Tax Type
Corporation Income Tax
Description
Bank mortgage lending program
Topic
Taxable Income
Date Issued
03-22-1984
March 22, 1984
Dear **********************
By letter dated February 15, 1984, you have submitted facts concerning activities in Virginia contemplated by *************** (Bank) and you request a ruling that such activities will not subject Bank to income taxation under Virginia law.
Facts
Bank is a trust company organized and operating under Massachusetts laws, subject to the direct supervision of the Massachusetts Commissioner of Banks. Bank, an indirect subsidiary of ***************, intends to initiate a mortgage loan program under which it will use one or more third parties (a Virginia bank or mortgage company, possibly including an affiliated corporation) for the purpose of originating and servicing its first mortgage loans on residential property located in Virginia.
Bank's mortgage lending program will be conducted in the following manner:
1. Third party Originator will solicit loans under guidelines provided by Bank using loan application forms which identify Bank as the prospective lender.
2. Originator will gather information with respect to potential loans, but loans will be approved or rejected by Bank at its offices in Massachusetts. While not contemplated, infrequent examinations of subject property in Virginia may be made by a representative of Bank.
3. Loan closing will take place in Virginia under the supervision of Originator, but all loan documents will clearly indicate that the lender and mortgagee is Bank. Original loan documents will be held by Bank in its offices outside Virginia.
4. Mortgagers may be directed to render their periodic payments via checks payable to Originator for deposit in an account in Bank's favor. Originator will perform substantially all servicing functions with respect to the loans which it originates for Bank and Bank will not maintain any branch or other office in Virginia for any purpose.
Ruling
On the basis of facts submitted by you as summarized above, loans in Virginia will be originated on behalf of Bank by third party Originator, a Virginia taxpayer. While all loan documents will be executed in the name of Bank, and the interest on such loans will be earned by Bank, all substantial servicing functions will be performed by Originator. Thus, while Bank will earn income from Virginia sources, it will conduct no substantial activities in Virginia.
While § 58-151.03 of the Code of Virginia imposes tax on foreign corporations having income from Virginia sources, the department has always viewed banks in the same light that it is required to view various other businesses which are subject to the federal limitations of Public Law 86-272, 15 U.S.C.A. §§ 381-384, i.e. "income from Virginia sources" will not be taxed if activities in Virginia do not exceed certain limitations.
Each individual case must be considered in light of the nature, volume and degree of its activities in Virginia and no foreign corporation will be subject to Virginia income taxes if its activity in Virginia is limited to the earning of interest from loans to persons in Virginia secured by property located in Virginia.
On the basis of information submitted, no substantial services will be performed directly by Bank in Virginia; all will be performed by third party Originator. I therefore conclude that Bank's activities in Virginia will be insufficient to subject its income to Virginia income tax. However, any additional activities in Virginia, if performed by employees of Bank, may subject Bank to Virginia income taxes, depending on the frequency and degree of such activities in Virginia. Furthermore, the foreclosure and holding or selling of property in Virginia will subject Bank to Virginia income tax.
This ruling is limited to the specific facts as you have presented them, as summarized herein, and absent changes in applicable law you may rely upon this ruling as representing the position of the Department of Taxation.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner