1. (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 CFR 1.882-5), must compute the interest expense of the IBF for New York State tax purposes as described in subdivision (c) of this section. Every other taxpayer must compute the interest expense of the IBF for New York State tax purposes as described in subdivision (b) of this section.

2. (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. (1) Interest expense on the 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 that was allowed for Federal income tax purposes.

   2. (2) Each deposit placed 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 the following applicable rates:

      1. (i) a rate of interest representing the interest cost of the lending office on arm's-length borrowings made to obtain funds which were loaned to, deposited in or placed with the IBF; or
      2. (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

      3. (iii) any other rate which the taxpayer establishes to the Tax Commission as a more appropriate rate.

         (c)

   3. (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 CFR 1.882-5), must compute its interest expense of the IBF for New York State 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 State tax purposes, the three-step process described in section 1.882-5 of the Federal income tax regulations (26 CFR 1.882-5) is applied using the following rules:

      1. (i) The term interoffice means the activities between the IBF and the separate branches, agencies or offices of the taxpayer.
      2. (ii) The classification of items as assets or liabilities must be on a consistent basis from year to year and determined according to United States tax principles.
      3. (iii) The average total value of IBF assets must be stated in United States 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 State tax purposes.
      4. (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.
      5. (v) A particular asset value or liability amount that is denominated in one currency is translated into another currency 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 CFR 1.964-1[d][5]).
   4. (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 which is or would be included in the computation of entire net income for the taxable year, or portion thereof.
   5. (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.

   6. (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 State 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:

      1. (i) amount of IBF-connected liabilities determined in paragraph (3) of this subdivision; multiplied by
      2. (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
      3. (iii) the average worldwide interest rate actually used for Federal income tax purposes in computing that particular currency.
   7. (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 (26 CFR 1.882-5[b][3][i][A]) applied, the IBF interest expense for New York State tax purposes is determined by multiplying the IBF-connected liabilities, determined in paragraph (3) of this subdivision, by the same average United States-connected interest rate actually used for Federal income tax purposes.

   8. (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 (26 CFR 1.882-5[b][3][i][B]) 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 State tax purposes is determined by adding:

      1. (i) the amount of IBF interest expense (stated in United States dollars) shown on the books (excluding interoffice) for the taxable year, or portion thereof; and
      2. (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 United States dollars) shown on the books (excluding interoffice) for the taxable year, or portion thereof, by the average interest rate on United States dollar liabilities actually used for Federal income tax purposes.

   9. (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 (26 CFR 1.882-5[b][3][i][B]) 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 State tax purposes is determined by subtracting:

      1. (i) the amount determined by multiplying the difference between the average total amount of IBF liabilities (stated in United States 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 United States dollar liabilities actually used for Federal income tax purposes; from

      2. (ii) the amount of IBF interest expense (stated in United States dollars) shown on the books (excluding 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 State 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 United States 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.

Tax Law, § 1453(f)(3)