications of Gramm-Leach-Bliley

Bibliography

Bibliography