New York Advisory Opinion TSB-A-15(4)C: Can a qualified New York manufacturer claim the real property tax credit for real property taxes it pays under a lease from a related party?

Plain-English summary

A New York manufacturer rented its plant from a lessor and paid the building's real property taxes under the lease. The two were related: a 66% and a 17% owner of the manufacturer were also a 76% and a 12% owner of the lessor. The manufacturer asked whether it could claim the real property tax credit for qualified New York manufacturers (Tax Law § 210(48)) on those taxes for 2014.

The Department said no. The credit reaches taxes a tenant pays on leased property only when the property is leased from an unrelated third party (Tax Law § 210(48)(b)(2)), and only if the lease explicitly requires the tenant to pay and the tenant pays the taxing authority directly. An "unrelated third party" is anyone who is not a related person under IRC § 465(b)(3)(C), which treats corporations in the same controlled group (a 10% ownership test) as related. Because the manufacturer and its lessor were related under that test, the leased-property taxes did not count — even assuming the manufacturer otherwise qualified.

What this means for you

Manufacturers that lease their facilities

The manufacturer's real property tax credit is available on leased space, but the related-party rule is a hard gate: if your landlord is commonly owned with you under the IRC § 465(b)(3)(C) 10% test, the taxes you pay under that lease don't generate the credit. Manufacturers that own their facilities, or lease from truly independent landlords, are the intended beneficiaries.

Accountants and tax professionals

Test the lessor relationship under IRC § 465(b)(3)(C) before claiming. Even a fully compliant lease (explicit tax obligation, direct payment, written receipt) fails if the landlord is a related person. See TSB-M-15(3)C, (3)I.

Common questions

Q: Can a manufacturer claim the credit for property it leases? A: Yes, but only when it leases from an unrelated third party and pays the tax directly under an explicit lease requirement.

Q: Why was this manufacturer denied?
A: Its landlord was a related party under IRC § 465(b)(3)(C)'s 10% controlled-group test, so the leased-property taxes did not qualify.

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

Citations and references

• Tax Law § 210(48) (real property tax credit for qualified New York manufacturers)
• Tax Law § 210(48)(b)(2) (leased-property taxes count only from an unrelated third party; explicit lease + direct payment)
• Tax Law § 210(1)(a)(vi) (qualified New York manufacturer)
• IRC § 465(b)(3)(C) (related person; 10% controlled-group ownership test); TSB-M-15(3)C, (3)I

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2015.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a15_4c.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-15(4)C
Corporation Tax
May 29, 2015

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

PETITION NO. C150210A

The Department of Taxation and Finance received a Petition for Advisory Opinion from REDACTEDREDACTEDREDACTEDREDACTED “Petitioner”. Petitioner asks whether, assuming that it meets the definition of a qualified New York manufacturer, as described herein, it is eligible to claim the real property tax credit for manufacturers for the 2014 tax year. We conclude that Petitioner is not allowed to claim the real property tax credit for manufacturers for the real property taxes it pays pursuant to a lease agreement, as described herein, for the 2014 tax year.

Facts
Petitioner is a manufacturer that rents its manufacturing facilities from REDACTEDREDACTED (the “lessor”) and pays real property taxes pursuant to its lease agreement. Petitioner and the lessor are related through common ownership: A 66% owner and a 17% owner of Petitioner are also, respectively, a 76% owner and a 12% owner of the lessor. The Petition states: Petitioner “rents its manufacturing facilities from a related party.”

Analysis
Tax Law section 210(48) provides for the real property tax credit for qualified New York manufacturers, as defined in Tax Law section 210(1)(a)(vi), available for the 2014 tax year. Specifically, Tax Law section 210(48)(b)(2) provides, in relevant part (emphasis added), that: the term real property tax includes taxes paid by the taxpayer upon real property principally used during the taxable year by the taxpayer in manufacturing where the taxpayer leases such real property from an unrelated third party if the following conditions are satisfied: (i) the tax must be paid by the taxpayer as lessee pursuant to explicit requirements in a written lease, and (ii) the taxpayer as lessee has paid such taxes directly to the taxing authority and has received a written receipt for payment of taxes from the taxing authority. An unrelated third party is any person that does not meet the definition of a related person under Internal Revenue Code §465(b)(3)(C), which definition includes two corporations that are members of the same controlled group of corporations determined by applying a 10% ownership test (see TSB-M-15(3)C, (3)I, “Real Property Tax Credit and Reduction of Tax Rates for

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TSB-A-15(4)C
Corporation Tax
May 29, 2015

Qualified New York Manufacturers”; see also IRS Publication 925, “Passive Activity and AtRisk Rules”). Since the lessor is a related person to the Petitioner under Internal Revenue Code
§465(b)(3)(C), the taxes paid by Petitioner upon the real property leased from the lessor are not included in the term “real property tax” for purposes of Tax Law §210(48). Therefore, even assuming that Petitioner is a qualified New York manufacturer, and further assuming that it otherwise meets the requirements of Tax Law section 210(48)(b)(2), Petitioner is not allowed to claim the real property tax credit for manufacturers for the real property taxes it pays pursuant to its lease agreement with the lessor for the 2014 tax year.

DATED: May 29, 2015

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.