On November 2, 2018, the Chief Counsel of the California Franchise Tax Board issued Chief Counsel Ruling No. 2018-01, determining: (1) that a taxpayer servicing mortgages was not a financial corporation for purposes of the corporation franchise tax; and (2) gains from interest rate hedging contracts are general income, not money or moneyed capital. Although the taxpayer earned origination income, interest income and net gains from sales of mortgages, its primary revenue was from servicing the mortgage loans.
Among other differences, California taxes financial corporations at a higher corporation franchise tax rate than general corporations.
First, the Chief Counsel determined that the taxpayer was not a financial corporation because it derives more than 50% of its total gross income from servicing mortgages. A financial corporation is a corporation that predominantly deals in money or moneyed capital in substantial competition with the business of national banks. While originating and selling mortgage loans constitutes dealing in moneyed capital, servicing loans does not. Rather, servicing loans generates income from a service activity. Because the taxpayer predominantly engaged in service activities instead of dealing in money or moneyed capital, it was not a financial corporation.
Second, the Chief Counsel determined that gains from interest rate hedging contracts are general income, not money or moneyed capital. The hedging contracts are not specifically listed as money or moneyed capital, nor are they similar to the listed examples. Thus, the hedging contracts would not qualify the taxpayer as a financial corporation.
Chief Counsel Ruling No. 2018-01, California Franchise Tax Board (Nov. 2, 2018).