If a QEZE partnership restructures by inserting two single-member LLCs between itself and its existing owners, without changing who ultimately controls it, will it lose its empire zone tax benefits - and would a later change in the Department's position apply retroactively?

Plain-English summary

The Petitioner is a limited liability company treated as a partnership for federal income tax purposes. It was certified as a qualified empire zone enterprise (QEZE) under Article 18-B of the General Municipal Law on February 13, 2008, and later received an EZ Recertification Certificate. Petitioner is 99% owned by LLC A and 1% owned by LLC B. When the partnership planned to take on new debt, its owners wanted to restructure: LLC A would form a new single-member LLC (SMLLC 1), contribute its 99% interest in Petitioner to SMLLC 1 in exchange for 100% ownership of SMLLC 1, and LLC B would do the same with a new SMLLC 2 for its 1% interest. Both SMLLCs would be treated as disregarded entities, and the new debt would become the liability of SMLLC 1 and SMLLC 2, allocated 99%/1%.

After the restructuring, Petitioner would remain the same partnership-taxed LLC. LLC A would still indirectly own and control 99% of Petitioner (through its 100% ownership of SMLLC 1), and LLC B would still indirectly own and control 1% (through its 100% ownership of SMLLC 2). Nothing about who ultimately stood to benefit from Petitioner's operations, or from its EZ tax benefits, would change - only an intermediate layer of disregarded holding entities would be added.

Petitioner asked two questions: (1) would its QEZE certification and eligibility for empire zone (EZ) tax benefits survive this restructuring, and (2) if the Department later changed its position on that question, would the change apply only to future restructurings, or could it reach back and affect Petitioner's existing EZ benefit period.

The Department concluded both in Petitioner's favor. On the certification question, it noted that the Department of Economic Development (DED) had already issued an August 24, 2011 declaratory ruling finding the same restructuring would not cause decertification, and because the restructuring did not change who would ultimately obtain the EZ tax benefits, Petitioner would not lose them. On the second question, the Department explained that Advisory Opinions bind the Commissioner only as to the petitioner and the facts described, and that any future modification or revocation operates prospectively only - it would not reach back to affect Petitioner's existing structure or benefit period.

What this means for you

QEZE and Empire Zone businesses considering restructuring

If your business is certified as a QEZE and you're considering a change in ownership structure - such as inserting single-member LLCs or other disregarded entities between the certified entity and its existing owners - the key question is whether the change alters who ultimately owns, controls, or benefits from the entity. Here, adding two disregarded-entity SMLLCs as pass-through holding vehicles did not change the underlying 99%/1% ownership split or who would receive the EZ tax benefits, so the Department found no loss of certification. A restructuring that did change the ultimate ownership or control could come out differently.

Businesses relying on an Advisory Opinion

An Advisory Opinion binds the Department only as to the petitioner who requested it and the facts described in it. This opinion confirms that if the Commissioner later modifies or revokes an Advisory Opinion's conclusion, that change operates prospectively only - existing arrangements that already relied on the opinion, and benefit years that occurred before the change, are not disturbed by a later reversal.

Common questions

Q: Does adding a disregarded entity as an intermediate owner automatically preserve QEZE status?
A: Not automatically - it depends on the facts. Here, the Department found no loss of benefits because the restructuring didn't change who ultimately owned or controlled the QEZE, or who would receive the EZ tax benefits; the SMLLCs were disregarded entities inserted purely as intermediate holding vehicles for the existing 99%/1% owners.

Q: What role did the Department of Economic Development's ruling play?
A: DED, which administers empire zone certification, had already issued an August 24, 2011 declaratory ruling concluding the proposed restructuring would not result in Petitioner's decertification. The Department of Taxation and Finance's Advisory Opinion relied on that conclusion in confirming the tax-benefit consequences.

Q: If the Department changes its mind about this issue later, does that undo Petitioner's benefits for past years?
A: No. The opinion confirms that modifications or revocations of Advisory Opinions operate prospectively only, per 20 NYCRR § 2376.5(a) - they affect only future changes in structure occurring after the date of the modification, not the petitioner's existing arrangement or already-completed benefit years.

Q: Can another taxpayer with a similar restructuring rely on this opinion?
A: No. An Advisory Opinion binds the Department only with respect to the petitioner who requested it, and only if that petitioner fully and accurately described all relevant facts. A business considering a similar restructuring should seek its own guidance rather than relying on this opinion.

Citations and references

• General Municipal Law Article 18-B - governs QEZE certification and the Empire Zone program under which Petitioner was certified on February 13, 2008
• 20 NYCRR § 2376.5(a) - provides that modifications or revocations of Advisory Opinions operate prospectively only
• DED declaratory ruling (August 24, 2011) - the Department of Economic Development's determination that the proposed restructuring would not result in Petitioner's decertification as a QEZE

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2012.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a12_1i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-12(1)I
Income Tax
January 31, 2012

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

PETITION NO. l110614A

The Department of Taxation and Finance (the Department) received a Petition for Advisory
Opinion from Petitioner’s name redacted. Petitioner asks (1) whether the Petitioner’s empire zone (EZ)
certification as a qualified empire zone enterprise (QEZE), and its accompanying eligibility for EZ tax
benefits will survive and remain in full force and effect after the proposed change in its corporate
structure, and (2) whether a future modification by the Commissioner of this Advisory Opinion on the
issue presented in (1) above will operate prospectively to impact only subsequent changes in structure
which occur after the date of such future modification.
We conclude that a proposed change in the corporate structure by adding two new single member
limited liability companies (SMLLCs), treated as disregarded entities, that will become the new legal
owners of Petitioner will not result in a loss of EZ tax benefits to Petitioner. We also conclude that any
future modifications of this Advisory Opinion by the Commissioner on the issue presented in (1) will
operate prospectively.
Facts
Petitioner, a limited liability company (LLC), is a QEZE which was certified under Article 18-B
of the General Municipal Law (GML) on February 13, 2008 and subsequently issued an EZ
Recertification Certificate. Petitioner, which is treated as a partnership for federal income tax purposes, is
99% owned by LLC A and 1% owned by LLC B. Petitioner’s owners would like to modify the
partnership structure when the partnership takes on new debt. The proposed structure would add two new
SMLLCs, treated as disregarded entities, as follows: LLC A would form SMLLC 1, whereby LLC A
would contribute its 99% ownership interest in Petitioner to SMLLC 1 in exchange for 100% of its
ownership. LLC B would form SMLLC 2 whereby LLC B would contribute its 1% ownership interest in
Petitioner to SMLLC 2 in exchange for 100% of its ownership. The additional debt contemplated by
Petitioner would then become the liability of SMLLC 1 and SMLLC 2 pro rata, 99% and 1%,
respectively.
After the proposed structure is implemented, Petitioner will remain the same LLC which is
treated as a partnership for tax purposes. In addition, LLC A will still indirectly own and control 99% of
Petitioner through its 100% ownership interest in SMLLC 1. LLC B will still indirectly own and control
1% of Petitioner through its 100% ownership interest in SMLLC 2.
Analysis
Issue 1: You have asked if Petitioner will lose its certification as a QEZE and the attendant tax
benefits, if the SMLLCs are introduced into the ownership structure of the partnership as described above.
It has come to our attention that the Department of Economic Development (DED) issued a declaratory
ruling on August 24, 2011 that stated that the proposed restructuring would not result in the
decertification of Petitioner. Because the restructuring in this instance does not change who ultimately

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TSB-A-12(1)I
Income Tax
January 31, 2012

will be able to obtain the EZ tax benefits, we conclude that the Petitioner will not lose its attendant tax
benefits.
Issue 2: Petitioner asked whether a future modification of this Advisory Opinion by the
Department on issue 1 will operate prospectively to impact only subsequent changes in structure which
occur after the date of such future modification, and will not impact tax years within the Petitioner’s EZ
benefit period occurring after the date of such modification, as a result of the structural changes described
issue 1. Generally, issued Advisory Opinions are binding on the Commissioner with respect to the
petitioner and the facts described in the Opinion. Advisory Opinions may be affected by subsequent
changes in law, regulations, or court or Tribunal decisions, or they may be modified or revoked by the
Commissioner. Modifications and revocations operate prospectively only. See 20 NYCRR §2376.5(a).

DATED: January 31, 2012

NOTE:

/S/
DEBORAH R. LIEBMAN
Deputy 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. The information provided in this document does not cover every situation and is
not intended to replace the law or change its meaning.