NY TSB-A-13(7)C / TSB-A-13(6)I Corporation Tax; Income Tax 2013-05-20

New York Advisory Opinion TSB-A-13(7)C / (6)I: Do payments by members who fund a QETC's research and development qualify for the qualified emerging technology company capital tax credit?

Short answer: No. The members who funded the company's research and development cannot claim the QETC capital tax credit, because they were owners of the company from inception, holding more than a 10% interest, and the credit excludes investments made by or on behalf of an owner or related person.

Disclaimer: This is an official New York State Department of Taxation and Finance Advisory Opinion (TSB-A), issued by the Office of Counsel at a taxpayer's request. It is limited to the facts set forth in it and binds the Department only with respect to the petitioner to whom it was issued, and only if that petitioner fully and accurately described all relevant facts; another taxpayer cannot rely on it. It reflects the law, regulations, and Department policy in effect when issued and may since have changed. Taxpayer-identifying details are redacted. New York State and local sales taxes are administered centrally by the Department. This summary is informational only and is not legal or tax advice. Consult a licensed New York tax professional about your specific situation.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked at the bottom of this page, or PDF in the sidebar) is the authoritative source for any reliance.

View original ruling (PDF)

Plain-English summary

A start-up LLC taxed as a partnership had five members. Two "funding members" — a corporation entitled to 25% of distributions and an individual entitled to 45% — agreed to pay all phase-one research and development costs, which they did (recorded as member equity). They asked whether those payments qualify for the QETC capital tax credit (Tax Law § 606(r)).

The Department said no. The credit is a percentage of "qualified investments" in a qualified emerging technology company, except investments made by or on behalf of an owner of the business — including a stockholder, member, or any related person under IRC § 465(b)(3)(C). The Department has long read "owner" of a QETC to mean an entity owning more than a 10% interest, consistent with 20 NYCRR § 5-8.2(b) (used for the economic-development-zone capital tax credit). The members were granted their ownership percentages when the company formed in 2010, and the two funding members were entitled to 25% and 45% of distributions — far over 10%. Because they were owners from inception, their funding payments are excluded, and they cannot claim the QETC capital tax credit.

What this means for you

Founders and investors in emerging technology companies

The QETC capital tax credit rewards outside investment, not money owners put into their own business. If you hold more than a 10% interest, your contributions — even large R&D-funding payments — are excluded as owner investments.

Accountants and tax professionals

Apply the more-than-10% "owner" threshold (and the IRC § 465(b)(3)(C) related-person rule) before claiming the QETC capital credit. Distribution/ownership percentages set at formation determine owner status; structuring funding as "member equity" does not convert it into a creditable qualified investment.

Common questions

Q: Can a member who funds a QETC's R&D claim the QETC capital tax credit?
A: Not if the member is an owner. The credit excludes investments by an owner or related person.

Q: Who counts as an "owner"?
A: An entity or individual owning more than a 10% interest in the company (20 NYCRR § 5-8.2(b)); the funding members held 25% and 45%.

Q: Can my company rely on this opinion?
A: No. It binds the Department only as to this petitioner and these facts.

Citations and references

Tax Law § 606(r) (QETC capital tax credit; "qualified investment"; exclusion for owners and related persons)
IRC § 465(b)(3)(C) (related person); 20 NYCRR § 5-8.2(b) (owner of a business = more than a 10% interest)
Tax Law § 210.12-F (Article 9-A QETC capital tax credit); Public Authorities Law § 3102-e (QETC); TSB-M-99(2.1)C

Source

Original ruling text

New York State Department of Taxation and Finance
TSB-A-13(7)C
Corporation Tax
TSB-A-13(6)I
Income Tax
May 20, 2013

Office of Counsel
Advisory Opinion Unit

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. Z120709A

The Department of Taxation and Finance received a Petition for Advisory Opinion from
name and address redacted. Petitioner asks whether the payments made by members to fund
research and development costs will qualify for the Qualified Emerging Technology Company
(QETC) capital tax credit.
We conclude that the payments will not qualify for the credit.
Facts
Petitioner, a Delaware limited liability company (Company), is a start-up company taxed as
a partnership. The Petition states: “The Company was formed in 2010 whereupon the members
were granted their ownership percentages subject to further capital commitments.” Although there
are five members altogether, two members, a corporate member (“A”) and an individual member
(“B”) (“the funding members”), agreed to fund all of the phase one research and development costs
in equal amounts. The Operating Agreement, signed on September 12, 2011, provides that A and B
will receive 25% and 45% respectively of the distributions (the “Distribution Percentage”). In
addition to A and B, three other individual members were not obligated to make monetary
contributions to capital but were designated to receive distributions of 20%, 5%, and 5%. Article II
Capital Contributions, § 2.1 provides that “As of the Effective Date of the Agreement, the Members
have heretofore made their respective capital contributions to the Company as reflected on Schedule
2.1....” Schedule 2.1 showed no capital contributions as having been made.
The Company began its operations in 2011 and, as a result, started requiring the funding
members to pay the bills as agreed. The Company did not have a checking account of its own, so
all the money that was billed by the vendors was paid by A with the corporate member’s funds. B
reimbursed A for 50% of A’s payments. The Company’s General Ledger showed entries for dozens
of payments as “member equity” for each of the funding members, beginning on January 10, 2011
through December 16, 2012.
Analysis
A taxpayer may be eligible for a tax credit for each “qualified investment” in a QETC as
defined in § 3102-e of the Public Authorities Law.1 See Tax Law § 606(r). “Qualified investment”
1

For purposes of this Advisory Opinion, we have assumed, without examining the facts, that the Company satisfies the
requirements to be a QETC.

-2-

TSB-A-13(7)C
Corporation Tax
TSB-A-13(6)I
Income Tax
May 20, 2013

means the contribution of property to a corporation in exchange for original issue capital stock or
other ownership interest, the contribution of property to a partnership in exchange for an interest in
the partnership, and similar contributions in the case of a business entity not in corporate or
partnership form in exchange for an ownership interest in such entity. See Tax Law § 606(r). The
amount of the credit is a certain percentage of qualified investments in QETCs, “except for
investments made by or on behalf of an owner of the business, including, but not limited to, a
stockholder, member or sole proprietor or any related person” as defined in Internal Revenue Code
§ 465(b)(3)(C).
The Department has long interpreted “owner of a QETC” for purposes of the capital tax
credit to mean “an entity that owns more than a 10% interest in a qualified emerging technology
company.”2 This interpretation of “owner” for purposes of the QETC is consistent with the
definition of “owner of a business” under 20 NYCRR § 5-8.2(b) pertaining to the economic
development zone capital tax credit, which reads, “...owner of the business means an entity or
individual that owns more than a 10 percent interest in a certified zone business.”
The Petition states that the members of the Company were granted their ownership
percentages when the Company was formed in 2010, subject to further capital commitments. Thus,
we conclude that the funding members, who were entitled to distribution percentages of 25% and
45% respectively, met the QETC definition of “owners” from the inception. As owners, they are
ineligible for the credit.

DATED: May 20, 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.

TSB-M-99(2.1)C. Originally, the QETC capital tax credit was available only to Article 9-A taxpayers under Tax Law
§210.12-F for taxable years beginning on or after January 1, 1999. The credit was extended to Article 22 taxpayers the
following year.