New York Advisory Opinion TSB-A-09(6)C: How do Empire Zone benefit periods and QEZE credits work for a parent and subsidiary filing combined, and when a certified subsidiary merges into the parent?

Plain-English summary

A parent corporation that files a combined New York return with affiliates asked several questions about Empire Zone (EZ) benefits for itself and a subsidiary, given a history of single-member LLCs (disregarded entities, "DEs") that had been certified as EZ businesses and later merged into a surviving non-certified LLC.

The Department's answers:
- Subsidiary's benefit period (Q1): A business first certified on or after April 1, 2005 that meets the QEZE employment test gets a 10-year benefit period starting with the certification year, but only for years the employment test is met (Tax Law section 14(a)).
- Credits in a combined return (Q2): A combined subsidiary computes its QEZE credits on its own eligibility, benefit period, employment, and property taxes; the credit is then applied against the combined tax. For the QEZE tax reduction credit, the subsidiary's tax factor is its share of the combined tax (its New York income over the group's New York income, ignoring losses).
- Parent's benefit period (Q3): A DE and its single member are the same taxpayer, so certification of one is imputed to the other, using the earliest certification date among the member and all its DEs (here December 27, 2001). For a test date on/before December 31, 2001, the benefit period is the first 15 taxable years beginning on/after January 1, 2001 -- so the parent's period begins January 1, 2001. Merging certified DEs into a non-certified DE doesn't break that imputation.
- Merger of subsidiary into parent (Q4): A taxpayer can't have two benefit periods. If a certified subsidiary merges (liquidates) into the parent, the parent keeps its own earlier period and the subsidiary's separate period is lost.
- Recapture (Q5): No recapture of QEZE TRC or EZ wage tax credit; the only QEZE real property tax credit recapture is for a later judicial reduction of the real property taxes used to compute the credit.

What this means for you

Multi-entity EZ groups and combined filers

Each certified entity carries its own benefit period and computes credits on its own facts, even inside a combined return. But corporate reorganizations matter: merging a certified subsidiary into the parent forfeits the subsidiary's separate benefit period in favor of the parent's (earlier) one.

Accountants and tax professionals

Track the same-taxpayer rule for DEs and the earliest-certification-date imputation -- it can move a benefit period years earlier. Reassure clients that QEZE TRC and EZ WTC have no recapture; only the QEZE RPTC has a narrow judicial-reduction recapture.

Common questions

Q: Does a combined subsidiary share the parent's EZ benefit period?
A: No. It has its own benefit period and computes credits on its own numbers, applied against the combined tax.

Q: What happens to a certified subsidiary's benefit period if it merges into the parent?
A: It is lost. A taxpayer can have only one benefit period, and the parent's earlier period controls.

Citations and references

• Tax Law § 14(a) (QEZE 10-year benefit period; tax reduction credit)
• Tax Law § 210.12(j) (new business definition for EZ credits)
• General Municipal Law Article 18-B (Empire Zone certification)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2009.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a09_6c.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-09(6)C
Corporation Tax
April 20, 2009

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C090126A

On January 26, 2009, the Department of Taxation and Finance received a Petition for Advisory
Opinion from Petitioner asking several questions regarding availability of Empire Zone(EZ) tax benefits for
itself and its wholly-owned subsidiary, (Subsidiary).
Facts
Petitioner has nexus in New York, and it files a combined New York franchise tax return with its
affiliates, including Subsidiary. Subsidiary, a wholly owned subsidiary of Petitioner, was formed in New York
in 1998. Subsidiary has employees in New York. Subsidiary has not yet been certified as an EZ business under
Article 18-B of the General Municipal Law.
Petitioner previously owned various single-member limited liability companies (SMLLCs) that held
New York retail stores. Those SMLLCs were treated as disregarded entities (DE) for federal income tax and
New York State franchise tax purposes. Some of those SMLLCs were independently certified as EZ businesses
at various EZ sites around New York State. The earliest EZ certification date of those certified was December
27, 2001. In December 2006, Petitioner merged several of those SMLLCs into LLC, which survived. Petitioner
is the single member of LLC. At the time of the merger, and now, LLC was and is taxed as a disregarded entity,
but it has never been certified. Petitioner has also never been certified in its own right.
Analysis
Question 1 - If Subsidiary becomes a qualified EZ enterprise (QEZE), what will be its tax benefit
period? Answer - A business enterprise that is first certified under Article 18-B of the General Municipal Law
(GML) on or after April 1, 2005 and meets the employment test to qualify as a QEZE, will have a benefit period
of ten taxable years, starting with the taxable year in which the enterprise is first certified, but only with respect
to each of those years for which the employment test is met. Tax Law §14(a). As a subsidiary of Petitioner,
Subsidiary would have its own benefit period if it becomes certified. Its benefit period will be ten taxable years,
starting with the taxable year in which it is certified, but only with respect to each of those years for which the
employment test is met.
Question 2 – How will the QEZE franchise tax credits be applied for a taxpayer included in a combined
franchise tax return? Answer - If Subsidiary is included in a combined return with Petitioner, Subsidiary will
calculate the QEZE tax credits based on its own eligibility for the credits, using its own benefit period,
employment numbers, and information necessary to calculate the credit, such as the property taxes it paid. Any
credit allowed to Subsidiary will be applied against the combined tax on the combined return. In computing the
QEZE tax reduction credit (TRC), Subsidiary’s tax factor would be equal to a percentage of the combined
group’s tax. That percentage would be determined by multiplying the combined tax by a fraction, the numerator
of which is Subsidiary’s income allocated to New York and the denominator of which is the combined group’s
income allocated to New York State. The percentage is determined without regard to any member’s losses
included in the group’s calculation of income.

-2-

TSB-A-09(6)C
Corporation Tax
April 20, 2009

Question 3 – Does Petitioner have a business tax benefit period that begins on December 27, 2001?
Answer – Petitioner’s tax benefit period begins on January 1, 2001. A SMLLC that is a DE and its single
member, for purposes of the QEZE tax credits, are regarded as the same taxpayer, and the certification of one
will be imputed to the other. If an entity was a member of more than one certified SMLLC/DE, the certification
date for the single member and all the SMLLC/DEs will be the earliest certification date of the single member
and all the DEs. In this case, the earliest certification date in the group was December 27, 2001. However, for a
business enterprise with a test date (i.e., certification date) on or before December 31, 2001, the benefit period is
the first 15 taxable years beginning on or after January 1, 2001.1 Thus, Petitioner’s business tax benefit period
will begin on January 1, 2001. The fact that several of Petitioner’s SMLLC/DEs were merged into a noncertified SMLLC/DE, LLC, and legally dissolved, does not affect the continuing imputation of certification to
Petitioner or alter its benefit period.
Question 4 – If, after being certified and qualifying as a QEZE, Subsidiary were to merge into
Petitioner, what would be the QEZE’s business tax benefit period after the merger? Answer – If this were a
merger that resulted in the complete liquidation of Subsidiary as a subsidiary of Petitioner, this merger would
not alter Petitioner’s benefit period. Immediately after the merger, Petitioner would in essence have two benefit
periods: its own that started on January 1, 2001, and the benefit period of Subsidiary that it assumes. Because
the statute does not contemplate that a taxpayer may have more than one benefit period for business tax
purposes, the benefit period applicable to Subsidiary’s operations when it was a separate certified entity would
be lost when Subsidiary merges into Petitioner. Petitioner’s own benefit period, because it start started earlier
than the benefit period of Subsidiary, would control. The benefit period for that business, after the merger of
Subsidiary into Petitioner, will be Petitioner’s benefit period, i.e. the first 15 taxable years beginning on January
1, 2001.
Question 5 – If the QEZE’s business tax benefit period obtained by Subsidiary prior to the merger were
to be reduced as a result of the merger in Question #4, would Petitioner be required to repay any benefits
received by Subsidiary under the QEZE RPTC, QEZE TRC, or EZ wage tax credit (WTC)? Answer – No.
There are no recapture requirements in the QEZE TRC and EZ WTC. The only recapture requirement in the
QEZE RPTC is the requirement that the credit be recaptured to the extent of any reduction resulting under a
final order in a judicial proceeding in the real property taxes used to calculate the QEZE RPTC claimed.

DATED: April 20, 2009

NOTE:

1

/S/
Jonathan Pessen
Director of Advisory Opinions
Office of Counsel

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.

§14(a))(1) of the Tax Law.