New York Advisory Opinion TSB-A-13(2)C: Does an S corporation keep its Empire Zone certification and tax benefits after transferring non-voting shares to grantor trusts treated as disregarded entities?

Plain-English summary

The petitioner is a New York S corporation, owned 50/50 by two resident shareholders, that was certified as an Empire Zone (EZ) business in 2007 and holds an EZ Retention Certificate. For estate planning, the owners want to transfer a large share of the company's non-voting stock to two grantor trusts set up for their children, while keeping 100% of the voting shares and control. Under IRC sections 671-678 the trusts are disregarded entities, so all of their income, deductions, and credits flow onto the owners' personal returns. The company asked whether this restructuring would cost it its EZ certification and benefits.

The Department said no, with the usual conditions. Whether the certification continues is up to the Department of Economic Development (DED), so the company should confirm with DED. Assuming DED keeps it certified, simply adding the disregarded-entity trusts does not cause the company to fail the EZ requirements, and the Department will accept the DED certification as evidence of eligibility. The company must still meet the Tax Law's requirements -- chiefly the annual employment test (Tax Law §§ 14(a)(1)(C), 14(b)(4)). Because federal and New York rules treat a corporation and its disregarded entities as one entity, the trusts are folded in when computing the employment number and the employment increase factor (Tax Law §§ 14(g), 15(d)).

What this means for you

EZ businesses doing estate or ownership planning

A transfer of ownership interests -- especially non-voting interests to disregarded grantor trusts, with control unchanged -- generally won't end Empire Zone benefits. But two gatekeepers remain: DED must keep you certified, and you must keep passing the annual employment test. Confirm the certification with DED before relying on the benefits.

Accountants and tax professionals

Note the two-agency split: DED owns certification; the Department of Taxation and Finance owns Tax Law compliance. Disregarded entities collapse into the corporation for the employment number and increase factor, so the planning shouldn't distort the employment test math.

Common questions

Q: Does moving shares into grantor trusts end Empire Zone benefits?
A: Not by itself, if the trusts are disregarded entities and the Department of Economic Development keeps the company certified; the company must still meet the annual employment test.

Q: Who decides whether the certification survives?
A: The Department of Economic Development. The Tax Department accepts DED's certification as evidence and then checks Tax Law compliance.

Q: How are the disregarded trusts treated for the employment test?
A: The corporation and its disregarded entities are treated as one entity (Tax Law §§ 14(g), 15(d)), so the trusts are included in the employment number and increase factor.

Citations and references

• Tax Law § 14(a)(1)(C) (QEZE eligibility; employment test); Tax Law § 14(b)(4) (employment test computation)
• Tax Law § 14(g) (employment number; disregarded entities treated as one); Tax Law § 15(d) (employment increase factor)
• General Municipal Law § 959(a) (DED authority to certify under Article 18-B)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2013.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a13_2c.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Counsel
Advisory Opinion Unit

TSB-A-13(2)C
Corporation Tax
January 8, 2013

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C120403B

The Department of Taxation and Finance received a Petition for Advisory Opinion from
name and address redacted. Petitioner asks whether its Empire Zone (EZ) certification under
Article 18-B of the General Municipal Law (GML) and its accompanying eligibility for EZ tax
benefits, will survive and remain in full force and effect after its proposed change in its corporate
structure.
We conclude that Petitioner will be eligible to claim the EZ tax benefits after the
proposed change in its corporate structure for the remainder of its benefit period, provided that
the Department of Economic Development (DED) continues its certification of Petitioner under
Article 18-B of the GML and Petitioner meets the requirements in the Tax Law.
Facts
Petitioner is a New York State (NYS) corporation taxable as a Subchapter S corporation
under Section 1361 of the Internal Revenue Code (IRC). Petitioner is owned by two individual
NYS resident shareholders (“owners”), each owning 50%. Petitioner was certified under Article
18-B of the GML on November 1, 2007 and subsequently issued an EZ Retention Certificate
(EZRC). For estate planning purposes, Petitioner’s owners propose to transfer a substantial
percentage of the non-voting shares in Petitioner to two Grantor Trusts (“the trusts”), established
for the benefit of their children. These transfers will be reported as gifts by the owners on
Federal Form 709. One hundred percent of the voting shares and control of Petitioner will
remain with the owners. For income tax purposes under IRC sections 671-678, the trusts will be
disregarded entities. As such, all taxable income, deductions, and credits from the trusts will be
reported on the individual tax returns of the owners as if they had received the items of income,
deductions, and credits directly. The trusts will not obtain separate Federal Employer
Identification Numbers and will not file separate trust tax returns.
Analysis
Petitioner asked whether Petitioner’s Empire Zone (EZ) certification under Article 18-B
of the General Municipal Law (GML) and its accompanying eligibility for EZ tax benefits will
survive and remain in full force and effect after its proposed change in its corporate structure.
DED will determine whether Petitioner’s certification will continue after the trusts are created,
and Petitioner should contact DED to confirm that its certification will be retained after a change
in its corporate structure. Provided that DED determines that Petitioner’s certification will
remain in effect, the addition of the trusts treated as disregarded entities by itself will not cause

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TSB-A-13(2)C
Corporation Tax
January 8, 2013

Petitioner to fail to meet the requirements for the tax credits. The Department of Taxation and
Finance (DTF) will accept the certification as evidence that Petitioner is eligible to claim the
credits. In order to claim the credits, however, Petitioner must also meet the requirements in the
Tax Law. To qualify to claim the qualified EZ enterprise (QEZE) credits, Petitioner must
continue to meet the employment test annually. See Tax Law §14(a)(1)(C) and §14(b)(4). For
federal income tax purposes, a corporation and its disregarded entities are treated as one.
New York State follows the federal rule. Thus, Petitioner and its disregarded entities will be
deemed one entity for purposes of calculating the employment number used in the employment
test and the employment increase factor. See Tax Law sections 14(g), 14(b)(4), and 15(d)
respectively.

DATED: January 8, 2013

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.