NY TSB-A-00(9)C Corporation Tax 2000-04-19

Does paying an annual dividend to an investor in a For-Profit Zone Capital Corporation within 36 months trigger recapture of the zone capital credit?

Short answer: No. An annual dividend paid out of current or accumulated earnings to an investor in a For-Profit Zone Capital Corporation, even within 36 months of the credit year, is not a redemption or disposition of the corporate stock, partnership interest, or other ownership interest that gave rise to the credit, and is not a recovery of the qualified investment. It therefore does not trigger recapture of the zone capital credit under section 210.20(d) (Article 9-A), 1456(d)(4) (Article 32), or 1511(h)(4) (Article 33).

Disclaimer: This is an official New York State Department of Taxation and Finance Advisory Opinion (TSB-A), issued by the Office of Counsel at a taxpayer's request. It is limited to the facts set forth in it and binds the Department only with respect to the petitioner to whom it was issued, and only if that petitioner fully and accurately described all relevant facts; another taxpayer cannot rely on it. It reflects the law, regulations, and Department policy in effect when issued and may since have changed. Taxpayer-identifying details are redacted. New York State and local sales taxes are administered centrally by the Department. This summary is informational only and is not legal or tax advice. Consult a licensed New York tax professional about your specific situation.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked at the bottom of this page, or PDF in the sidebar) is the authoritative source for any reliance.

View original ruling (PDF)

Plain-English summary

The New York State Department of Economic Development asked whether paying an annual dividend (out of current or accumulated earnings) to an investor in a For-Profit Zone Capital Corporation, within 36 months of the close of the taxable year for which a zone capital credit was allowed, is a recovery of the qualified investment that would trigger recapture of the credit under section 210.20 (Article 9-A), 1456(d) (Article 32), or 1511(h) (Article 33).

The Department held a dividend does not trigger recapture:

The recapture provisions (sections 210.20(d), 1456(d)(4), 1511(h)(4)) are triggered by a disposition of the corporate stock, partnership interest, or other ownership interest, or a recovery of the qualified investment, within the recapture period.
Distributions in redemption of stock are treated as gain from the sale or exchange of property -- but an ordinary annual dividend out of earnings is not a redemption or disposition of the underlying investment, and is not a recovery of the contribution.
Accordingly, an annual dividend to a credit-allowed investor does not constitute a disposition of the ownership interest or a recovery of the qualified investment, and so does not trigger recapture of the zone capital credit under any of the three Articles.

What this means for you

Earning a return is not "recovering" the investment

The zone capital credit is recaptured when the investor pulls out -- by disposing of the ownership interest or recovering the contributed capital -- within the recapture window. A dividend representing the investment's return on capital, not a return of capital, does not count.

Same answer across Articles 9-A, 32, and 33

The result is uniform: section 210.20(d), 1456(d)(4), and 1511(h)(4) all turn on a disposition/recovery, and an ordinary dividend is none of those.

Watch redemptions, not dividends

The distinction is dividend vs. redemption. A distribution in redemption of the stock would be a sale/exchange and could implicate recapture; a regular dividend out of earnings does not.

Common questions

Q: Does a dividend to a Zone Capital Corporation investor recapture the zone capital credit?
A: No. An ordinary annual dividend is not a disposition of the investment or a recovery of the qualified investment, so it does not trigger recapture.

Q: Does it matter that the dividend is paid within 36 months?
A: No. The timing does not matter because a dividend is not a disposition or recovery in the first place.

Q: What would trigger recapture?
A: A disposition of the ownership interest, or a recovery of the qualified investment (for example, a redemption), within the recapture period.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 210.20 (zone capital credit; Article 9-A)
- Tax Law section 210.20(d) (recapture of zone capital credit)
- Tax Law section 1456(d) (zone capital credit; Article 32)
- Tax Law section 1456(d)(4) (recapture; Article 32)
- Tax Law section 1511(h) (zone capital credit; Article 33)
- Tax Law section 1511(h)(4) (recapture; Article 33)
- New York State Department of Economic Development, TSB-A-00(9)C (Apr. 2000)

Source

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-00(9)C
Corporation Tax
April 19, 2000

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C000317A

On March 17, 2000, a Petition for Advisory Opinion was received from New York State
Department of Economic Development, 30 South Pearl Street, Albany, New York 12245.
The issue raised by Petitioner, New York State Department of Economic Development, is
whether the payment of an annual dividend out of current year and /or accumulated earnings to an
investor in a For-Profit Zone Capital Corporation, within 36 months from the close of the taxable
year with respect to which a zone capital tax credit was allowed for investment in the Zone Capital
Corporation, constitutes a recovery of a portion of the qualified investment under sections 210.20
of Article 9-A, 1456(d) of Article 32 or 1511(h) of Article 33 of the Tax Law which would trigger
a recapture of all or a portion of the credit allowed.
Petitioner submits the following facts as the basis for this Advisory Opinion.
The New York State Economic Development Zones Act, codified in Article 18-B of the New
York General Municipal Law and selected provisions of the Tax Law (“EDZ Program”), was enacted
in 1986 and modified in 1993, to promote new jobs and investment in the State’s most economically
distressed communities. The EDZ Program targets small businesses located within designated
economic development zones who are certified under the EDZ Program (“Zone Certified Business”).
To encourage private investment in and /or contributions to or for the benefit of Zone Certified
Businesses, the EDZ Program authorizes the issuance of an economic development zone capital tax
credit (“Zone Capital Credit”). The EDZ Program authorizes Zone Capital Credit for business
corporations under section 210.20 of the Tax Law, for banking corporations under section 1456(d)
of the Tax Law, and for insurance corporations under section 1511(h) of the Tax Law.
There are three categories of activities identified under the EDZ Program for which Zone
Capital Credit is available: (i) direct equity investments in Zone Certified Businesses; (ii)
contributions to community development projects sponsored by a not-for-profit corporation which
promote the goals of a Zone’s economic development plan; and (iii) investment in a “zone capital
corporation” a separate entity which pools funds and serves as a source of community based financial
assistance to Zone Certified Businesses in the form of loans and/or equity. In each instance, the
availability of the Zone Capital Credit is the primary inducement to attract private capital which
ultimately will fulfill the purposes of the EDZ Program.
To ensure that investor or contributor dollars remain with Zone Certified Businesses for at
least three years, the EDZ Program imposes gradational recapture provisions if the investor or
contributor who claims Zone Capital Credit recovers all or a portion of its contribution or

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investment, or sells, transfers or otherwise disposes of the interest that was the basis for claiming the
credit during the taxable year or within 36 months from the close of the taxable year with respect to
which the credit is allowed.
Discussion
In this case, the provisions of sections 210.20, 1456(d) and 1511(h) of the Tax Law,
respectively, are substantially identical and will be treated similarly.
Sections 210.20(d), 1456(d)(4) and 1511(h)(4) of the Tax Law, respectively, provide that
where a taxpayer sells, transfers or otherwise disposes of corporate stock, a partnership interest or
other ownership interest arising from the making of a qualified investment which was the basis, in
whole or in part, for the allowance of the Zone Capital Credit provided for under sections 210.20,
1456(d) and 1511(h) of the Tax Law, respectively, or where a contribution or investment which was
the basis for such allowance is in any manner, in whole or in part, recovered by such taxpayer, and
such disposition or recovery occurs during the taxable year or within 36 months from the close of
the taxable year with respect to which such Zone Capital Credit is allowed, the taxpayer shall add
back, with respect to the taxable year in which the disposition or recovery occurred, a portion of the
credit originally allowed. The portion that is to be added back, is computed pursuant to sections
210.20(d)(3) and (4), 1456(d)(4)(C) and(D), and 1511(h)(4)(C) and (D) of the Tax Law, respectively.
The Zone Capital Credit provisions do not discuss what constitutes a disposition of an
investor’s interest or a recovery of an investor’s contribution or investment, that would trigger a
recapture of a portion of the credit allowed. However, pursuant to section 1-2.1 of the Business
Corporation Franchise Tax Regulations and section 16-2.1 of the Franchise Tax on Banking
Corporations Regulations, terms presumably have the same meaning as when used in a comparable
context for federal income tax purposes under the Internal Revenue Code (“IRC”). Since the
provisions of Article 33 that are the same as or are substantially identical with those in Article 9-A
of the Tax Law are regarded as being in pari materia (§ 12 Chapter 649 of the Laws of 1974) , they
are construed in a like manner. Accordingly, it is proper to look to the IRC for guidance in
determining whether a dividend received by an investor, within 36 months from the taxable year in
which Zone Capital Credit is allowed, will trigger a recapture of part of such credit under sections
210.20(d), 1456(d)(4) and 1511(h)(4)of the Tax Law, respectively.
The term “dividend” in the sense in which it is “generally understood and used, refers to the
recurrent return upon stock paid to stockholders by a going corporation in the ordinary course of
business which does not reduce their stock holdings and leaves them in a position to enjoy future
returns upon the same stock. See Lynch v. Hornby, 247 U.S. 339, 344-346; and Langstaff v. Lucas
(D.C.) 9F. (2d) 691, 694.” (Hellnich v. Hellman, 276 U.S. 233). Distributions in complete or partial
liquidation of corporations have not been construed to constitute the payment of dividends where
they are in redemption for stock interests.

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For federal income tax purposes, section 316(a) of the IRC defines the term “dividend” as
any distribution of property made by a corporation to its shareholders out of its earnings and profits
of the taxable year or out of its accumulated earnings and profits that were accumulated after
February 28, 1913.
Section 301 of the IRC distinguishes a dividend from other distributions of property from a
corporation to a shareholder. Section 301(a) and (c) of the IRC provide that a distribution of
property made by a corporation to a shareholder with respect to its stock shall be treated as follows:
(1) Amount constituting dividend – That portion of the distribution which is a
dividend shall be included in gross income.
(2) Amount applied against basis – That portion of the distribution which is not a
dividend shall be applied against and reduce the adjusted basis of the stock.
(3) Amount in excess of basis – Generally, that portion of the distribution which is
not a dividend, to the extent that it exceeds the adjusted basis of the stock, shall be
treated as gain from the sale or exchange of property.
Following Hellnich, supra, and sections 301 and 316 of the IRC, a dividend paid by a
corporation out of current or accumulated earnings to a shareholder is a return on the shareholder’s
investment in the corporation, and is not a distribution made to a shareholder that would reduce a
shareholder’s interest in the corporation.
Accordingly, for purposes of the recapture provisions of the Zone Capital Credit described
in sections 210.20(d), 1456(d)(4), and 1511(h)(4) of the Tax Law, respectively, an annual dividend
paid out of current year and/or accumulated earnings of a For-Profit Zone Capital Corporation to an
investor that was allowed a Zone Capital Credit under sections 210.20, 1456(d) and 1511(h) of the
Tax Law, respectively, will not constitute the disposition of the corporate stock, a partnership interest
or other ownership interest arising from the making of a qualified investment which was the basis
for the allowance of the Zone Capital Credit, and will not constitute the recovery of a contribution
or investment which was the basis for the allowance of the Zone Capital Credit.

DATED: April 19, 2000

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.