Does a newly formed C corporation that bought New York manufacturing assets qualify as a 'new business' under section 210.12(j), making its investment tax credit refundable?
Plain-English summary
A newly formed C corporation ("Opco") was incorporated in Delaware in 2007, bought manufacturing assets in New York from an unrelated third party, and began operating. It wanted to claim New York's investment tax credit (ITC) on that equipment and, better yet, get any unused credit refunded in its first year rather than carried forward. The ITC is refundable only for a corporation that qualifies as a "new business" under Tax Law § 210.12(j). The petitioner asked whether Opco qualifies under two ownership scenarios.
A corporation is a "new business" unless it falls into one of three exclusions:
1. Over 50% of its voting stock is owned or controlled, directly or indirectly, by a taxpayer subject to tax under Article 9-A, 32, or 33, or under sections 183/184/185 of Article 9;
2. it is substantially similar in operation and ownership to an existing or former New York taxpayer (an anti-evasion rule); or
3. it has been subject to Article 9-A tax for more than five years.
Opco cleared exclusions (2) and (3) easily — it was brand new and not similar to any existing taxpayer. So everything turned on exclusion (1). Walking up Opco's ownership chain — a holding company, a non-U.S. parent, Delaware limited partnerships, and a corporate general partner — the Department found none of them were New York taxpayers: the holding companies and parents did no New York business; partnerships are not subject to Articles 9, 9-A, 32, or 33; and the one corporate general partner (GP) had no New York activity. Notably, GP's only New York link was a resident director/officer who was not its employee — and the appointment of a New York-resident officer or director who is not an employee does not make a corporation a New York taxpayer if it is not otherwise doing business here. (A mistaken 2003 New York return GP had filed did not change that.)
Because no Article 9-A/32/33 taxpayer owned over 50% of Opco's voting stock, Opco qualifies as a new business and its ITC is refundable. The result was the same under both scenarios (the second simply moved the directors/officers out of New York, which did not matter).
What this means for you
New manufacturers and capital-intensive startups
If you form a fresh corporation to buy and operate qualifying New York production equipment, you may be able to refund the investment tax credit immediately instead of waiting up to 15 years to use a carryover — provided you genuinely satisfy the new-business test. The refund election turns an otherwise-stranded credit into cash.
Groups with complex, foreign, or partnership ownership
Trace your ownership chain carefully. What matters is whether a New York taxpayer (an entity subject to Article 9-A/32/33) owns or controls more than 50% of the voting stock. Foreign parents, holding companies with no New York activity, and partnerships generally are not New York taxpayers — so their ownership does not disqualify you.
Accountants and tax professionals
Two practical traps to check: the substantially-similar anti-evasion rule (don't reconstitute an old New York business as a "new" one), and stray facts like an inadvertent prior-year return or a New York-resident director. The opinion confirms that a non-employee resident officer/director, by itself, does not create taxpayer status.
Common questions
Q: What makes the investment tax credit refundable?
A: Qualifying as a "new business" under Tax Law § 210.12(j). A new business may elect to treat an unused ITC carryover as a refundable overpayment instead of carrying it forward.
Q: Does foreign or partnership ownership disqualify the corporation?
A: No, as long as no entity that is itself a New York taxpayer (subject to Article 9-A, 32, or 33) owns or controls more than 50% of the voting stock.
Q: Does putting a New York resident on the board create nexus?
A: Not by itself. Appointing a New York-resident director or officer who is not an employee does not make a corporation a New York taxpayer if it is not otherwise doing business in the State.
Citations and references
Statutes, regulations, and authorities:
- Tax Law § 210.12 (investment tax credit); § 210.12(j) (new business definition)
- Tax Law § 210.12(e) (ITC carryover or new-business refund election)
- Tax Law § 208.2 (taxpayer defined); § 209 (franchise tax imposition)
- IRC § 167 (depreciable property); IRC § 179(d) (acquired by purchase)
- Tax Law § 1086 (overpayment credit/refund)
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2008.htm
- Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a08_4c.pdf
Original ruling text
New York State Department of Taxation and Finance
Office of Tax Policy Analysis
Taxpayer Guidance Division
TSB-A-08(4)C
Corporation Tax
July 23, 2008
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. C071204A
On December 4, 2007, a Petition for Advisory Opinion was received from Ernst &
Young, LLP, 1500 Key Tower, 50 Fountain Plaza, Buffalo, New York, 14202. Petitioner, Ernst
& Young, LLP, submitted additional information relating to the Petition on April 23, 2008.
The issue raised is whether the corporation described below will qualify as a “new
business” under section 210.12(j) of the New York State Tax Law, and therefore be eligible for a
refundable investment tax credit in its first tax year beginning in 2007, under both Scenarios 1
and 2 below.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Opco, a newly formed C corporation taxable under Article 9-A of the Tax Law, was
incorporated in Delaware during 2007. During 2007, Opco purchased manufacturing assets
located in New York State from an unrelated third party C corporation and began its new
business operations. None of the shareholders of the unrelated third party directly or indirectly
own stock in Opco. There are no business entities currently or previously subject to tax under
Articles 9, 9-A, 22, 23, 32 or 33 of the Tax Law that are substantially similar in operation and
ownership to Opco.
Scenario 1
�
The stock of Opco is 100% owned by P Corporation, a newly formed C
corporation holding company that was incorporated in Delaware during 2007. P
Corporation’s only asset is the stock of Opco. P Corporation has no employees,
employs no capital, does not own or lease property, does not maintain an office,
and is not doing business in New York. P Corporation is not registered to do
business in New York and has never filed a New York State corporate income tax
return.
�
Approximately 40% of the stock of P Corporation is owned by Holdco, a non-US
holding company which is a disregarded entity for United States federal and New
York corporate income tax purposes. Holdco has no employees in New York,
employs no capital in New York, does not own or lease property, does not
maintain an office, and does not do business in New York. Holdco is not
registered to do business in New York and has never filed a New York State
corporate income tax return.
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�
The stock of Holdco is 100% owned by Global Parent, a non-U.S. company,
indirectly through other wholly-owned disregarded entities. Global Parent has no
employees in New York, employs no capital in New York, does not own or lease
property, does not maintain an office, and is not doing business in New York.
Global Parent is not registered to do business in New York and has never filed a
New York State corporate income tax return.
�
The remaining approximately 60% of the stock of P corporation is owned by LP
2, a Delaware limited partnership. LP-2 has no employees in New York, employs
no capital in New York, does not own or lease property, does not maintain an
office and is not doing business in New York. LP-2 is not registered to do
business in New York and has never filed a New York State partnership return.
Control of the voting rights of LP-2’s 60% stock ownership in P Corporation
resides solely with LP, a Delaware limited partnership that is the general partner
of LP-2. The limited partners of LP-2 have no voting rights over LP-2’s 60%
stock ownership in P Corporation.
�
LP, a Delaware limited partnership, owns approximately 60% of LP-2 and is the
only general partner of LP-2. LP has no employees in New York, employs no
capital in New York, does not own or lease property, does not maintain an office
and is not doing business in New York. LP is not registered to do business in
New York and has never filed a New York State partnership return. As the
general partner, LP is responsible for decisions on investments, dispositions,
capital calls, etc., of LP-2. The general partner of LP is GP, a Delaware C
corporation. GP owns 60% of LP. The limited partner of LP has no involvement
in any decisions required to be made by LP. LP-2 has entered into a management
agreement with Manager to handle investment and other decisions and to
undertake day-to-day operations, if any, of LP-2. Manager, a separate legal entity
indirectly owned by Global Parent, is engaged in business in New York and is a
New York State taxpayer. However, Manager is not in the chain of ownership of
P Corporation, LP-2, LP or GP.
�
GP, a Delaware C Corporation and the general partner of LP, employs no capital
in New York, does not own or lease property in New York, does not maintain an
office in New York, does not do business in New York and is not filing a New
York State corporate income tax return. All of GP’s stock is owned either by
Global Parent or a subsidiary of Global Parent. The subsidiary of Global Parent
has no employees in New York, employs no capital in New York, does not
maintain an office in New York, does not own or lease property in New York,
does not do business in New York and has never filed a New York State corporate
income tax return. In 2003, the year of its formation, GP filed a New York State
corporate income tax return. Global Parent determined that this was done in error
and GP has not filed a New York State corporate income tax return in any
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subsequent year. GP has three directors. One director resides in Connecticut, a
director resides in New York, and a director resides in Ohio. The three directors
are also listed as the only officers of GP (President and two Vice-Presidents with
the New York state resident being one of the Vice-Presidents). These
directors/officers are all employees of other Global Parent affiliates. The
directors/officers are compensated by the other Global Parent affiliates and
receive no compensation from GP. No directors’ meetings have been held in New
York. GP has no other employees. GP’s books and records are maintained in
Ohio by the Ohio resident director. GP’s duties are to manage LP. The New
York State resident director participates in any decision that may have to be made
by GP. The duties of GP and the activities of the New York State resident
director on behalf of GP are limited based upon LP’s delegation of virtually all of
its decision-making responsibilities to Manager (see discussion concerning LP
above).
None of the related corporations in the chain of ownership described above are entities
that, if taxable in New York, would be subject to tax under Article 9, Article 32, or Article 33 of
the Tax Law. Neither P Corporation nor GP Corporation is a corporate partner in any
partnership that is doing business, employing capital, owning or leasing property, or maintaining
an office in New York. It is assumed for purposes of this Advisory Opinion that Global Parent is
not owned or controlled directly or indirectly by a New York State taxpayer.
Scenario 2
For Scenario 2, the facts and ownership structure are exactly the same as described above
for Scenario 1 except for the following difference:
�
None of GP’s directors and officers resides in New York State. Any decisions or duties
required by the directors/officers of GP are performed outside of New York State.
Applicable law and regulations
Section 208.2 of the Tax Law provides:
The term “taxpayer” means any corporation subject to tax under this article;
Section 209 of the Tax Law provides, in part:
1. For the privilege of exercising its corporate franchise, or of doing business, or
of employing capital, or of owning or leasing property in this state in a corporate or
organized capacity, or of maintaining an office in this state, for all or any part of each of
its fiscal or calendar years, every domestic or foreign corporation, except corporations
specified in subdivision four of this section, shall annually pay a franchise tax,…
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Section 210.12 of the Tax Law provides, in part:
Investment tax credit (ITC). (a) A taxpayer shall be allowed a credit, to be
computed as hereinafter provided, against the tax imposed by this article. The amount of
the credit shall be the per cent provided for hereinbelow of the investment credit base.
The investment credit base is the cost or other basis for federal income tax purposes of
tangible personal property and other tangible property, including buildings and structural
components of buildings, described in paragraph (b) of this subdivision, less the amount
of the nonqualified nonrecourse financing with respect to such property to the extent such
financing would be excludible from the credit base pursuant to section 46(c)(8) of the
internal revenue code (treating such property as section thirty-eight property irrespective
of whether or not it in fact constitutes section thirty-eight property). If, at the close of a
taxable year following the taxable year in which such property was placed in service,
there is a net decrease in the amount of nonqualified nonrecourse financing with respect
to such property, such net decrease shall be treated as if it were the cost or other basis of
property described in paragraph (b) of this subdivision acquired, constructed,
reconstructed or erected during the year of the decrease in the amount of nonqualified
nonrecourse financing. In the case of a combined report the term investment credit base
shall mean the sum of the investment credit base of each corporation included on such
report. The percentage to be used to compute the credit allowed pursuant to this
subdivision shall be that percentage appearing in column two which is opposite the
appropriate period in column one in which the tangible personal property was acquired,
constructed, reconstructed or erected, as the case may be….
(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 (A) principally used by the taxpayer in the
production of goods by manufacturing, processing, assembling, refining, mining,
extracting, farming, agriculture, horticulture, floriculture, viticulture or commercial
fishing,…
*
*
*
(e) Except as otherwise provided in this paragraph, the credit allowed under this
subdivision for any taxable year shall not reduce the tax due for such year to less than the
higher of the amounts prescribed in paragraphs (c) and (d) of subdivision one of this
section. However, if the amount of credit allowable under this subdivision for any
taxable year reduces the tax to such amount, any amount of credit … allowed for a
taxable year commencing on or after January first nineteen hundred eighty-seven and not
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deductible in such year may be carried over to the fifteen taxable years next following
such taxable year and may be deducted from the taxpayer’s tax for such year or years. In
lieu of such carryover, any such taxpayer which qualifies as a new business under
paragraph (j) of this subdivision may elect to treat the amount of such carryover as an
overpayment of tax to be credited or refunded in accordance with the provisions of
section ten hundred eighty-six of this chapter, provided, however, the provisions of
subsection (c) of section ten hundred eighty-eight of this chapter notwithstanding, no
interest shall be paid thereon.
*
*
*
(j) For purposes of paragraph (e) of this subdivision, a new business shall include
any corporation, except a corporation which:
(1) over fifty percent of the number of shares of stock entitling the holders
thereof to vote for the election of directors or trustees is owned or controlled,
either directly or indirectly, by a taxpayer subject to tax under this article; section
one hundred eighty-three, one hundred eighty-four or one hundred eighty-five of
article nine; article thirty-two or thirty-three of this chapter; or
(2) is substantially similar in operation and in ownership to a business
entity (or entities) taxable, or previously taxable, under this article; section one
hundred eighty-three, one hundred eighty-four, one hundred eighty-five or one
hundred eighty-six of article nine; article thirty-two or thirty-three of this chapter;
article twenty-three of this chapter or which would have been subject to tax under
such article twenty-three (as such article was in effect on January first, nineteen
hundred eighty) or the income (or losses) of which is (or was) includable under
article twenty-two of this chapter whereby the intent and purpose of this
paragraph and paragraph (e) of this subdivision with respect to refunding of credit
to new business would be evaded; or
(3) has been subject to tax under this article for more than five taxable
years (excluding short taxable years).
Opinion
Tax Law section 210.12 allows a business corporation to claim an investment tax credit
(ITC) against its corporate franchise tax for investments in qualified tangible property and real
property. The ITC is a percentage of the cost or other federal income tax basis of such
qualifying property less the amount of certain non-qualified nonrecourse financing of the
property. Property qualifies for the ITC if it (1) is tangible property, including buildings and
their structural components; (2) is depreciable under IRC section 167; (3) has a useful life of four
or more years; (4) is acquired by the taxpayer by purchase as defined in IRC section 179(d); (5)
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has a situs in New York; and (6) is principally used by the taxpayer in the production of goods.
It is assumed for purposes of this Advisory Opinion that the manufacturing assets purchased by
Opco will meet these statutory requirements to qualify for the ITC.
The ITC may not reduce a taxpayer’s tax liability to less than the greater of its tax
computed on the minimum taxable income base or its fixed dollar minimum tax. However, any
ITC that cannot be used to reduce a taxpayer’s current year tax liability may be carried over for
the next 15 taxable years and deducted from the tax due in those taxable years.
In lieu of a credit carryover, a corporation which qualifies as a new business, as defined
under section 210.12(j) of the Tax Law, may elect to treat an ITC carryover as an overpayment
that may be refunded or credited to the tax due in the following year. A new business is defined
as any corporation, except (1) a corporation which over 50% of the voting stock is owned or
controlled, either directly or indirectly, by a taxpayer subject to tax under Article 9-A, 32, 33, or
section 183, 184, or 185 of Article 9; (2) a corporation that is substantially similar in operation
and ownership to a business entity (or entities) taxable, or previously taxable, under Article 9-A,
22, 32, 33, or section 183, 184, or 185 of Article 9; or Article 23, or would have been subject to
tax under Article 23 (as such article was in effect on January 1, 1980); or (3) a corporation that
has been subject to tax under Article 9-A for more than five taxable years (excluding short
taxable years).
Opco is a C corporation that is not substantially similar in operation and ownership to any
other business entity currently or previously subject to tax in New York. Opco was formed in
2007 and has not been subject to tax under Article 9-A for more than five taxable years,
excluding short years. Therefore, Opco will meet the requirements for a refund of the ITC under
sections 210.12(j)(2) and (3) of the Tax Law. Thus, the only issue that must be considered to
determine if Opco is a new business eligible for a refund of the ITC is whether more than 50% of
the number of shares of stock entitling the stockholders to vote for the election of directors or
trustees is owned or controlled, directly or indirectly, by a taxpayer subject to tax under Article
9-A, 32, or 33 of the Tax Law; or section 183, 184, or 185 of Article 9 of the Tax Law. None of
the business entities in Opco’s chain of ownership are entities that, if taxable, would be subject to
tax under Article 9, Article 32, or Article 33 of the Tax Law. Therefore, the determination of
whether Opco will qualify for a refund of the investment tax credit will be based on whether any
of those entities in the chain of ownership are subject to tax under Article 9-A.
Opco is directly owned by P Corporation, a holding company formed in Delaware during
2007 whose only asset is the stock of Opco. P Corporation owns 100% of Opco’s stock.
P Corporation has no employees, employs no capital in New York, does not maintain an office in
New York, does not own or lease property in New York and is not doing business in New York.
Also, P Corporation is not a corporate partner of a partnership that is conducting any of those
activities in New York. Accordingly, P Corporation is not subject to tax under Article 9-A.
Therefore, 100% of Opco’s voting stock is directly owned by a taxpayer that is not subject to tax
under Article 9-A of the Tax Law. Since Opco’s stock is not directly owned by a taxpayer
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subject to tax under Article 9-A, the determination of whether the ITC is refundable under
section 210.12(j)(1) of the Tax Law is dependent on whether more than 50% of Opco’s voting
stock is owned or controlled indirectly by a corporation subject to tax under Article 9-A, through
P Corporation.
P Corporation is 40% owned by Holdco, which is a non-US holding company, wholly
owned by Global Parent. Holdco is a disregarded entity for federal and state tax purposes, and
therefore files as a division of Global Parent. These entities are not subject to tax in New York.
Therefore, the 40% of Opco’s stock that is owned indirectly by Holdco and Global Parent
through P Corporation is owned and controlled by an entity not subject to tax in New York.
The remaining 60% of P Corporation’s stock is owned by LP-2, a Delaware limited
partnership. LP- 2’s general partner is LP, a Delaware limited partnership. LP has control over
the voting rights of LP-2’s entire 60% ownership of P Corporation’s stock. None of LP-2’s
limited partners have control over any of P Corporation’s stock voting rights. Therefore, over
50% of Opco’s stock voting rights are indirectly controlled by LP, a Delaware limited
partnership. Since partnerships are not subject to tax under Article 9, 9-A, 32, or 33 of the Tax
Law, LP- 2’s and LP’s indirect ownership and control of more than 50% of the voting stock of
Opco does not affect the determination of whether Opco is eligible for a refund of the ITC. The
refundability of the credit will be dependent upon whether LP is owned or controlled, directly or
indirectly, by a taxpayer subject to tax under Article 9-A of the Tax Law.
GP, a Delaware C Corporation, is the general partner of LP, who indirectly controls 60%
of the voting stock of Opco through partnerships LP and LP-2, and P corporation. GP has no
employees, does not employ capital in New York, does not maintain an office in New York, does
not own or lease property in New York and is not doing business in New York. GP is not a
corporate partner in a partnership that is doing business, employing capital, owning or leasing
property or maintaining an office in New York. GP’s only connection to New York is the
appointment of a New York resident to GP’s board of directors and as a Vice-President of GP.
The New York resident director is not an employee of GP.
Section 208.2 of the Tax Law defines a taxpayer as any corporation subject to tax under
Article 9-A. A foreign corporation is subject to tax in New York for the privilege of exercising
its corporate franchise, or of doing business, or of employing capital, or of owning or leasing
property, or maintaining an office in this State for all or any part of each of its fiscal or calendar
years. The appointment of a New York resident individual as a corporate officer or director, if
that individual is not an employee of the corporation, is not a factor in determining whether a
corporation is subject to tax in New York, if the corporation is not otherwise doing business,
employing capital, or owning or leasing property, or maintaining an office in New York. Based
on the facts in the Petition, it appears that GP does not and has not conducted any of the activities
that would subject it to tax under Article 9-A and is not a taxpayer within the meaning of section
208.2 of the Tax Law, notwithstanding its filing of a New York State corporation tax return in
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- Assuming that GP is not a taxpayer subject to tax under Article 9-A, over 50% of Opco’s
stock is not owned or controlled indirectly by a taxpayer subject to tax under Article 9-A.
GP’s stock is wholly owned or controlled, directly or indirectly, by either Global Parent,
or a subsidiary of Global Parent, neither of which is subject to tax under Article 9-A of the Tax
Law.
Therefore, it appears that over 50% percent of the number of shares of Opco’s stock
entitling the holders thereof to vote for the election of directors or trustees is not owned or
controlled, either directly or indirectly, by a taxpayer subject to tax under Article 9-A, 32, or 33
of the Tax Law, or section 183, 184, or 185 of Article 9. Accordingly, Opco qualifies as a new
business under section 210.12(j) of the Tax Law and is eligible for a refund of the investment tax
credit.
Scenario 2
Since the residency of GP’s directors and officers is not a factor in determining whether
GP is subject to tax in New York under Article 9-A of the Tax Law, the analysis and
determination of whether Opco is eligible for a refund of the investment tax credit is the same as
that set forth in Scenario 1.
DATED: July 23, 2008
NOTE:
/s/
Jonathan Pessen
Tax Regulations Specialist IV
Taxpayer Guidance Division
An Advisory Opinion is issued at the request of a person or entity. It is
limited to the facts set forth therein and is binding on the Department only
with respect to the person or entity to whom it is issued and only if the
person or entity fully and accurately describes all relevant facts. An
Advisory Opinion is based on the law, regulations, and Department
policies in effect as of the date the Opinion is issued or for the specific
time period at issue in the Opinion.