Will selling a minority (up to 49%) ownership stake in a Qualified Empire Zone Enterprise LLC to an outside investor cause it to lose its QEZE tax credits?

Plain-English summary

Petitioner is a limited liability company that is a Qualified Empire Zone Enterprise (QEZE) - it was certified under Article 18-B of the General Municipal Law on February 13, 2008 and later issued an EZ Retention Certificate, which lets it claim QEZE tax credits. Petitioner is currently 99 percent owned by another LLC (itself treated as a partnership for federal tax purposes) with the remaining 1 percent owned by a third LLC. Petitioner asked whether a proposed change in its ownership would jeopardize those QEZE benefits.

Under the proposal, the 99 percent owner would sell up to 49 percent of its stake to an unrelated third party, either directly or by forming a new holding LLC ("NEWCO") that would own 99 percent of Petitioner, with NEWCO itself owned no less than 51 percent by the current majority owner and no more than 49 percent by the outside buyer. Either way the deal was structured, Petitioner's existing majority owner would retain, directly or indirectly, majority ownership and control of Petitioner.

The New York State Department of Economic Development (DED), which administers Empire Zone certification, had already issued a Declaratory Ruling on October 3, 2012 finding that this proposed minority ownership change would not revoke Petitioner's Empire Zone certification, because a change of that kind is not a ground for revocation under the General Municipal Law and its regulations.

Relying on DED's certification determination, the Department of Taxation and Finance concluded that the proposed transfer of no more than a 49 percent interest to the unrelated third party would not cause Petitioner to lose its QEZE tax benefits - so long as DED's Empire Zone certification of Petitioner remains in effect and Petitioner continues to satisfy the Tax Law's requirements for the QEZE credits.

What this means for you

Businesses holding Empire Zone / QEZE certification

A sale of a minority ownership stake - up to 49 percent - to an outside investor, whether done directly or through a newly formed holding entity, does not by itself disqualify a QEZE from its tax credits, as long as the existing majority owner keeps control and DED's certification stays in place. The Department of Taxation and Finance defers to DED's Empire Zone certification determination rather than independently second-guessing whether an ownership change threatens QEZE status.

Accountants and tax professionals structuring an ownership change

Before restructuring the ownership of a QEZE-certified client, confirm two things: (1) DED has determined (or will determine) that the specific ownership change is not a ground for revocation of Empire Zone certification under the General Municipal Law, and (2) the entity will continue to meet the Tax Law's substantive requirements for the QEZE credits going forward. Both conditions matter - continued DED certification alone doesn't guarantee continued eligibility if the Tax Law requirements aren't otherwise met.

Common questions

Q: Does selling a minority stake in a QEZE automatically end its tax credits?
A: No. Here, selling up to 49 percent of the ownership interest to an unrelated third party did not result in a loss of QEZE tax benefits, because the majority owner retained control and DED confirmed the Empire Zone certification would remain in effect.

Q: Does it matter whether the sale happens directly or through a new holding company (NEWCO)?
A: No. The Department treated both structures the same way, since under either one Petitioner's current majority owner retains, directly or indirectly, majority ownership and control of Petitioner.

Q: Who decides whether an ownership change revokes Empire Zone certification?
A: The Department of Economic Development (DED), not the Department of Taxation and Finance. DED had already issued a Declaratory Ruling concluding the proposed minority ownership change was not a ground for revocation under the General Municipal Law and its regulations.

Q: Is the QEZE tax credit eligibility guaranteed going forward after this ruling?
A: Only conditionally. The Department's conclusion is expressly conditioned on Petitioner continuing to be certified by DED and continuing to meet the requirements in the Tax Law to qualify for the tax credits.

Citations and references

• General Municipal Law Article 18-B - governs Qualified Empire Zone Enterprise (QEZE) certification and issuance of an EZ Retention Certificate
• Department of Economic Development Declaratory Ruling, October 3, 2012 - determined the proposed minority ownership change was not a ground for revocation of Petitioner's Empire Zone certification

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2013.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a13_3i.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Counsel
Advisory Opinion Unit

TSB-A-13(3)I
Income Tax
February 25, 2013

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I121108A

The Department of Taxation and Finance received a Petition for Advisory Opinion
from name and address redacted. Petitioner is certified under Article 18-B of the General
Municipal Law (GML) and has been receiving Qualified Empire Zone Enterprise (QEZE)
tax benefits. Petitioner asks whether a sale or transfer of less than a majority ownership
interest in Petitioner will change its entitlement to such benefits under the facts provided.
We conclude that the proposed change in the corporate structure by a transfer of no
more than a 49% ownership interest in Petitioner to an unrelated third party will not result
in a loss of QEZE tax benefits to Petitioner, provided that the Department of Economic
Development (DED) determines that Petitioner’s Empire Zone certification will remain in
effect and Petitioner continues to meet the requirements in the Tax Law to qualify for the
tax credits.
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 Retention Certificate. Petitioner, which is treated as a partnership for federal
income tax purposes, is 99 percent owned by an LLC treated for tax purposes as a
partnership. Another LLC owns the remaining one percent. Under the proposed change in
the ownership of Petitioner, the 99 percent owner would sell up to 49 percent of its
ownership interest to an unrelated third party, either by (i) selling the ownership interest
directly or (ii) establishing a new LLC (NEWCO) which would own and control 99
percent of Petitioner. NEWCO would be owned no less than 51% by the current 99
percent owner and no more than 49 percent by an unrelated third party. Regardless of
whether the change in ownership of Petitioner occurs under proposal (i) or proposal (ii),
Petitioner’s current majority owner will retain, directly or indirectly, majority ownership
and control of Petitioner. DED has determined in a Declaratory Ruling dated October 3,
2012, that the proposed minority ownership change will not result in revocation of
Petitioner’s Empire Zone certification, because such proposed change in ownership is not a
ground for revocation pursuant to the GML and the regulations promulgated thereunder.

-2-

TSB-A-13(3)I
Income Tax
February 25, 2013

Analysis
The Department of Taxation and Finance (DTF) will accept the DED’s Empire
Zone certification as evidence that Petitioner is eligible to claim the QEZE credits.
Provided that Petitioner continues to be certified by DED and meets the requirements in
the Tax Law to qualify for the tax credits, Petitioner will be able to continue to claim the
tax credits.

DATED: February 25, 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.