For the broker-dealer investment tax credit, does having 83% to 88% of administrative and support employees in New York satisfy the substantial-portion requirement?

Plain-English summary

Morgan Stanley DW Inc., the retail broker-dealer arm of Morgan Stanley Dean Witter & Co. headquartered in New York City, buys property that can qualify for New York's broker-dealer investment tax credit under section 210.12(b)(i)(D), (E) and (F). The credit requires that all or a substantial portion of the administrative and support employees related to the qualifying property be located in New York. The company estimated 83% to 88% of those employees would be in New York and asked whether that meets the test. (This is the companion ruling to TSB-A-03(10)C for an affiliated entity.)

The Department explained:

• Who counts. Per TSB-M-98(8)C, (6)I, administrative and support employees are all employees other than the brokers/dealers/investment advisors using the property; an employee paid more than 50% on commissions is presumed a producer.
• The threshold. "Principally" means more than 50% (20 NYCRR section 5-2.4(c)); the related "significant percentage" standard is read as at least 75%, and the Department treats "substantial portion" as at least that level.
• Result. With 83%-88% of relevant employees in New York, it appears the substantial-portion requirement is met -- but whether the company actually qualifies is a factual question for audit.

What this means for you

"Substantial portion" means roughly three-quarters

For the broker-dealer investment tax credit, the Department treats "substantial portion" of in-New-York administrative/support employees as at least 75%. At 83%-88%, the company is above the line.

Identify producers correctly

Only employees other than the brokers, dealers, and investment advisors using the property count toward the test. Anyone paid more than 50% on commission is presumed a producer and excluded.

The standard is settled; the facts are not

The Department confirmed the threshold but emphasized that actual eligibility is a question of fact decided on audit. Maintain headcount documentation under the 95% method or an accepted alternative.

Common questions

Q: Does 83%-88% of employees in New York meet the broker-dealer ITC test?
A: It appears so. The Department treats "substantial portion" as at least 75%, which 83%-88% exceeds.

Q: Which employees count?
A: Administrative and support employees -- everyone other than the brokers, dealers, or investment advisors using the property; those paid more than 50% on commission are presumed producers.

Q: Is the credit guaranteed by this opinion?
A: No. Actual eligibility is a factual question for audit.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 210.12 (investment tax credit; broker-dealer property under 210.12(b)(i)(D), (E), (F))
- 20 NYCRR section 5-2.4(c) (principally means more than 50%)
- TSB-M-98(8)C, (6)I (Tax Credits for the Financial Services Industry; 95% employment method)
- Morgan Stanley DW Inc., TSB-A-03(11)C (Oct. 10, 2003)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2003.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a03_11c.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-03(11)C
Corporation Tax
October 10, 2003

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C030520C

On May 20, 2003, a Petition for Advisory Opinion was received from Morgan Stanley DW
Inc., 1585 Broadway, New York, New York 10036.
The issue raised by Petitioner, Morgan Stanley DW Inc., is whether a substantial portion of
its employees performing administrative and support functions are located in New York State for
purposes of qualification for the investment tax credit under section 210.12 of Article 9-A of the Tax
Law.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Morgan Stanley Dean Witter & Co. is a global financial services firm that provides
investment banking, sales and trading services to domestic and international corporate, government,
and other institutional clients through its various subsidiaries. In addition, Morgan Stanley Dean
Witter & Co. provides individual investors with a range of securities and savings products and
services, primarily through Petitioner. Petitioner conducts its business from its headquarters in
New York City, its regional offices and branches throughout the United States, and its principal
offices located in financial centers worldwide. Petitioner is registered as a broker-dealer with the
Securities and Exchange Commission and is a member of various self-regulatory organizations,
including the National Association of Securities Dealers, Inc. and various securities exchanges,
including the New York Stock Exchange, Inc.
Petitioner makes purchases of property that potentially qualify for the New York State
investment tax credit for broker-dealers and investment advisors. Petitioner estimates that, during
the fiscal year ending November 30, 2002, between 83 percent and 88 percent of the administrative
and support personnel employed by Petitioner who support Petitioner’s employees using the
property that potentially qualifies for the investment tax credit were located in New York State. The
percentage of such administrative and support personnel employed by Petitioner for the fiscal year
ending November 30, 2003 is expected to be the same.
Applicable law and regulations
Section 210.12 of the Tax Law contains the provisions for the investment tax credit, and
provides in pertinent part:
(a) A taxpayer shall be allowed a credit, to be computed as hereinafter
provided, against the tax imposed by this article....

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(b)(i) A credit shall be allowed under this subdivision with respect to tangible
personal property and other tangible property, including buildings and structural
components of buildings, which are: depreciable pursuant to section one hundred
sixty-seven of the internal revenue code, have a useful life of four years or more, are
acquired by purchase as defined in section one hundred seventy-nine (d) of the
internal revenue code, have a situs in this state and are ... (D) principally used in the
ordinary course of the taxpayer’s trade or business as a broker or dealer in
connection with the purchase or sale (which shall include but not be limited to the
issuance, entering into, assumption, offset, assignment, termination, or transfer) of
stocks, bonds or other securities as defined in section four hundred seventy-five
(c)(2) of the Internal Revenue Code, or of commodities as defined in section four
hundred seventy-five (e) of the Internal Revenue Code, (E) principally used in the
ordinary course of the taxpayer’s trade or business of providing investment advisory
services for a regulated investment company as defined in section eight hundred
fifty-one of the Internal Revenue Code, or lending, loan arrangement or loan
origination services to customers in connection with the purchase or sale (which shall
include but not be limited to the issuance, entering into, assumption, offset,
assignment, termination, or transfer) of securities as defined in section four hundred
seventy-five (c)(2) of the Internal Revenue Code, or (F) principally used in the
ordinary course of the taxpayer’s business as an exchange registered as a national
securities exchange within the meaning of sections 3(a)(1) and 6(a) of the Securities
Exchange Act of 1934 or a board of trade as defined in section 1410(a)(1) of the
New York Not-for-Profit Corporation Law or as an entity that is wholly owned by
one or more such national securities exchanges or boards of trade and that provides
automation or technical services thereto. For purposes of clauses (D), (E) and (F) of
this subparagraph, property purchased by a taxpayer affiliated with a regulated
broker, dealer, national securities exchange or board of trade, is allowed a credit
under this subdivision if the property is used by its affiliated regulated broker, dealer,
national securities exchange or board of trade in accordance with this subdivision.
Provided, however, a taxpayer shall not be allowed the credit provided by clauses
(D), (E) and (F) of this subparagraph unless all or a substantial portion of the
employees performing the administrative and support functions resulting from or
related to the qualifying uses of such equipment are located in this state....
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(m)(1)(i) If a taxpayer is required by paragraph (g) of this subdivision to add
back a portion of the credit taken because property was destroyed or ceased to be in
qualified use as a direct result of the September eleventh, two thousand one terrorist
attacks, such taxpayer may elect to defer the amount to be recaptured for all such

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property to the taxable year next succeeding the taxable year in which the destruction
or cessation of qualified use occurred. The taxable year in which the destruction or
cessation of qualified use occurred shall be hereinafter referred to as the “recapture
event taxable year”. If the taxpayer’s total employment number in the state on the
last day of the taxable year next succeeding the recapture event taxable year is a
significant percentage of the taxpayer’s average total employment number in the
state for the taxpayer’s recapture event taxable year and the two taxable years
immediately preceding the recapture event taxable year, then the taxpayer shall not
be required to recapture any credit with respect to such property.... (emphasis added)
Section 5-2.4(c) of the Business Corporation Franchise Tax Regulations (Article 9-A
Regulations) provides, in pertinent part: “The term principally used means more than 50 percent....”
Opinion
Before a taxpayer may claim an investment tax credit pursuant to section 210.12(b)(i)(D),
(E) or (F) of the Tax Law, all or a substantial portion of its employees performing the administrative
and support functions resulting from or related to the qualifying uses of the property must be located
in New York State. To meet this requirement, a taxpayer must maintain a requisite number of
employees performing administrative and support functions in New York State in the taxable year
for which the investment tax credit is claimed.
Technical Services Bureau Memorandum entitled Tax Credits for the Financial Services
Industry, December 1998, TSB-M-98(8)C, (6)I, provides that employees performing administrative
and support functions, for purposes of section 210.12(b)(i)(D), (E) and (F) of the Tax Law, include
all employees other than the brokers, dealers, or investment advisors engaged in the qualifying usage
of the property for which the investment tax credit may be claimed. Generally, any employee whose
compensation for the taxable year is based more than 50 percent on commissions will be presumed
to be a broker, dealer, or investment advisor.
An acceptable method of determining whether a taxpayer has maintained a requisite number
of employees performing the administrative and support functions in New York State in the taxable
year for which the investment tax credit is claimed is the 95 percent employment method, which is
described in TSB-M-98(8)C, (6)I, supra. Under the 95 percent employment method, a taxpayer is
presumed to maintain the requisite number of employees if the average number of employees
performing these functions in New York State during the taxable year for which the investment tax
credit is claimed is equal to or greater than 95 percent of the average number of employees
performing these functions in New York State during the 36 months immediately preceding the year
for which the investment tax credit is claimed. If a taxpayer does not compensate employees who
are employed as brokers, dealers, or investment advisors on a commission basis, the taxpayer must

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specifically identify the employees performing those functions and must exclude those employees
from the employment percentage calculation. The average number of employees must be computed
on a quarterly basis. A taxpayer may employ an alternate method to determine eligibility. The use
of an alternate method must be demonstrated to the Department of Taxation and Finance as an
appropriate method.
In this case, Petitioner is not using the 95 percent employment method safe harbor rule,
contained in TSB-M-98(8)C, (6)I, supra, to determine whether all or a substantial portion of its
employees performing the administrative and support functions resulting from or related to the
qualifying uses of equipment qualifying for the investment tax credit are located in this state.
Instead, Petitioner has asked whether it would meet the requirement, under section 210.12(b)(i)(D),
(E) and (F) of the Tax Law, that “all or a substantial portion of the employees performing the
administrative and support functions resulting from or related to the qualifying uses of such
equipment are located in this state” if between 83 percent and 88 percent of its employees
performing the administrative and support functions are located in New York State during the
taxable year for which the investment tax credit is claimed.
Under the investment tax credit provisions of section 210.12 of the Tax Law, the term
principally as used under section 210.12(b) of the Tax Law means more than 50 percent. See
section 5-2.4(c) of the Article 9-A Regulations. The phrase significant percentage as used under
section 210.12(m)(1)(i) of the Tax Law with respect to the employment test applicable to taxpayers
that elect to defer the recapture of the investment tax credit is interpreted to mean at least 75 percent
pursuant to Technical Services Bureau Memorandum entitled Investment Tax Credit (ITC) Relief
for Property Destroyed as a Direct Result of the Terrorist Attacks of September 11, 2001 (Articles
9-A, 22 32, and 33), September 23, 2002, TSB-M-02(3)C, (7)I.
However, the phrase all or a substantial portion as used within the context of section
210.12(b)(i)(D), (E) and (F) of the Tax Law is not defined in the Tax Law or regulations. It is
reasonable to interpret the phrase all or a substantial portion to mean that at least 80 percent of the
taxpayer’s employees performing the administrative and support functions during the taxable year
that support the taxpayer’s broker, dealer, and investment advisor employees that use the property
qualifying for the investment tax credit under section 210.12(b)(i)(D), (E) and (F) of the Tax Law
will be located in New York State.
Petitioner estimates that for fiscal year ending November 30, 2002, between 83 percent and
88 percent of the administrative and support personnel employed by Petitioner who support its
employees using the property that potentially qualifies for the investment tax credit will be located
in New York State, and that the percentage is expected to be the same for fiscal year ending
November 30, 2003. Accordingly, it appears that all or a substantial portion of Petitioner’s
employees performing the administrative and support functions resulting from or related to the

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qualifying property that is principally used by Petitioner in the ordinary course of its trade or
business as a broker-dealer, or as an investment advisor, for purposes of section 210.12 of the Tax
Law, will be located in New York State.
However, whether Petitioner actually qualifies for the investment tax credit is a question of
fact not susceptible of determination in an advisory opinion. An advisory opinion merely sets forth
the applicability of pertinent statutory and regulatory provisions to “a specified set of facts.” Tax
Law, §171.Twenty-fourth; 20 NYCRR 2376.1(a). The necessary factual determination would have
be made within the context of an audit in accordance with the principles outlined above.

DATED: October 10, 2003

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

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