New York Advisory Opinion TSB-A-09(7)C/(4)I: May an LLC specially allocate the tangible-property component of the Brownfield Redevelopment Tax Credit in the same proportion as the related depreciation deductions?

Plain-English summary

A New York LLC (taxed as a partnership) in the Brownfield Cleanup Program expected to place qualified tangible property in service in 2009-2010. A new investor member would contribute capital for a 5% profits/loss interest but be specially allocated 99.99% of both the depreciation deductions and the tangible-property component of the Brownfield Redevelopment Tax Credit (Tax Law section 21) for those years. The LLC asked whether that special allocation of the credit is valid.

The Department concluded it is valid, provided the depreciation allocation has substantial economic effect. The Tax Law doesn't spell out how to allocate most New York credits, so the Department looked to the Article 9-A partnership regulations (20 NYCRR 3-13.3 -- distributive share follows the federal section 704 character) and to IRC section 704(b), under which an allocation that lacks substantial economic effect is redone by the partner's interest. Federally, a tax credit may be specially allocated to match a loss/deduction allocation when the sole component of the credit is a partnership expenditure that itself has a valid special allocation (Treas. Reg. 1.704-1(b)(5), example 11; CCA 200812023 on the section 42 credit). Because the tangible-property credit component is computed solely on the property's federal cost basis -- the same basis driving the depreciation deduction (Tax Law section 21(a)(3)) -- the credit allocation follows the expenditure allocation. So if the 99.99% depreciation allocation has substantial economic effect and isn't principally for tax avoidance, the matching credit allocation is valid.

What this means for you

Brownfield developers using investor/partnership structures

You can steer the tangible-property credit to an investor in the same proportion as depreciation -- the classic tax-equity structure -- as long as the underlying depreciation allocation is real (substantial economic effect), not a tax-avoidance device.

Accountants and tax professionals

New York conforms to federal section 704(b) principles for credit allocation where the credit's sole component is a partnership expenditure that is itself validly allocated. The credit "follows the expenditure." Document substantial economic effect in the LLC agreement and capital accounts.

Common questions

Q: Can a partnership special-allocate the Brownfield tangible-property credit disproportionately?
A: Yes, in the same proportion as the related depreciation deductions, if that depreciation allocation has substantial economic effect.

Q: What's the controlling principle?
A: The credit follows the expenditure: because the credit is computed solely on the property's federal basis (the same basis behind depreciation), a valid depreciation allocation supports the matching credit allocation under IRC 704(b).

Citations and references

• Tax Law § 21 (Brownfield Redevelopment Tax Credit); Tax Law § 21(a)(3) (tangible property component computed on federal cost basis)
• IRC § 704(b) (partner's distributive share; substantial economic effect)
• 20 NYCRR 3-13.3 (aggregate method; distributive share follows federal character)
• Treas. Reg. 1.704-1(b)(5) example 11; IRS CCA 200812023

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/multitax/a09_7c_4i.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-09(7)C
Corporation Tax
TSB-A-09(4)I
Income Tax
May 13, 2009

Office of Counsel
Advisory Opinion Unit

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. Z081208A

The petitioner, name redacted (“Petitioner”), asks whether its tangible property component of the
Brownfield Redevelopment Tax Credit may be specially allocated among Petitioner’s members in the same
proportion as the depreciation deductions relating to the qualified tangible property that gives rise to the tax
credit are allocated in the tax year the qualified tangible property is placed in service.
We conclude that the special allocation of the tangible property component of the Brownfield
Redevelopment Tax Credit that is based on Petitioner’s special allocation of the depreciation deductions
between its members is valid, provided that the special allocation of the depreciation deductions has
substantial economic effect.
Facts
Petitioner is a New York limited liability company classified as a partnership for Federal and
New York tax purposes. Substantially all of the interests in Petitioner are owned by other limited liability
companies. All of the members of those other limited liability companies are individuals or trusts subject to
New York personal income tax, or are corporations subject to New York corporation franchise tax.
Petitioner is currently a party to a Brownfield Site Cleanup Agreement with the New York State
Department of Environmental Conservation (“DEC”) to remediate and redevelop a qualified site. The DEC
issued a notice to Petitioner that its request for participation in the Brownfield Cleanup Program had been
accepted. The DEC issued a Certificate of Completion (“COC”) to Petitioner prior to June 23, 2008, so that
the amendments made by Chapter 390 of the Laws of 2008 to Tax Law section 21 do not apply. Petitioner
has not yet placed into service qualified tangible property that will give rise to a portion of the tax credits, but
expects to do so during tax years 2009 and 2010, or a date no later than ten years from the date of the
issuance of the COC.
Petitioner anticipates that a new member (“Investor”), which is likely to be a business entity
classified as a corporation for Federal and New York corporation tax purposes, will make a cash contribution
to the capital of Petitioner before the qualified tangible property is placed in service. In exchange for the
capital contribution, Investor will receive through 2014, a 5% interest in the profits and losses of Petitioner.
Thereafter, Investor will have a .01% interest in the profits and losses of Petitioner. For 2009 and 2010,
Petitioner plans on allocating 99.99% of the depreciation deductions with respect to qualified tangible
property and the tangible property component of the Brownfield Redevelopment Credit to Investor. The
remaining .01% will be allocated to the existing members of Petitioner. It is Petitioner’s position that the
special allocation of the depreciation deductions for tax years 2009 and 2010 will have substantial economic
effect for Federal tax purposes.

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TSB-A-09(7)C
Corporation Tax
TSB-A-09(4)I
Income Tax
May 13, 2009

Analysis
Although some credits (e.g. QEZE real property and tax reduction credits and the film production
credit) reference a partner’s “pro rata share,” this is not a defined term in the statute. Other than these
instances, the Tax Law does not contain any specific explanation on how to allocate New York State credits.
The regulations under Article 9-A state that the general rule for the computation of tax under the
aggregate method for corporate partners is that a taxpayer’s distributive share (as that term is defined in
section 704 of the Internal Revenue Code) of each partnership item of receipts, income, gain, loss and
deduction and the taxpayer’s proportionate part of each partnership asset and liability and each partnership
activity shall have the same source and character in the hands of the partner for Article 9-A purposes as that
item has in its hands for federal income tax purposes. (See, 20 NYCRR §3-13.3(a)(1).)
Section 704 of the IRC defines a partner’s distributive share, in relevant part, as follows:
(a) Effect of Partnership Agreement. – A partner’s distributive share of income, gain, loss,
deduction, or credit shall, except as otherwise provided in this chapter, be determined by the
partnership agreement.
(b) Determination of Distributive Share – A partner’s distributive share of income, gain,
loss, deduction, or credit (or item thereof) shall be determined in accordance with the partner’s
interest in the partnership (determined by taking into account all facts and circumstances), if –
(1) the partnership agreement does not provide as to the partner’s distributive share
of income, gain, loss, deduction, or credit (or item thereof), or
(2) the allocation to a partner under the agreement of income, gain,
loss, deduction, or credit (or item thereof) does not have substantial
economic effect (emphasis added).
The Article 9-A regulations also provide that an allocation of an item, amount, or activity, even if
recognized for Federal income tax purposes, will not be recognized when its principal purpose is the
avoidance or evasion of any tax imposed on the taxpayer. Where an allocation is not recognized, the
taxpayer’s distributive share will be determined in accordance with the partner’s interest in the partnership
(determined by taking into account all facts and circumstances). The regulation then describes the
circumstances to be considered in determining whether a principal purpose of an allocation of an item,
amount or activity is the avoidance or evasion of any tax imposed on the taxpayer. Among the relevant
circumstances are whether the allocation has substantial economic effect, and whether the related items of
partnership income, gain, loss and deduction from the same source are subject to the same allocation. (See,
20 NYCRR § 3-13.3(a)(3)).
For federal income tax purposes, a special allocation of a tax credit may be allowed if the sole
component in the calculation of the tax credit is a partnership expenditure and that partnership expenditure
has a valid special allocation of loss or deduction (or other downward capital account adjustments) in the
partnership’s tax year, so that the partners’ interests in the partnership with respect to the credit are in the
same proportion as the partners’ distributive shares of loss or deduction which relate to such expenditure.
(See, Treas. Reg. § 1.704-1(b)(5), example (11)).

-3-

TSB-A-09(7)C
Corporation Tax
TSB-A-09(4)I
Income Tax
May 13, 2009

While the Article 9-A regulations do not specifically cover the proper allocation of a New York State
tax credit, it is reasonable to conform this allocation to the principles in those regulations and the federal
regulatory principle on the allocation of federal tax credits. This leads to the conclusion, for purposes of this
inquiry, that if a partnership expenditure is the sole component in the calculation of the New York tax credit
and the New York tax credit is allocated in the same way as that expenditure is allocated among the partners,
the allocation of the New York tax credit is valid if it does not have as a principal purpose the avoidance or
evasion of any tax imposed on the taxpayer, and the allocation of the expenditure has substantial economic
effect.
According to the facts provided by Petitioner and the LLC agreement, Investor has a 5% interest in
the profits and losses of Petitioner through 2014 and thereafter Investor will have a 1% interest in the profits
and losses. However, Investor will be allocated 99.99% of the tangible property component of the
Brownfield Redevelopment Tax Credit and the depreciation deductions with respect to such property for tax
years 2009 and 2010. The tangible property credit component is equal to the applicable percentage of the
cost or other basis for federal income tax purposes of tangible personal property and other personal property,
including buildings and structural components of buildings, which constitute qualified tangible property.
(See, Tax Law §21(a)(3)). Thus, because the calculation of Petitioner’s tangible property credit component
is based solely on the cost or other basis in the property for federal income tax purposes and the depreciation
deduction for such property also relies on the property’s federal basis, the credit allocation is following the
expenditure allocation. In the Internal Revenue Service Chief Counsel Advice (CCA 200812023), the
Internal Revenue Service concluded that the section 42 low income housing tax credit could be allocated in
the same proportion as the special allocation of the partnership’s depreciation deduction. The position in
this Chief Counsel Advice is consistent with 26 C.F.R. § 1.704-1(b)(5) example 11(i) and (ii).
Accordingly, if Petitioner’s special allocation of 99.99% of the depreciation deductions to Investor
has substantial economic effect and is valid for federal and state tax purposes, then the same allocation of the
tangible property component of the Brownfield Redevelopment Tax Credit to Investor is a valid allocation.

DATED: May 13, 2009

NOTE:

/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.