IDA COUNTY STATE BANK (1994)(DR)(CORP)
Topic Code: F209Franchise Tax - Document Reference:
Matter of Ida County State Bank, Dept. Rev. & Fin. Dkt. No. Iowa Dept. of Revenue and Finance, Declaratory Ruling iowadrf 94-24-6-0192 . Franchise tax on financial institutions—foreign subsidiary—definition of financial institution; consolidated returns. A Nevada subsidiary of an Iowa bank, set up to hold and manage the bank's investment portfolio, couldn't be required to pay Iowa's franchise tax on financial institutions. The subsidiary had no depository or lending powers and therefore didn't qualify as a financial institution. The bank couldn't bm required to include the subsidiary on its own franchise tax return as there is no statutory authority for consolidated returns for this tax. See also Pursuant to a Petition for Declaratory Ruling submitted to the Iowa Department of Revenue and Finance (hereinafter referred to as “Department”) by Ida County State Bank (hereinafter referred to as “Petitioner”) on June 7, 1994 and in accordance with Iowa Code § 17.9 (1993) and Department rule 701-x-1 (17A) “Petition for Declaratory Ruling” Iowa Administrative Code, the Department hereby issues its Declaratory Ruling. The facts presented by the Petitioner are as follows: The Petitioner is an Iowa banking corporation with its principal officer and place of business located in Ida Grove, Iowa. The Petitioner owns various investment securities, including U.S. Treasury and government agency obligations, corporate debt instruments, municipal bonds and securitized asset obligations. The Petitioner wishes to transfer a significant portion of the investment portfolio to the Subsidiary. The precise percentage of the investment portfolio which will be transferred to the Subsidiary will depend on the circumstances as evaluated by the Petitioner, including (1) the amount of securities pledged by the Petitioner (2) the Petitioner need for collateral to support repurchase agreements, and (3) the internal demand for funds for the Petitioner's growth. The manner in which the Subsidiary will be managed and operated is more fully set forth below. The Subsidiary will be organized as a business corporation under the laws of the state of Nevada and will have its sole place of business in Nevada. All officers and employees of the Subsidiary will be residents of Nevada, except an officer of the Petitionere, a resident of Iowa, will serve as secretary of the Subsidiary (the “Secretary”). The Secretary will not perform any services in Iowa, and the services performed by the Secretary will be mainly ministerial. The Subsidiary will not be a “financial institution” because it will not have depository or lending powers. The Subsidiary's board of directors will have three members. The president of the Subsidiary, who will be a Nevada resident, will be a member of the Subsidiary's board of directors. The other two board members will be Iowa residents. Meetings of the board of directors will be held in Nevada. The board meetings will be held at least annually, and generally will address the following matters:(a) review and ratification of previously completed investment transactions; (b) adoption, review and modification of investment policy and guidelines; (c) review, discussion, and adoption of investment parameters; and (d) declaration of dividends.
The Petitioner will make an initial capital contribution to the Subsidiary of various investment securities in exchange for all of the common stock of the Subsidiary. It is anticipated that additional capital contributions may be made to the Subsidiary. The Subsidiary may pay dividends to the Petitioner as determined by the Subsidiary's board of directors. Considerations affecting the payment of dividends will include the cash and liquidity requirements of the Petitioner. The board of directors of the Subsidiary will adopt a written investment policy which will serve as a guideline for the investment of assets held by the Subsidiary. The president of the Subsidiary will make final investment decisions within the investment policies, including the parameters established by the Petitioner as incorporated in the investment policies. A member of the Subsidiary's board of directors may occasionally visit Nevada to meet with the president to review the investment activities of the Subsidiary. The Subsidiary's operations will take place entirely within Nevada and will involve the investment and management of its securities portfolio. The president of the Subsidiary will be responsible for day-to-day business activities and operations of the Subsidiary. The president will make investment decisions within the investment guidelines and parameters established by the Subsidiary's board of directors. The president will also call brokers to order securities trades and perform other necessary aspects of executing trades, including receiving and reviewing the confirmations of trades which are sent by brokers. The president will also be responsible, subject to board of directors guidelines, for managing the Subsidiary's daily cash flow requirements and will make appropriate short-term investment decisions regarding excess uninvested cash. The president of the Subsidiary will utilize various informational sources in Nevada to review market data to make investment decisions. He will have knowledge of general market conditions through such materials as The Wall Street Journal, the Bond Buyer, broker market letters and other investment publications. It is also expected that the president will utilize a computer interactive system which lists current market data and market news, permits tracing of specific securities, computes gains and losses on potential sales, and computes yields as regards potential purchases. While there may be telephone contract between the Petitioner and the Subsidiary, especially during the Subsidiary's initial stages of operations, the purpose of the telephone contact will not be to oversee or make investment decisions as regards the portfolio, absent a cataclysmic event such as a market crash. It is intended that the degree of oversight by the Petitioner will be similar to that of any parent of a subsidiary holding a portion of the overall group's assets. The president of the Subsidiary will be a Nevada resident. The president will not devote all his time to the Subsidiary, but, instead, will be a part-time, shared employee. The president will enter into an employment contract with the Subsidiary and will be paid a salary by the Subsidiary commensurate with his position and responsibilities with, and time commitment to, the Subsidiary. The president will be fully accountable to the board of directors and subject to termination by it. The president will serve on the board of directors. As described below, the Subsidiary will obtain use of office space in Nevada. This office space will be shared with other corporations, including other bank investment subsidiaries. The Subsidiary's president will perform his services as an employee at the Subsidiary's office location in Nevada during regular periods of time. In addition to his services to the Subsidiary, the president will perform similar services for other bank investment subsidiaries and will be an employee of a third-party corporation (the “Service Corp.” described below) which provides various administrative services to the Subsidiary. Accordingly, the president is expected to receive employment compensation from a number of different corporations. Because of the part-time, shared nature of his employment by the Subsidiary and other bank investment subsidiaries, the president will not receive employee benefits from that employment beyond this salary. The president will, however, receive employee benefits, such as health insurance and retirement benefits, through his employment by Service Corp. The Subsidiary will contract with a third-party corporation (“Service Corp.”) in Nevada for the provision of certain services. Service Corp. will also be a Nevada business corporation and will be a non-Iowa corporation which is not affiliated with the Petitioner in any manner. Service Corp. will provide its services to the Subsidiary pursuant to a written contract. The contract will provide that, for a monthly fee, Service Corp. will provide the Subsidiary with the following services:(a) office space for use by the Subsidiary's employees and board of directors; (b) custody agent services to safekeep securities and monitor investment income and maturities; (c) bond accounting services; (d) use of office supplies and equipment, including computers and attendant software; (e) preparation of monthly financial statements for the Subsidiary; and (f) any other services or items appropriate for operation of the Subsidiary.
The custody services made available to the Subsidiary by Service Corp. will be delivered in conjunction with a non-Iowa commercial bank or trust company, which will act as the custody agent for the securities. The custody services will involve regular communication by Service Corp. with the custody agent, through both an on-line access terminal and the telephone, to monitor activities of the portfolio. These custody services will also include delivery in of securities purchased, delivery out of securities sold, interest payment collection and maturity payment collection. The following bond accounting services will be provided by Service Corp. to the Subsidiary:(a) accounting entries for computing income from investments, taking into account such items as acquisition premiums and discounts and original issue discount; (b) investment information on a daily and monthly basis in a format easily adapted to the reports banks and bank holding companies must file with regulatory authorities; and (c) portfolio management reports, for example, sorting municipal bonds by state of issue and dividing the portfolio by type of security (e.g., U.S. Treasury securities, municipal bonds, etc.) and maturity.
The Subsidiary will receive a printout of its investment activity directly from the bond accounting system. These printouts will be used to prepare general ledger entries, reconcile general ledger accounts, and prepare monthly summary reports. The general ledger system will generate financial statements for use by the Subsidiary's president and board of directors for management purposes. It is expected that on a monthly basis, the Subsidiary's financial statements will be sent to the Petitioner for consolidation. Consolidated financial statements are used by banks for performance analysis, shareholder reporting, and regulatory reporting purposes. The Subsidiary will have its own bank accounts in Nevada, including a checking account for use in payment of expenses. Investment activities, receipt of proceeds, and investment income will be facilitated through custody accounts and Service Corp. Financial accounting for the Subsidiary will be conducted in Nevada. In summary, the Subsidiary and Service Corp. will:(a) conduct their day-to-day operations in Nevada; (b) maintain their books and records in Nevada; (c) maintain no assets in Iowa; (d) execute all contracts or agreements outside of the state of Iowa:
(e) lease property and maintain an office in Nevada; (f) hold all their assets in their own name:
(g) receive all payments of principal and interest outside of the state of Iowa; (h) execute all contracts and transactions outside the state of Iowa and primarily, if not entirely, in Nevada; and (i) hold meetings of their board of directors in Nevada.
The function of a Declaratory Ruling is to provide “reliable advice from an agency as to the applicability of unclear law.” Bonfield, The Iowa Administrative Procedure Act: Background, Construction, Applicability, Public Access to Agency Law, the Rulemaking Process, 60 Iowa Law Rev. 731, 805 (1975). Iowa Code § 17A.9 (1993) contemplates declaratory rulings by administrative agencies on a disclosed set of facts. City of Des Moines v. P.E.R.B., 275 N.W. 2d 753, 758 (Iowa 1979). A declaratory ruling enables the public to secure definitive binding advice as to the applicability of agency-enforced law to a particular set of facts. Bonfield, at 822-823. It is not the function of a declaratory ruling to resolve issues involving factual analysis “too complicated to handle outside of an actual adjudication.” Bonfield, at 807. A Declaratory Ruling is not a “contested case” as defined in Iowa Code § 17A.2(2) (1993); namely, it is not an evidentiary hearing which is also an administrative remedy set forth in Iowa Code ch. 17A (1993) and in the Department's rules. see 701-7.14-7.23 Iowa Admin. Code. Consequently, for purposes of this Declaratory Ruling, the Director views the issues raised in the Petition for Declaratory Ruling as questions of law applicable to the factual situation disclosed by the Petitioner in the Petition. This view is consistent with Department rule 701-7.25 Iowa Admin. Code concerning the issuance of Declaratory Rulings. The Subsidiary of the Petitioner will not have depository or lending powers, therefore, it is not a financial institution as defined in Iowa Code § 422.61(1) (1003). Iowa Code § 422.61(1) (1993) imposes a franchise tax on financial institutions for the privilege of doing business in this state as a financial institution. Because the Subsidiary of the Petitioner is not a financial institution nor is it engaged in business in this state, it is not subject to the Iowa Franchise tax. Iowa Code § 422.33 (1993) imposes a tax on each foreign corporation doing business in this state or deriving income from sources within this state. Income from sources within this state is defined as income from real or tangible property located or having a situs in this state by § 422.33 supra . The Subsidiary of the Petitioner is not doing business in this state nor does it receive income from sources within this state and is not subject to Iowa corporation income tax. The Subsidiary of the Petitioner is a legal entity separate and distinct from the Petitioner, and there is no statutory authority for requiring or allowing a consolidated franchise tax return. See Curtis Companies, Inc. vs. Tax Commission, 251 N.W. 497 (Wisc. 1934); Burroughs Adding Machine Co. v. Tax Comm., 297 N.W. 574 (Wisc. 1941); Northern States Power Co. v. Tax Comm. 297 N.W. 578 (Wisc. 1941). In view of the lack of statutory authority, the Petitioner is not required to include its Subsidiary in its Iowa franchise tax return. This Declaratory Ruling is predicated upon information presented by the Petitioner and is applicable only to the factual situation presented.