WAC 146

Loan Set Up Fees Cancelled 07/17/02 Loan Set Up Fees--This directive explains that loan set-up fees that represent an adjustment to yield will be considered interest income for tax purposes. This directive is no longer needed. This issue is addressed more completely in subsequent published determinations (e.g., Det. 89-280, 7 WTD 375 (1989) and Det. 99-241, 19 WTD 295 (1999)).

Audits of Banks and Other Financial Institutions Cancelled 07/17/02

Stripped Mortgage Pass-Throughs Cancelled 07/17/02

Gains and Losses on Futures Contracts Cancelled 07/17/02 Gains and Losses on Futures Contracts--This directive explains that losses from futures contracts should not be used to offset gains. This information is outdated and incorrect. Det. 90-63, 9 WTD 107 (1990) provides sufficient information on this subject and explains that futures contract gains may be offset by losses.

Interest Income on Municipal Securities Repealed 6/30/2000 - This directive provides incorrect information. It explains that the B&O tax deduction allowed by RCW 82.04.4293 does not apply to interest received on obligations issued by entities such as school districts, preservation and development authorities, and similar entities because they are not municipal corporations. These instructions have been superseded by Determination No. 89-370, 8 WTD 111 (1989), which held that the term "municipal corporation" in RCW 82.04.4293 refers to a broader range of entities that just cities.

Interest From Sales of Real Estate Cancelled 07/17/02 Interest From Sales of Real Estate This directive explains that the deduction for interest earned on loans secured by a first mortgage or trust deed on nontransient residential property may not be claimed for interest derived from real estate sales contracts. This information is accurate, but the directive is no longer needed. This issue is sufficiently addressed in subsequent published determination of the Department (e.g., Det. 93-023, 12 WTD 575 (1993)).

Taxability of Investment Income--Cancelled effective July 2, 2002.

Tax Guide - Mortgage Brokers

Tax on international investment management services or other business or service activities.

Deductions - Dividends received by a parent from its subsidiary corporations

Deductions - Interest rec'd on obligations of the State of WA, its political subdivisions and municipal corporations

Deductions--Interest on investments or loans secured by mortgages or deeds of trust.

These rules all refer to resale certificates. Proposed action is to add standard language to recognize reseller permits for sales made on or after January 1, 2010.

National and state banks, mutual savings banks savings and loan associations and other financial institutions.

Taxability of federal instrumentalities and federally created corporate entities - Cancelled effective 2/7/05 because the information is sufficiently addressed in WAC 190 (as adopted on 1/5/05).

Deductibility of interest received on investments or loans primarily secured by first mortgages or trust deeds on nontransient residential properties

Deductibility of Interest Received on Investments or Loans Primarily Secured by First Mortgages or Trust Deeds on Nontransient Residential Properties. The Department issued ETA 3076.2011 Deductibility of Interest Received on Investments or Loans Primarily Secured by First Mortgages or Trust Deeds on Nontransient Residential Properties. ETA 3076 previously cited to Lacey Nursing v. Department of Revenue, 128 Wn.2d 40, 53, 905 P.2d 338 (2000). The Department updated the ETA to correct this citation to Lacey Nursing v. Department of Revenue, 103 Wn.App. 169, 11 P.3d 839 (2000).

Taxability of interest from participation loans

Loan application deposits

Amounts collected by a mortgagee to cover insurance premiums and real estate taxes owed by a mortgagor

Corporate distribution of stock dividends This document does not recognize the specific tax-reporting instructions for financial businesses provided in ETA 571.04.169 (Taxability of investment income). In addition, ETA 019.04.194 (Engaging in business within the state) also explains that a person is not required to hold itself out to the public as a prerequisite to be considered "engaging in business." Cancelled by ETA 2003 -2s 6/30/00.

INTEREST RECEIVED ON DIRECT OBLIGATIONS OF THE FEDERAL GOVERNMENT - This document notes that WAC 458-20-146 (National and state banks, mutual savings banks, savings and loan associations and other financial institutions) explains that a deduction is available for interest received on direct obligations of the federal government. ETA 459 then provides a limited list of federal agencies/instrumentalities. This list is in part incorrect (e.g., the Federal Home Loan Bank and Bank for Cooperatives are no longer federal agencies or instrumentalities).

DEDUCTIBILITY OF INTEREST RECEIVED ON INVESTMENTS OR LOANS PRIMARILY SECURED BY FIRST MORTGAGES OR TRUST DEEDS ON NONTRANSIENT RESIDENTIAL PROPERTIES Revised 2/2/09 See ETA 3076.2009

AMOUNTS COLLECTED BY A MORTGAGEE TO COVER INSURANCE PREMIUMS AND REAL ESTATE TAXES OWED BY A MORTGAGOR Revised 2/2/09 See ETA 3144.2009

TAXABILITY OF INTEREST FROM LOANS SECURED BY UNDEVELOPED LAND Revised 2/2/09 See ETA 3076.2009

TAXABILITY OF INTEREST FROM PARTICIPATION LOANS Revised 2/2/09 See ETA 3078.2009

TAXABILITY OF INVESTMENT INCOME RCW 82.04.4281 gives a deduction from the measure of the business and occupation (B&O) tax for amounts received from investments or the use of money as such for taxpayers not engaged in banking, loan, security, or other financial business. Repealed effective 7/2/02.

Cancelled 7/2/2002 - ETA 165 explains the Department’s position on interest received for loans made to affiliated companies when the business making the loans has procured these funds from a third-party lending source. ETA 571 provides guidance on the B&O tax deduction provided by RCW 82.04.4281, which provides a deduction for amounts received from investments or the use of money as such for taxpayers not engaged in banking, loan, security, or other financial business. These documents are being cancelled because the information is out-of-date.

FINANCIAL INSTITUTIONS INCURRING BAD DEBTS ON CONTRACT ASSIGNMENTS Cancelled effective March 1, 2005. The information was incorporated consistent with recent amendments in the revision of WAC 196 (which was effective 2/27/05).

LOAN APPLICATION DEPOSITS Revised 2/2/09 See ETA 3095.2009

Limits on Interest Deduction for First Mortgages

New "Economic Nexus" in Washington State May Impact Financial Institutions Including Out-of-state Banks and Credit Card Issuers

State Credit Unions - New Tax Exemption

B&O Tax Reporting Requirement Continues After Business Activity Stops (Trailing Nexus)

Combined Excise Tax Return Classification Reporting Change

Limited Exemption for Electronically Delivered Standard Financial Information Effective August 1, 2007

Taxability of Federal Instrumentalities and Federally Created Corporate Entities

New Law Limits First Mortgage Deduction for B&O Tax

Questions & Answers about the International Services Districts B&O Tax Credit

SERVICE BUSINESS & OCCUPATION TAX -- INTEREST DEDUCTION "FINANCIAL BUSINESSES" -- INVESTMENTS -- LOANS TO SUBSIDIARIES -- SURPLUS FUNDS -- ANALYTICAL STEPS -- FOR DETERMINING DEDUCTION. A large manufacturing company which made loans of surplus funds held not to be "ejusdem generis" with banking, loan, security businesses and was therefore not a "financial business" within the intent of RCW 82.04.4281. It was therefore entitled to a refund of Service business tax paid upon interest received from its various subsidiaries.

THIS DETERMINATION HAS BEEN OVERRULED OR MODIFIED IN WHOLE OR PART BY DET.NO. 93-269ER, 14 WTD 153 (1995).

ASSIGNMENT -- LOAN. Where a bank pursuant to written contract assigns the right to receive payments on a loan and does not thereafter book any interest income but continues to collect loan payments and remit them to the assignee, the bank is not subject to B&O tax on interest on the loans following such assignment; however, Service and Other Activities B&O tax is due on fees charged for servicing loans.

NEXUS. Persons with no place of business or employees and engaging in no business activities in this state is not taxable with respect to interest on loan payments the right to which was purchased from a Washington bank, despite the presence of the buyers and loan collateral in this state.

MEASURE OF TAX -- EVIDENCES OF INDEBTEDNESS --ASSIGNMENT -- LOAN. The assignment of the right to receive payments on a loan by the originating bank constitutes trading in evidences of indebtedness such that B&O tax applies only to gains realized in such, a sale as where the consideration for the assignment exceeds the face amount of the loan.

B&O TAX -- DEDUCTION -- INTEREST ON INVESTMENT OR LOAN SECURED BY FIRST MORTGAGE -- COLLATERALIZED MORTGAGE OBLIGATION. Interest received on bond secured by mortgage-backed security is not deductible as interest received from an investment or loan primarily secured by first mortgage or trust deed on nontransient residential properties. The primary security for the bond is readily tradable investment instrument rather than a qualifying mortgage.

INTEREST -- FIRST MORTGAGE. Interest received on home improvement loans secured by second deeds of trust, or unsecured, is not entitled to exemption, even though lender holds the first trust deed or mortgage on the same residential property. Statute strictly construed.

BUSINESS AND OCCUPATION TAX -- FEDERAL MORTGAGE-BACKED SECURITIES -- SALE OF -- ACCRUED INTEREST. Amounts received from buyers GNMA, FNMA, AND FHLMC mortgage-backed securities in payment of interest accrued prior to the sale date will constitute deductible "amounts derived from interest received on investments or loans primarily secured by first mortgages or trust deeds on nontransient residential properties" when such amounts have been entered as such in the taxpayer's books of account.

BUSINESS AND OCCUPATION TAX -- ADVANCES AND REIMBURSEMENTS WALTHEW - LOAN APPLICATION REFUNDABLE DEPOSITS. The WALTHEW decision is applicable to attorney taxpayers bound by the Disciplinary Rules of the Code of Professional Responsibility, which prohibits them from incurring liability to third party providers in the course of litigation. Service providers other than attorneys will remain subject to the three Christensen requirements for excludability.

BUSINESS AND OCCUPATION TAX -- DEDUCTIONS -- INTEREST --GAINS ON SALE OF FIRST MORTGAGE LOANS. The gain from the sale of a mortgage is not an "amount derived from interest received on investments or loans primarily secured by first mortgages or trust deeds on nontransient residential properties."

BUSINESS AND OCCUPATION TAX -- ADVANCES AND REIMBURSEMENTS -- LOAN APPLICATION REFUNDABLE DEPOSITS. Refundable deposits from loan applicants to cover the financial institution's costs in processing loan applications (costs for credit reports, title insurance property appraisals, etc.) held not excludable under Rule 111 when no evidence offered to indicate that the outside consultants recognized that they were to be paid only from funds received from the taxpayer's clients, or that the taxpayers would not be liable to them for compensation if customer funds were not received.

B&O TAX -- ESCROW AGENTS -- ADVANCES AND REIMBURSEMENTS -- LOAN COST. Escrow agent not liable other than as agent for third-party fees charged to clients for title insurance, credit reports, and appraisals to process mortgages. The escrow agent could excluded deposits for these client expenses deposited in its trust account.

EXEMPTION -- INTERNATIONAL BANKING FACILITY -- SEGREGATION OF ACCOUNTS -- RETROACTIVE CORRECTIONS. Because the Federal Reserve permits IBF classification of income, retroactive corrections to IBF accounts will be considered as "segregated" for purposes of the B&O exemption even though these amounts were segregated after-the-fact. There is no policy or legal reason to deny the RCW 82.04.315 exemption once accounts are amended in accordance with Federal Reserve directives.

B&O - INTEREST - SALE OF LOAN -- INTEREST V. PREMIUM. If a portion of interest is paid over to the seller of a loan by the buyer of the loan--even though no portion of the loan has been retained by the seller--that interest is a premium properly taxable to the seller of the loan as a gain. The buyer of the loan is taxable - absent a deduction - on that portion of the interest retained by or paid over to the seller of the loan. Accord: Det. No. 90-141, 9 WTD 280 (1990).

INTEREST. Interest is the charge for the use or forbearance of money. Citing: Security Savings Society v. Spokane County, 11 Wash. 35 (1920).

THIS DETERMINATION HAS BEEN OVERRULED OR MODIFIED IN WHOLE OR PART BY DET.NO. 98-218, 18 WTD 46 (1999).

INTEREST. Where a financial business originates loans secured by first mortgages on nontransient residential real property and then sells the principal portion of the mortgages and a part of the interest portion while retaining a part of the interest stream, the retained part is still income derived from interest on a loan primarily secured by a first mortgage on nontransient residential real property and deductible from gross income for business and occupation tax purposes. DISTINGUISHING: DET. NO. 89-474, 8 WTD 259 AND DET. NO. 90-141, 9 WTD 280-29.

REQUIREMENTS. The deduction available under RCW 82.04.4292 is available only when all of the following conditions are met: (1) The taxpayer is engaged in banking, loan, security, or other financial business (2) the amounts received are derived from interest; (3) on an investment or loan; (4) primarily secured by a first mortgage or deed of trust; (5) on nontransient residential real property.

B&O TAX -- DEDUCTION -- MORTGAGE INTEREST -- REQUIREMENTS. The deduction available under RCW 82.04.4292 is available only when all of the following conditions are met: (1) The taxpayer is engaged in banking, loan, security, or other financial business; (2) the amounts received are derived from interest; (3) on an investment or loan; (4) primarily secured by a first mortgage or deed of trust; (5) on nontransient residential real property.

B&O TAX -- DEDUCTION -- MORTGAGE INTEREST -- "PRIMARILY" SECURE -- SECOND TRUST DEEDS. The deduction for interest on loans secured by first trust deeds does not extend to interest on loans secured by second trust deeds even when the taxpayer holds both the first and second trust deeds because the second loan is only tangentially secured by the first deed of trust.

B&O TAX -- DEDUCTION -- MORTGAGE INTEREST -- INTEREST ON SECOND TRUST DEEDS. Interest on loans secured by second trust deeds is not deductible from the measure of tax under RCW 82.04.4292. The taxpayer's reliance on an internal reference to all prior position liens on the real property is not sufficient to overcome the statutory restriction to interest on first trust deeds. PARTIAL ACCORD: Det. No. 80-121, 11 WTD 1 (1980).

B&O TAX -- DEDUCTION -- INTEREST -- HOUSING BONDS. Interest received on housing bonds is exempt when a fiduciary holds a first mortgage or deed of trust in the underlying qualifying properties and has the power to foreclose on behalf of the bondholders. The exemption will not apply when only the issuer of the bond is so secured.

B&O TAX -- DEDUCTION -- INTEREST -- "MORTGAGE WAREHOUSING LOANS." Only the beneficial owner of a loan is eligible for the RCW 82.04.4292 deduction. Interest earned by bank on "mortgage warehousing" lines of credit debt are not deductible, even though first deeds of trust on "nontransient residential properties" were assigned to Taxpayer as collateral along with promissory notes from home buyers. The first deeds of trust secured only the payment of home buyers' promissory notes, and not the mortgage companies' obligations to Taxpayer under their warehousing agreements.

EXCLUSION -- ADVANCES -- CREDIT REPORTS AND APPRAISAL FEES. The burden of proof is upon the taxpayer to go forward with evidence in support of its claimed deduction or exclusion. Taxpayer bank did not satisfactorily demonstrate that it had no liability for payment of appraisal and credit report fees.

B&O TAX -- DEDUCTION -- INTEREST -- FEDERAL OBLIGATION -- POINTS -- STUDENT LOANS. Payment of points by a student will not be construed as payment of a direct obligation of the U.S. government merely because their payment reduces the federal government's interest obligation to the taxpayer. Points paid by the student are an obligation that the federal government has intentionally chosen not to assume under this program.

B&O TAX -- DEDUCTION -- OTHER FINANCIAL BUSINESS -- FIRST INQUIRY -- PERCENTAGE TEST - CALCULATION. To determine whether a taxpayer's financial income is incidental, the percentage of financial income will be computed by including all calendar or fiscal year financial income from "loans and investments or the use of money as such" in the numerator, whether taxable, exempt, or deductible, and including all calendar or fiscal year revenues as normally measured by the B&O tax, including all revenues otherwise exempt or deductible, in the denominator.

B&O TAX -- DEDUCTION -- OTHER FINANCIAL BUSINESS -- SECOND INQUIRY -- EJUSDEM GENERIS -- SIMILAR/COMPARABLE TO -- INDICIA. For a business activity to be considered "similar" and comparable" to "banking, loan, [or] security" businesses, the activity must be regular and recurrent. Indicia of regular and recurrent activities "similar or comparable" to those of a "banking, loan [or] security business" include, but are not limited to: (1) For a bank and loan business: the making of loans.

B&O TAX -- DEDUCTION -- OTHER FINANCIAL BUSINESS -- SECOND INQUIRY -- EJUSDEM GENERIS -- SIMILAR OR COMPARABLE. The second inquiry for determining when a taxpayer's activities constitute a financial business" involves whether, under the rule of ejusdem generis rule of statutory construction, the taxpayer's activities are similar to, or comparable to, those of "banking, loan, [or] security businesses", even though the taxpayer might not technically fall within one of those three categories.

B&O TAX -- DEDUCTION -- OTHER FINANCIAL BUSINESS -- FIRST PART OF INQUIRY -- PERCENTAGE TEST. Although the Court did not adopt a percentage test in either Sellen or Rainier, the Department of Revenue, as an administrative agency, will consider financial income of five percent or less of a taxpayer's annual gross income to be "incidental" and the taxpayer not to be a financial business.

B&O TAX -- DEDUCTION -- OTHER FINANCIAL BUSINESS -- INVESTMENT V. LENDING ACTIVITY. "Investments or the use of money as such" encompasses not only investment activity, but also lending activity, or a combination of both lending and investment activities.

B&O TAX -- DEDUCTION -- OTHER FINANCIAL BUSINESS -- FIRST INQUIRY. The first inquiry for determining when a taxpayer's activities constitute a "financial business" involves whether the "primary purpose and objective [of the taxpayer's financial activities] is to earn income through the utilization of significant cash outlays", or whether these activities are merely "incidental" to the taxpayer's other nonfinancial business activities.

B&O TAX -- DEDUCTION -- OTHER FINANCIAL BUSINESS -- TWO PART INQUIRY. A two-part inquiry is required to determine whether a taxpayer is a "financial business" and therefore ineligible for RCW 82.04.4281 deduction. Sellen and Rainier Bancorporation, cited.

B&O TAX -- DEDUCTION -- MORTGAGE INTEREST -- REQUIREMENTS. The RCW 82.04.4292 deduction is available only when all of the following conditions are met: (1) The taxpayer is engaged in banking, loan, security, or other financial business; (2) the amounts received are derived from interest; (3) on an investment or loan; (4) primarily secured by a first mortgage or deed of trust; (5) on nontransient residential real property.

GROSS INCOME OF BUSINESS -- TRUST ACCOUNTS OF MORTGAGE BROKERS. The gross income of business does not include specific amounts which a mortgage broker receives from a borrower to pay third-party costs and which RCW 19.146.050 prohibits the taxpayer from commingling with its operating funds.

GROSS INCOME OF THE BUSINESS -- "DOCUMENT PREPARATION" FEES, "CORRESPONDENT" FEES, ACCRUED INTEREST, AND GAIN ON SALE OF LOANS. Gross income of the business includes amounts received by a mortgage broker for document preparation fees, correspondent fees, accrued interest, and gain on the sale of loans because they are received in the taxpayer's own right.

GAIN ON SALE OF LOAN. When the taxpayer sells a loan to a third-party, the gain realized on that sale is fully taxable. The gain is not entitled to the deduction under RCW 82.04.4292.

B&O TAX -- OTHER FINANCIAL BUSINESS. Persons, other than banks, loan businesses, security businesses, and "other financial businesses", are allowed a deduction for interest, dividends, and gain on sale of investments. The determination whether a business is an "other financial business" is made by applying the test stated in Excise Tax Bulletin 571.

B&O TAX -- OTHER FINANCIAL BUSINESS. A person is engaged in an "other financial business" if the business is similar or comparable to a banking, loan, or security business.

B&O TAX -- OTHER FINANCIAL BUSINESS. Where (1) a taxpayer's financial income and securities business-like fees constitute over 87% of its gross income; (2) the taxpayer is involved in regular and recurrent trading; and (3) the taxpayer has no business purpose other than the investment of money, the taxpayer is similar or comparable to a securities business and the RCW 82.04.4281 deduction is not available to it.

B&O TAX -- GROSS INCOME OF THE BUSINESS. Generally, the measure of the business and occupation includes interest, dividends, and gains on the sale of investments.

B&O TAX-- ADJUSTMENT TO YIELD -- LOAN ORIGINATION FEES -- INTEREST. To the extent that a loan origination fee is treated as an adjustment to yield, it is interest. The portion of a loan origination fee not treated as an adjustment to yield is a fee for service and is not interest.

B&O TAX -- FEES -- CORRESPONDENT BROKER -- LOAN -- INVESTMENT -- INTEREST. Fees received for providing correspondent broker services are not deductible under RCW 82.04.4292 because the correspondent broker is merely the agent for the correspondent bank, which bears the risk of interest rate fluctuation.

B&O TAX-- REQUIREMENTS. The person claiming the B&O tax deduction under RCW 82.04.4292 must meet all five elements of the statute.

B&O TAX -- FACTORS TO DETERMINE A TAXPAYER'S LOAN OR INVESTMENT -- INTEREST -- DEDUCTION. The only person entitled to the deduction is the owner of the loan or investment. The owner of a loan or investment is the party who is entitled to receive the principal of the loan. Stated another way, the owner of the loan or investment is the person who retains the risk of interest rate fluctuations.

B&O TAX-- INTEREST DEFINED. Interest is defined as the charge for the use or forbearance of money. This definition includes, but is not limited to, amounts charged to borrowers for the use of money over time. However, time is not an element of interest as defined.

B&O TAX -- SALE OF LOAN -- RETAINED SERVICING RIGHTS. When a loan is sold and the seller retains the servicing rights, the value of the retained servicing rights is not part of the measure of gain on sale. OVERRULING: Det. No. 90-141, 9 WTD 280-29 (1990) on this point.

B&O TAX -- SALE OF LOAN -- RETAINED SERVICING RIGHTS. Once a taxpayer sells a loan, the receipt of servicing fees is a separate transaction from the granting of the loan. Loan servicing services are provided to the purchaser of the loan. The servicing fees are not derived from the servicer's loan or investment; rather they are fees for services. OVERRULING Det. No. 92-392, 12 WTD 535 (1992), in part, on this point.

B&O TAX -- FEES -- PURE MORTGAGE BROKER -- LOAN -- INVESTMENT -- INTEREST. Fees received for providing pure mortgage broker services are not deductible under RCW 82.04.4292 because the pure mortgage broker has not made the loan or investment.

B&O TAX -- LOAN ORIGINATION FEES -- LENDING BROKER. Gross loan origination fees less direct loan origination costs result in net loan origination fees, which a lending broker receives as interest under FASB 91 and which are deductible under RCW 82.04.4292. Costs related to specific services, which are separately charged to the borrower, are not considered in calculating direct loan origination costs.

B&O TAX -- LOAN -- INVESTMENTS -- OWNERSHIP -- RISK -- INTEREST RATE FLUCTUATIONS. Only interest received on the taxpayer's loans or investments qualifies for RCW 82.04.4292 deduction. Whenever a person makes a loan or an investment, the person assumes certain risks. When a person makes a loan or invests in a loan, the primary risk affecting the value of the loan or investment is interest rate fluctuation.

B&O TAX -- INTEREST -- SERVICES. To the extent a fee charged to a borrower is for a combination of services and compensation for the use or forbearance of money, the fee will be allocated between service income and interest income.

B&O TAX -- SPECIFIC FEES -- LENDING BROKER -- INTEREST -- DEDUCTION. Fees a lending broker receives for specific services provided by the lending broker are not interest and not deductible as such.

B&O TAX-- TRANSACTIONAL TAX -- GAIN ON SALE -- PREVIOUSLY UNAMORTIZED LOAN ORIGINATION FEES. The B&O tax is a transactional tax. See Nordstrom Credit, Inc. v. Department of Rev., 120 Wn.2d 935, 942, 845 P.2d 1331 (1993). The granting of a loan and the sale of that loan are two separate transactions. The portion of loan origination fees treated as an adjustment to yield and not recognized until the loan is paid or sold, is not converted from interest to "gain on sale" of the loan. It remains interest. OVERRULING: Det. No 88-255, 6 WTD 123 (1988), and Det. No.

B&O TAX -- FACTORS TO DETERMINE IF A FEE IS INTEREST. A fee may be interest when: There is a legally enforceable obligation of the debtor to pay the creditor; the debtor makes the payment or the payment is made on behalf of the debtor; and the payment is not for specific services such as a finder's fee, document preparation, title examination fees, notary fees, etc.

B&O TAX - CORRESPONDENT MORTGAGE BROKERS. When the agreements between the mortgage broker and the financial business specify that loans funded by the financial business will be closed in the name of the mortgage broker and the mortgage broker is required to assign the loan to the financial business, the mortgage broker is acting as a correspondent mortgage broker. When a mortgage broker acts as a "correspondent mortgage broker", it is not entitled to the RCW 82.04.4292.

B&O TAX - PURE MORTGAGE BROKERS. When the agreements between the mortgage broker and the financial business specify that loans funded by the financial business will be closed in the name of the financial business, the mortgage broker is acting as a pure mortgage broker. When a mortgage broker acts as a "pure mortgage broker", it is not entitled to the RCW 82.04.4292.

B&O TAX-- REQUIREMENTS. The person claiming the B&O tax deduction under RCW 82.04.4292 must meet all five elements of the statute.

B&O TAX - MORTGAGE BROKERS. There are three types of mortgage brokers which the Department has classified as "pure mortgage brokers", "correspondent mortgage brokers", and "lending mortgage brokers".

B&O TAX -- SERVICE -- INTERNATIONAL BANKING FACILITIES (IBFs) --INTEREST ACCRUAL TRANSFERS. Interest income accrued and accounted for by a bank before it creates a tax exempt IBF account is not tax exempt under RCW 82.04.315, even though transferred into the IBF account when cash received.

B&O TAX -- SERVICE -- REVERSE REPOS. Interest income derived from reverse repurchase agreements is subject to Service B&O tax and is not within the scope of any state statutory tax exemption nor prohibited from state taxation under federal law, 31 U.S.C. 3124 (a).

B&O TAX -- SERVICE -- EXEMPTION -- 31 U.S.C 3124 (a) -- SECURITIES TRADING -- TAXABLE GAINS. Because the Service B&O tax measured by gains from trading in U.S. Government securities does not require a consideration of the government obligation or interest thereon, such amounts are not protected from state B&O taxation under 31 U.S.C. 3124 (a).

B&O TAX -- SERVICE -- DEDUCTION -- INTEREST -- PRESERVATION AND DEVELOPMENT AUTHORITIES LOANS. Interest income derived from loans to PDAs created by cities is not entitled to B&O tax deduction under RCW 82.04.4293 (see Determination 85-117 for substantive treatment of merits).

BANKS -- B&O TAX -- SERVICE -- FUTURES CONTRACTS -- INTEREST RATE SWAPS. Amounts derived from banking transactions designated as futures contracts and interest rate swaps constitute business taxable "gross receipts," regardless of their purpose of hedging against risk. (See Determination 85-117 for substantive treatment.)

B&O TAX -- LOANS -- CASH DISCOUNTS. Discounts given by a Taxpayer on loans it sells to investors, to increase the attractiveness of the investment's yield, are not allowable cash discounts.

RCW 82.04.4284; ETA 574: B&O TAX - MEASURE - BAD DEBT DEDUCTION - ASSIGNMENT. A creditor who purchases notes from a retailer upon which the debtor defaults, may not take a credit for B&O taxes paid by the retailer. Puget Sound National Bank v. Department of Rev., 123 Wn.2d 284, 868 P.2d 127 (1994) distinguished.

B&O TAX -- DEDUCTIONS -- INTEREST ON FIRST MORTGAGES OF RESIDENTIAL PROPERTY -- MORTGAGE BROKER -- FINDERS FEES. Where a first mortgage on residential property was closed in the name of the financial institution that was funding the loan, the amounts paid to a mortgage broker for finding and facilitating the customer's loan were for services rendered and not deductible as interest under RCW 82.04.4292.

B&O TAX -- DEDUCTIONS -- INTEREST ON FIRST MORTGAGES OF RESIDENTIAL PROPERTY -- YIELD SPREAD PREMIUMS. Where a first mortgage on residential property was closed in the name of the lending institution, a yield spread premium paid by the lending institution to a mortgage broker for closing a loan at a percentage higher than the prevailing rate was for brokerage services rendered and not deductible as interest under RCW 82.04.4292.

RCW 82.04.080: FINANCIAL INSTITUTIONS -- GROSS INCOME -- LOSSES ON LOANS. The gross income of a financial institution is to be determined "without any deduction on account of losses." Accordingly, because there is no statutory authority or controlling precedent that provides for a deduction for principal losses on impaired collateralized loans, the taxpayer is not entitled to a deduction for these losses.

B&O TAX -- DEDUCTION -- INTEREST -- LOAN SECURED BY FIRST MORTGAGE -- SECURITY UNDER UNIFORM COMMERCIAL CODE (UCC). RCW 82.04.4292 grants a deduction to commercial lenders for interest received on loans primarily secured by first mortgages on nontransient residential properties. Law holds that a security interest under the UCC, where it is a first lien on the property, qualifies as a "first mortgage."

B&O TAX -- INTEREST INCOME -- LOAN TO DEALER -- INVENTORY OF MANUFACTURED HOMES -- LOAN TO BUYER-USER OF MANUFACTURED HOME -- RESIDENTIAL PROPERTY. Interest income from loan to dealer secured by UCC security interest on the manufactured home held in inventory of the dealer held not to be deductible from the measure of the tax. While in dealer's inventory, the manufactured home is not residential property because it is not a residence while in inventory. Only after it is fixed in location for use as a residence by buyer/user does it become residential property.

RULE 146(3); RCW 82.04.4286: SERVICE AND OTHER ACTIVITIES B&O TAX – BANKS, INTEREST INCOME – “FANNIE MAE”, “FREDDIE MAC.” Interest earned by banks on securities issued by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) (“Fannie Mae”, and “Freddie Mac”) is received from government sponsored enterprises (GSEs). These GSE payments do not represent tax exempt direct obligations of the Federal Government, and are subject to B&O tax.

RULE 146; RCW 82.04.4292; B&O TAX – INTEREST INCOME FROM INVESTMENTS – DEFINITION OF “FINANCIAL BUSINESS.” A mobile home park that also provided loans on mobile homes in the park, and received interest income from such loans could not qualify as a “financial business” to qualify for a deduction of such income from its measure of tax liability because (1) the mobile home park’s primary purpose and objective was not to earn income through the utilization of significant cash outlays, and (2) the mobile home park was not a business comparable to a banking, loan or security business.

THIS DETERMINATION HAS BEEN OVERRULED OR MODIFIED IN WHOLE OR PART BY DET.NO. 98-218, 18 WTD 46 (1999).

B&O TAX -- DEDUCTION -- INTEREST ON LOANS SECURED BY A 1ST MORTGAGE OR DEED OF TRUST -- GAIN ON SALE OF LOANS DISTINGUISHED. Service B&O applies to the gain from the sale of loans as the gain is realized from the sale rather than for the use or forbearance of money.

B&O TAX -- DEDUCTION -- INTEREST ON LOANS SECURED BY 1ST MORTGAGE OR DEED OF TRUST -- ORIGINATION FEES. Loan origination fees which relate to loans primarily secured by first mortgages or deeds of trust on nontransient residential property, and which are based on a percentage of the principal amount and represent an interest yield adjustment charged on loans are deductible under RCW 82.04.4292. Loan fees which represent charges for set-up fees or other services are subject to Service B&O. Pacific First Federal Savings and Loan Association v. Commissioner, cited.

B&O TAX -- DEDUCTION -- INTEREST ON LOANS SECURED BY 1ST MORTGAGE OR DEED OF TRUST -- COMMITMENT FEES. Nonrefundable loan commitment fees paid by a prospective borrower to hold the terms of a loan for a stated period of time are not compensation for the use of money and, therefore, not deductible under RCW 82.04.4292.

B&O TAX -- DEDUCTION -- INTEREST ON LOANS SECURED BY 1ST MORTGAGE OR DEED OF TRUST -- ORIGINATION FEES. Loans origination fees which relate to loans primarily secured by first mortgages or deeds of trust on nontransient residential property, and which are based on a percentage of the principal amount and represent an interest yield adjustment charged on loans are deductible under RCW 82.04.4292. Loan fees which represent charges for set-up fees or other services are subject to Service B&O. Accord: Det. 88-255, ____ WTD ____(1989).

B&O TAX EXEMPTIONS - MUNICIPAL CORPORATIONS - WHAT CONSTITUTES. A municipal corporation for purposes of RCW 82.04.4293 and Rule 146, means any entity organized as such under the laws of the state of Washington.

GAINS FROM THE SALES OF SECURITIES -- TRADING GAINS --APPLICABILITY OF RULE. When a bank is engaged in essentially the same activities as a "security house," it is entitled to the tax treatment granted such entities.

B&O TAX -- SALE OF MORTGAGE BACKED SECURITIES -- GAIN --AMOUNTS "DERIVED FROM INTEREST" OR TAXABLE GAIN. Gain received on the sale of a mortgage-backed security cannot be excluded from income as an amount "derived from interest" because the amount is not dependent on whether or not the interest is ever paid. It is not, therefore, an amount received for the use or forbearance of money.

B&O TAX -- INTEREST ON LOANS SECURED BY A 1ST MORTGAGE OR DEED OF TRUST -- SERVICE RELEASE PREMIUM. Amounts received as service release premiums may not be deducted from the measure of tax. Such amounts are not derived from interest but are gains from the sale of loans. Accord: Determination No. 88-255, 6 WTD 123 (1988). THIS DETERMINATION HAS BEEN OVERRULED OR MODIFIED IN WHOLE OR PART BY DET.NO. 98-218, 18 WTD 46 (1999).

B&O TAX -- MORTGAGE-BACKED SECURITIES -- SALE OF--ACCRUED INTEREST. Amounts received from buyers of federal mortgage-backed securities (GNMA, FNMA, and FHLMC) for interest accrued by taxpayer-sellers prior to sale dates will constitute "amounts derived from interest received on investments or loans primarily secured by first mortgages or trust deeds on nontransient residential properties," and are thus deductible.

B&O TAX -- MORTGAGE-BACKED SECURITIES -- INTEREST --OWNERSHIP. In determining whether a taxpayer's interest in a mortgage-backed security is an ownership interest, or merely a security interest in a financing transaction, the Department will be guided by the mortgage-backed security accounting provisions contained in 12 C .F. R. 571.16.

B&O TAX -- MORTGAGE-BACKED SECURITIES -- INTEREST. Because GNMA, FNMA, AND FHLMC mortgage-backed securities are primarily secured by residential mortgages, interest payments to owners of such securities, or participations in them, are exempt under the business and occupation tax under RCW 82.04.4292.

B&O TAX-SALE OF LOANS SECURED BY FIRST MORTGAGES -"PREMIUM" INTEREST V. TRADING GAIN - AMOUNTS DERIVED FROM INTEREST RECEIVED - CONSTRUCTION OF. A "premium" which the taxpayer receives from the purchaser of a mortgage loan in addition to payment for the face amount of the loan is in the nature of consideration, taxable as a trading gain, and is not deductible as an "amount derived from interest received" under RCW 82.04.4292.

B&O TAX -- SALE OF LOANS SECURED BY FIRST MORTGAGES -"PREMIUM" - INTEREST V. TRADING GAIN -- CHARACTERIZATION BY PURCHASER AS "CONTRA-INTEREST." The nature of taxpayer receipts is not governed by how the payor accounts for the expenditure, but is classified on its own merits with respect to the nature of the taxpayer's activities.

B&O TAX -- SALE OF LOANS SECURED BY FIRST MORTGAGES -"PREMIUM" - RETAINED INTEREST ELEMENT - AMOUNT DERIVED FROM INTEREST RECEIVED. When a loan is sold for the face amount of the loan and an additional "premium" based on the spread in interest rates, such "premium" is trading gain and cannot properly be considered the receipt of deductible interest.

B&O TAX - FEDERAL OBLIGATIONS - INTEREST. Payments of interest on federal securities which are direct obligations of the federal government to banks which own the securities, or participations in them, are exempt under the business and occupation tax under WAC 458-20-146, even though such interest is paid through a federal reserve bank.

B&O TAX - FEDERAL SECURITIES -- RESALE/REPURCHASE TRANSACTION -- SALE/REPURCHASE V. SECURED LOANS -CRITERIA. Ownership of a security (other than a federal mortgage-backed security), and transfer thereof, must have a genuine basis in reality, and sale versus loan cases will turn upon their own particular facts.

SERVICE B&O TAX -- BANKS -- NEGOTIABLE INSTRUMENTS --BANKER'S ACCEPTANCES -- TAXABLE INCOME. The taxable income on a bankers' acceptance is the difference between the face amount of the acceptance and the amount dispersed to the drawer. When the acceptance is rediscounted to an unrelated third party, the difference between the amount dispersed and the amount the bank receives for the acceptance from the third party is the proper measure for tax.

B&O TAX -- ADVANCES AND REIMBURSEMENTS -- FEES AND COSTS. Fees and costs charged to customers of a bank for processing loan applications (costs for credit reports, title insurance, property appraisals, etc.) are not excludable under Rule 111 when the bank itself is liable for the payment of the costs. Accord: Christensen v. Department of Revenue, 97 Wn. 2d 764 (1982).

B&O TAX -- INTEREST -- PARTICIPATION. When loan agreements do not prohibit assignment or sale by the lender , the lender is authorized to assign or sell the loan, and interest collected by the seller of a loan participation for the owner of the participation is exempt. Portland Electric & Plumbing and Levinson v. Linderman cited.

B&O TAX - INTEREST-SALE OF LOAN "RETAINED INTEREST"-INTEREST V. PREMIUM. Only the owner of a first mortgage home loan may report and then deduct interest received on that loan. If the entire loan is sold to another, only the new owner may report and deduct the interest received, since only the new owner's money is being used by the borrower (the "old" owner having been repaid by the "new" owner).