New York Advisory Opinion TSB-A-12(6)C: Does converting a certified corporation into a disregarded single-member LLC keep its Empire Zone certification, and do its EZ ITC and EIC carryover credits flow up to the parent without a carryforward limit?
Plain-English summary
The petitioner was a Delaware corporation certified as an Empire Zone (EZ) business since 1999/2000, an indirect subsidiary of a New York Article 9-A parent. On July 1, 2011 it converted from a corporation into a single-member LLC treated as a disregarded entity (along with intervening subsidiaries), with no change in ultimate ownership. The conversion was structured as a transfer of assets under IRC sections 332, 334(b)(1), and 337, with the acquirer succeeding to tax attributes under IRC section 381(c). It asked two things: would it keep its EZ certification and benefits, and could its single member claim the company's pre-conversion EZ investment tax credit (EZ ITC) and EZ employment incentive credit (EZ EIC) carryovers, with no limit on the carryforward period?
The Department said yes to both. If the company stays certified after the conversion and presents its certificate of eligibility and EZ Retention Certificate (EZRC), the Tax Department accepts that as evidence of eligibility; a business certified in 2000 has a 15-year benefit period beginning January 1, 2001 (Tax Law § 14(a)(1)(A)). On the credits, an EZ ITC carryover may be carried forward with no limit where an EZRC has been issued (Tax Law § 210.12-B(d), (d-1)). In a reorganization, no disposition (and no add-back) occurs when qualified property is transferred in a transaction to which IRC section 381(a) applies -- such as a section 332 liquidation -- if the property stays in qualified use with a certified corporation (20 NYCRR § 5-10.8(g)). Because an SMLLC and its single member are one taxpayer for New York franchise tax, the certification and the carryover credits flow up to the parent, which may use them without a carryforward limit, as long as an EZRC exists.
What this means for you
EZ businesses converting entity form
Dropping from a corporation to a disregarded SMLLC -- a common internal simplification -- doesn't reset or destroy Empire Zone benefits, and the valuable ITC/EIC carryovers aren't lost; they move up to the single member. The EZ Retention Certificate is the key that unlocks the unlimited carryforward.
Accountants and tax professionals
The non-disposition rule (20 NYCRR § 5-10.8(g)) is what prevents an ITC recapture/add-back on the conversion: the qualified property moves in an IRC 381(a) transaction and stays in qualified use with a certified entity. Track the original benefit-period clock (here, 15 years from January 1, 2001) -- the conversion does not start a new one.
Common questions
Q: Does converting to a disregarded SMLLC end Empire Zone certification?
A: No, if the company stays certified and presents its certificate of eligibility and EZ Retention Certificate; the single member is treated as the same taxpayer.
Q: Are the EZ ITC and EIC carryovers lost in the conversion?
A: No. They flow up to the parent and can be carried forward with no time limit, provided an EZ Retention Certificate has been issued.
Q: Is there an investment-tax-credit recapture on the conversion?
A: No. Transferring qualified property in an IRC 381(a) transaction that keeps it in qualified use with a certified corporation is not a disposition (20 NYCRR § 5-10.8(g)).
Citations and references
- Tax Law § 14(a)(1)(A) (Empire Zone benefit period)
- Tax Law § 210.12-B(d) (EZ investment tax credit carryover); Tax Law § 210.12-B(d-1) (no carryforward limit with an EZRC)
- 20 NYCRR § 5-10.8(g) (no disposition on an IRC 381(a) transfer of qualified property); Internal Revenue Code § 381(a) (carryover of tax attributes)
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2012.htm
- Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a12_6c.pdf
Original ruling text
New York State Department of Taxation and Finance
TSB-A-12(6)C
Corporation Tax
October 15, 2012
Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. C120213A
The Department of Taxation and Finance (DTF) received a Petition for Advisory
Opinion from name and address redacted. The Petitioner asks whether it will maintain its
certification under Article 18-B of the General Municipal Law (GML) until April 1, 2014 and
retain its eligibility for Empire Zone (EZ) tax benefits, if it is converted from a corporation to
a single member limited liability company (SMLLC), treated as a disregarded entity. The
Petitioner also asks whether the EZ investment tax credit (EZ ITC) and EZ employment
incentive credit (EZ EIC) earned by Petitioner prior to its conversion will able to be claimed
by its single member after the conversion and have no limit as to the carry-forward period.
We conclude that Petitioner will retain its eligibility for EZ tax benefits after its
conversion for the duration of its benefit period, established by its certification date prior to its
conversion, provided that Petitioner meets the requirements in the Tax Law and obtains a
certificate of eligibility and an EZ Retention Certificate (EZRC) from the Department of
Economic Development (DED). We also conclude that Petitioner’s single member may claim
the carry-over EZ ITC and EZ EIC credits earned by Petitioner prior to its conversion without
limit on the carry-forward period, provided that the Petitioner has an EZRC.
Facts
Petitioner was formed as a Delaware corporation in 1993 and became certified in 2000
under Article 18-B of the GML, effective December 28, 19991 and received an EZRC for the
2008 tax year. Prior to July 1, 2011, Petitioner was an indirect subsidiary of Parent, a New
York Article 9-A taxpayer. On July 1, 2011, Petitioner was converted from a corporation into
a SMLLC, treated as a disregarded entity, as were two other subsidiaries intervening between
Petitioner and its Parent. There was no change in the ultimate ownership of Petitioner after
the conversion, because Parent continued to be the ultimate parent company for federal tax
consolidation purposes. Petitioner’s conversion was treated as a transfer of assets by
Petitioner under IRC Sections 332, 334(b)(1) and 337 with the acquiring SMLLC succeeding
to the tax attributes under the non-recognition provisions of IRC Section 381(c). The tax
consequences of income, losses, capital gains and capital losses of Petitioner and the two
other indirect disregarded entities after the reorganization will continue to be reported on
Parent’s federal consolidated return. Additionally, although Petitioner became treated as a
1
In 2006, there was a subsequent Certificate of Eligibility, issued to Petitioner for the same address and also
effective on 12/28/99, which appears to make minor editorial corrections.
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Corporation Tax
October 15, 2012
disregarded entity, it retained its federal employer identification number under which it
continues to file employment tax returns to the Internal Revenue Service and to states where it
maintains employment.
Analysis
Petitioner first asks whether it will maintain its certification under Article 18-B of the
GML until April 1, 2014 and retain its eligibility for Empire Zone tax benefits. The
Commissioner of DED has the authority to certify a business enterprise.2 If Petitioner
continues to be certified after its conversion and presents a certificate of eligibility and an
EZRC to the Department of Taxation and Finance (DTF) along with its tax returns, DTF will
accept Petitioner’s certificate of eligibility as evidence that Petitioner is certified as an EZ
business. A business enterprise certified in 2000 would have a benefit period of the first 15
taxable years, beginning on January 1, 2001,3 and it would be eligible to claim EZ tax benefits
in each of those years, provided that the business enterprise meets the requirements provided
in the Tax Law.
Petitioner further asks whether the EZ ITC and EZ EIC carry-over credits generated
by Petitioner prior to the conversion will carry-over to Parent after the conversion and have no
limit as to the carry-forward period. The amount of any credit allowed to a taxpayer under the
EZ ITC that is not deductible in a taxable year may be carried over and deducted from the
taxpayer’s tax for subsequent taxable years.4 No limitation is provided by the law, provided
that an EZRC has been issued to the taxpayer.5 In a corporate reorganization, the carry-over
EZ ITC credits potentially may be claimed by an acquiring company or a successor to the
taxpayer earning the credits. For purposes of the EZ ITC, a disposition of property on which
an EZ ITC credit has been claimed generally does not occur, and no add back is required
where property is transferred from a corporation as part of a transaction to which IRC Section
381(a) applies, e.g., a complete liquidation of a subsidiary under IRC Section 332 or a
reorganization under certain sections of IRC Section 361, provided that the property continues
in qualified use and is acquired by a certified corporation.6 A carry-over EZ ITC attributable
to such property may be claimed by the acquiring or surviving corporation.7 The conversion
of Petitioner fits this pattern. Petitioner’s conversion from a corporate subsidiary to a
disregarded SMLLC was accomplished using IRC Sections 332, 334(b)(1), and 337.
Petitioner’s direct owner following the conversion succeeded to the tax attributes of Petitioner
at the time of the conversion under IRC Section 381(a) and (c).8 After the conversion,
Petitioner’s certification will be deemed to apply to its direct owner and flow up to Parent,
2
Section 959 of the GML.
Section 14(a)(1)(A) of the Tax Law.
4
Tax Law Section210.12-B(d).
5
Tax Law Section210-12-B(d-1).
6
20 NYCRR Section5-10.8(g).
7
Id.
8
IRC Section381(c), referenced in the facts supplied by Petitioner, enumerates tax items that are subject to nonrecognition by IRC Section381(a).
3
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because an SMLLC and its single member are deemed a single taxpayer for purposes of
federal and New York State income and franchise taxes. Thus, the carry-over credits that
Petitioner earned prior to its conversion may be carried over and claimed by its Parent after
the conversion takes place without a limit on the carry-forward period, provided that the
Petitioner has an EZRC.
DATED: October 15, 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.