New York Advisory Opinion TSB-A-10(12)C: Are a parent's disregarded subsidiaries treated as one taxpayer for the QEZE real property tax credit, and does the group pass the employment test as a new business?
Plain-English summary
The petitioner is a New York subsidiary of a publicly owned New York parent, with a disregarded Subsidiary and a NewCo building project. It asked three things about the QEZE real property tax credit (RPTC): whether the three entities are one taxpayer; whether the group meets the employment test; and how to compute the credit for NewCo's building.
The Department answered: (I) The petitioner, Subsidiary, and NewCo are the same taxpayer -- a single member of a combined Article 9-A report -- because a single-member LLC/disregarded entity and its member are one taxpayer; the petitioner's EZ certification is imputed to the group, with the effective date being the earliest certification date in the group. (II) The employment test is computed using all three entities' employment numbers. Because the group was first certified in 2010 with zero employees in the four-year base period, it fails the ordinary employment test unless it qualifies as a new business under Tax Law § 14(j). It is substantially similar in ownership (all owned by Parent, which owns other New York taxpayers) but, on the facts, not substantially similar in operation -- so it passes the new business test. (III) The RPTC for NewCo's building is computed under Tax Law § 15(f-1), and that amount must be measured against the § 15(b)(2) limitation and the eligible real property taxes paid to fix the allowable credit.
What this means for you
Groups using disregarded entities in a zone
Disregarded subsidiaries collapse into one taxpayer for the QEZE credit, and one entity's certification can cover the group. But a brand-new group with no base-period employees only clears the employment hurdle by qualifying as a new business -- which turns on not being substantially similar in operation (and ownership) to an existing taxpayer.
Accountants and tax professionals
Aggregate employment across the disregarded group and test § 14(j) carefully: common parent ownership can make the group similar in ownership, so the operation prong usually decides. For the building credit, run both the § 15(f-1) computation and the § 15(b)(2) limitation against eligible real property taxes.
Common questions
Q: Are a parent's disregarded subsidiaries one taxpayer for the QEZE real property tax credit?
A: Yes -- they are a single Article 9-A taxpayer, and the certification is imputed to the group using the earliest certification date.
Q: Does the group meet the employment test?
A: Not the ordinary test (zero base-period employees), but it qualifies as a new business under Tax Law § 14(j) on these facts, so it passes.
Q: How is the building credit computed?
A: Under Tax Law § 15(f-1), measured against the § 15(b)(2) limitation and the eligible real property taxes paid.
Citations and references
- Tax Law § 14(a) (QEZE certification; employment test); Tax Law § 14(j) (new business test)
- Tax Law § 15(f-1) (QEZE real property tax credit computation); Tax Law § 15(b)(2) (credit limitation measure)
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2010.htm
- Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a10_12c.pdf
Original ruling text
New York State Department of Taxation and Finance
TSB-A-10(12)C
Corporation Tax
October 20, 2010
Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. C100527B
Name redacted (“Petitioner”), a single member limited liability company (SMLLC) treated as a
disregarded entity (DE), asks several questions pertaining to its potential eligibility to claim the qualified
empire zone enterprise (QEZE) real property tax credit (RPTC). Petitioner will file a return with its
single member (“Subsidiary”) and Petitioner’s to-be-formed SMLLC DE (“NewCo”).
Facts
Petitioner is a single-member limited liability company (SMLLC) owned by a wholly-owned
subsidiary (Subsidiary) of a large publicly-traded Delaware company (Parent) doing business in multiple
states, including New York. For tax purposes, Petitioner is treated as a disregarded entity (DE).
Petitioner and Subsidiary are both holding companies. Subsidiary files on a calendar year basis in New
York under Article 9-A as part of a combined report that includes Parent. Petitioner is a Delaware
company formed on January 27, 2010 and certified as an empire zone (EZ) business pursuant to Article
18-B of the General Municipal Law, effective March 30, 2010. In the fall of 2010 or the spring of 2011
after the Empire Zones Program expires, Petitioner will form an SMLLC DE (NewCo) to purchase and
own real property, oversee construction of improvements on the property, and, when the improvements
are completed, lease space on the property to other entities owned by Parent. NewCo is expected to have
at least one full-time employee in taxable year 2011 and for the subsequent nine taxable years. Neither
Petitioner nor Parent has ever had any employees or owned or leased any real property in New York.
Analysis
I. Petitioner asks whether Subsidiary, Petitioner, and NewCo will be considered one taxpayer for
purposes of Article 9-A of the Tax Law and the QEZE RPTC. We conclude that Subsidiary, Petitioner,
and NewCo (“the Aggregated Group”) will be considered one taxpayer that is a member of a combined
report for purposes of calculating the Article 9-A franchise tax liability including the QEZE RPTC.
In order to claim the QEZE RPTC, a taxpayer must be certified as an EZ business pursuant to
Article 18-B of the General Municipal Law and meet an employment test.1 Petitioner was certified in
March, 2010. An SMLLC/DE and its single member will be regarded as one taxpayer for purposes of the
Article 9-A franchise tax. Therefore, Petitioner, Subsidiary, and NewCo will be considered one taxpayer
for purposes of the QEZE RPTC, and Petitioner’s certification will be imputed to that taxpayer. The
employment test will be calculated using the employment numbers of all three entities, none of which to
date has ever hired an employee. The effective date of the certification is the earliest effective
certification date in that group.
II. Petitioner next asks whether the Aggregated Group (collectively, the “Taxpayer”) will meet
the employment test under Section 14(b) of the Tax Law, including whether the Taxpayer constitutes a
new business under Section 14(j) of the Tax Law. We conclude that Taxpayer will fail the employment
1
See Tax Law §14(a).
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Corporation Tax
October 20, 2010
test unless it qualifies as a new business, and, that based on the information provided with the petition,
Petitioner will pass the new business test.
In the case of a business enterprise that is first certified on or after April 1, 2005, the employment
test will be met with respect to a taxable year if the business enterprise’s employment number in the state
and the EZs for that taxable year exceeds its employment number in the state and the EZs, respectively,
for the base period.2 As stated above, the employment test will be calculated using the employment
numbers from Petitioner, Subsidiary, and NewCo. If an entity has a base period of zero years or zero
employment in its base period, and the entity has an employment number in such zone of greater than
zero with respect to a taxable year, then the employment test will be met only if the enterprise qualifies as
a new business under Section 14(j) of the Tax Law.3 For business enterprises first certified after April 1,
2005, the base period means the four taxable years immediately proceeding the taxable year in which the
business enterprise was first certified.4 The Taxpayer was first certified effective March 30, 2010 and had
no employees in any of the preceding four taxable years. Thus, the Taxpayer will have a zero base period
and zero employees in the base period, and it will be subject to the new business test in §14(j) of the Tax
Law in any taxable year that the Taxpayer has an employee in the zone.
A new business includes any business enterprise unless the business enterprise is substantially
similar in operation and in ownership to a business entity taxable or previously taxable under certain
sections of the Tax Law.5 The Taxpayer will be substantially similar in ownership to another business
entity taxable or previously taxable under certain sections of the Tax Law, because the Taxpayer at all
times will be wholly-owned by Parent, and the Parent owns directly or indirectly other New York
taxpayers. As to whether the Taxpayer will be substantially similar in operation to a business entity
taxable or previously taxable under certain sections of the Tax Law, based on the facts provided in
conjunction with the petition, it appears that the Taxpayer will not be substantially similar in operation to
another business entity taxable or previously taxable under certain sections of the Tax Law.
III. Petitioner asks whether the Taxpayer must calculate its QEZE RPTC credit in accordance
with Section 15(f-1) of the Tax Law with respect to NewCo’s building project. We conclude that the
amount calculated pursuant to Section 15(f-1) must be measured against the amount calculated pursuant
to Section 15(b)(2) of the Tax Law and the eligible real property taxes paid in order to determine the
amount of allowable credit.
For a business enterprise first certified on or after April 1, 2005, the amount of the QEZE RPTC
is the greater of the amount determined pursuant to Section 15(b)(2)6 of the Tax Law, relating to wages
and benefits paid to net new employees, or the capital investment amount determined under Section 15(f1), not to exceed the amount of the Taxpayer’s eligible real property taxes for the taxable year. As noted
above, the QEZE RPTC employment test will be calculated by aggregating the number of employees for
Petitioner, Subsidiary, and NewCo, as will the employment numbers for the calculation of the net new
employees. For calculation of the capital investment amount, each entity in the aggregated group will
first calculate its own capital investment limitation under Section 15(f-1) of the Tax Law, and then those
separate amounts will be aggregated to arrive at the capital investment limitation. This limitation will
2
Tax Law §14(b)(4).
Id.
4
Tax Law §14(c)(2).
5
Tax Law §14(j)(2).
6
The product of a percentage of total wages, health benefits, and retirement benefits paid to or on behalf of net new
employees during the taxable year, not to exceed $10,000 per employee.
3
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Corporation Tax
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then be measured against the employees’ wages and benefits factor computed under Section 15(b)(2) and
the eligible real property taxes paid to determine the credit allowable amount.
DATED: October 20, 2010
NOTE:
/S/
DANIEL SMIRLOCK
Deputy Commissioner and 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.