New York Tribunal Holds SBA Certificates Taxable

October 1999

New York Tribunal Holds SBA Certificates Taxable

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In the September 9 tax case, Sumitomo Trust and Banking Co. (USA), the New York State Tax Appeals Tribunal held that the interest earned on Small Business Administration guaranteed loan pool certificates is not exempt from New York state tax. New York's tax law section 1453(e)(12) exempts the interest on U.S. obligations from taxation. The tribunal ruled that SBA certificates are not U.S. obligations and, therefore, the interest they generate is not exempt from tax.

The SBA permits loans it guarantees to be pooled and traded in a secondary market similar to the federally guaranteed mortgages pooled under the Government National Mortgage Association, also known as Ginnie Mae. Sumitomo had purchased some of the SBA certificates and excluded a portion of their interest from its New York taxable income. On an audit, the State Department of Taxation and Finance disagreed with this approach and issued a deficiency notice for $514,915 plus interest.

At the trial level, the administrative law judge relied on the U.S. Supreme Court case, Rockford Life Ins. Co. v. Illinois Department of Revenue (482 U.S. 182), which held that Ginnie Maes are not "direct and certain obligations of the United States," the interest on which is exempt from Illinois tax. The Supreme Court instead ruled that Ginnie Maes are a collection of private mortgage obligations--the U.S. government is merely a guarantor.

In Sumitomo, the judge reasoned that the SBA certificates were similar to Ginnie Maes and, therefore, did not lead to New York state exempt interest. The Tax Appeals Tribunal later affirmed this opinion.