When is brownfield tangible property 'placed in service,' and which redevelopment costs qualify as site preparation costs versus the tangible property component of the brownfield credit?
Plain-English summary
A developer redeveloping a roughly 140,000 sq. ft. brownfield building (occupied in phases while other parts were remediated) asked two things about the Brownfield Redevelopment Tax Credit under Tax Law § 21: (1) when tangible property is "placed in service" when portions are occupied at different times, and (2) which of 11 listed cost categories count as site preparation costs.
The Office of Counsel concluded:
- Tangible property is placed in service when a separately occupied portion of the site is substantially complete and ready for its assigned function. Merely occupying a limited portion during ongoing remediation does not place property in service if no associated tangible personal property is placed in service. If tangible property is placed in service before the Certificate of Completion (CoC), it stays eligible only if the CoC issues in the same taxable year.
- The remediation-type costs (contaminated-soil excavation, site cover, soil-vapor investigation, environmental easement, site management plan, periodic review reports, sub-slab depressurization, asbestos removal, demolition of dilapidated buildings) qualify as site preparation costs if chargeable to a capital account and tied to CoC qualification or making the site usable.
- Converting warehouse space to offices and modifying existing fire-suppression, plumbing, HVAC and electrical systems are not site preparation, but may qualify under the tangible property component (Tax Law § 21(b)(3)).
What this means for you
Brownfield developers doing phased redevelopment
You can claim the tangible-property component portion-by-portion as each separately occupied area is finished, for up to ten years after the CoC. But watch the timing trap: anything placed in service before the CoC is lost unless the CoC arrives that same year.
Accountants and tax preparers
Sort costs into the right bucket. "Cleaning up the site" work is site preparation; "building out the space" work (office conversion, system upgrades) is tangible property. The two components have different rules, so mislabeling can cost or disqualify a credit.
Common questions
Q: If tenants still occupy part of the building, is it "placed in service"?
A: Not necessarily - occupying a limited portion during remediation doesn't place property in service unless associated tangible personal property is placed in service.
Q: We placed property in service before the CoC. Is it lost?
A: Only if the CoC doesn't issue in the same taxable year. Same-year CoC preserves eligibility.
Q: Can I rely on this opinion?
A: It binds the Department only as to the petitioner. Use it as guidance and confirm your own facts.
Citations and references
Statutes and regulations:
- Tax Law § 21; § 21(a)(3); § 21(b)(1)-(3)
- IRC §§ 167, 179(d); 26 CFR 1.167(a)-11(e)(1)
- TSB-A-11(9)C (placed-in-service before CoC)
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2018.htm
- Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a18_1i.pdf
Original ruling text
New York State Department of Taxation and Finance
TSB-A-18(1)I
Income Tax
March 7, 2018
Office of Counsel
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. I151104A
The Department of Taxation and Finance received a Petition for an Advisory Opinion
from REDACTED (“Petitioner”). Petitioner requests guidance on issues involving the
Brownfield Redevelopment Tax Credit under Tax Law § 21, which consists of three
components: site preparation, tangible property, and on-site groundwater remediation.
Petitioner is specifically inquiring about the first two components.
First, Petitioner asks when tangible property is considered “placed in service” given
that the project site involves the redevelopment of an approximately 140,000 sq. ft. building
and certain portions of the building will: (1) remain in use while remediation and
redevelopment are conducted on other portions of the site and building; and (2) be
redeveloped, receive Certificates of Occupancy from local officials, and be occupied and used
by Petitioner or another tenant while other portions of the building are still undergoing
redevelopment and remain uninhabitable. A portion of the building may also be redeveloped
and occupied by Petitioner prior to the issuance of a Certificate of Completion (“CoC”), and
Petitioner asks what affect this will have upon its eligibility for certain components of the
brownfield redevelopment credit. We conclude that tangible property will be considered
“placed in service” when any one of the separately occupied portions of the site is “available to
serve its assigned function.” However, as relates to point (1), set forth above, tangible property
will not be considered to have been “placed in service” if a limited portion of the building is
occupied and used during the pendency of remediation and/or redevelopment of other portions
of the site so long as no tangible personal property associated with the occupied portion is
placed in service. In the event that tangible property on the site is placed in service prior to the
issuance of a CoC, that property will remain eligible for the tangible property component only
if it is placed in service within the same year that the CoC is issued.
Second, Petitioner asks whether costs incurred for certain activities will qualify for the
site preparation component. Specifically, Petitioner asks whether the costs associated with the
following activities are eligible: (1) excavation and removal of contaminated soil; (2)
placement of one foot or more of site cover; (3) ongoing soil vapor intrusion investigation; (4)
placement of an environmental easement on the property; (5) development of a site
management plan; (6) submission of periodic review reports; (7) installation of a sub-slab
depressurization system; (8) asbestos removal; (9) demolition and removal of dilapidated
buildings on the site; (10) conversion of building space from warehouse to office space; and
(11) the modification and renovation of existing fire suppression, plumbing, HVAC and
electrical systems. We conclude that the costs associated with the activities listed above, except
for the conversion of warehouse space to office space and the modification and renovation of
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existing fire suppression, plumbing, HVAC and electrical systems, are eligible for the site
preparation component as long as they: (A) are properly chargeable to a capital account, and;
(B) are paid or incurred in connection with the site’s qualification for a CoC, or are otherwise
paid or incurred in connection with preparing the site for the erection of a building or building
component or to establish the site as usable for its industrial or commercial purpose. We
further conclude that costs associated with the conversion from warehouse to office space and
the modification and renovation of existing fire suppression, plumbing, HVAC and electrical
systems may be eligible as costs included the tangible property component as long as: (A) they
are not treated as site preparation costs; and (B) the property to which these costs relate meets
the requirements as tangible property pursuant to Tax Law § 21(b)(3).
Facts1
Petitioner is one of several lessees of a brownfield site (the “Site” or “Property”), and
has an option to purchase the Property. On December 10, 2014, Petitioner entered into a
Brownfield Site Cleanup Agreement (“BCA”) with the Department of Environmental
Conservation (“DEC”) under Environmental Conservation Law § 27-1409 A Remedial Action
Work Plan was accepted by the DEC in September of 2015, but a CoC has not yet been issued.
Petitioner intends to exercise its option to purchase the Property, redevelop the existing
building being utilized on the Site, and consolidate the two separate parcels that comprise the
Property. However, the existing contamination on the site must be remediated before Petitioner
is willing to exercise its option. The existing building utilized on the Site is comprised of
nearly 140,000 sq. ft. that is used as manufacturing, office, and warehouse space. The building
is presently occupied by at least three different tenants.
Petitioner has already commenced site remediation by conducting asbestos removal and
demolishing/removing two dilapidated buildings that were located on the Site. As additional
remediation work progresses, the various tenants will be constructively evicted from large
portions of the Site as remediation and redevelopment work begins on their occupied portion of
the building. Once the Site has been remediated, Petitioner intends to exercise its option to
purchase the property and commence the redevelopment and modification of the 140,000 sq. ft.
building. The redevelopment phase of the project will also require that tenants be
constructively evicted from their leased portion of the building as that portion of the building is
redeveloped or modified. The local building department has indicated that, as specific portions
of the building are redeveloped or modified, Certificates of Occupancy will be issued only to
those specific portions of the building so that they may be occupied and used without requiring
that all work on the entire 140,000 sq. ft. building first be completed. It is also anticipated that
1
The site was accepted into the Brownfield Clean-up Program (“BCP) on December 10, 2014, and Petitioner
anticipates receiving a CoC in 2016. Therefore, the amendments to the Brownfield Redevelopment Tax Credit
signed into law on April 13, 2015, L.2015, c.56, Part BB, are likely inapplicable. L.2015, c.56, Part BB, § 32.
However, if a CoC has not been issued for the site by December 31, 2019, the site will be eligible for the
Brownfield Redevelopment Tax Credit under Tax Law § 21 as if the site was accepted into the BCP on or after
July 1, 2015, i.e. the April 13, 2015, amendments will apply. L.2015, c.56, Part BB, § 33. The analysis and
conclusions contained within this opinion assumes that Petitioner will receive a CoC prior to December 31, 2019.
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a portion of the building will continue to be occupied and used while other portions of the
building undergo remediation and redevelopment. This will allow for some continued use of
the building as the project proceeds.
Petitioner anticipates that remediation of the Site will be complete, and a CoC issued, in
2016. Petitioner intends to claim the site preparation component at that time, and also intends
to claim the tangible property component for those portions of the building that are
redeveloped or modified in the year that those portions receive a Certificate of Occupancy and
are again occupied and used. While it is Petitioner’s intention that no tangible property on the
Site be “placed in service” prior to the issuance of the CoC, it is possible that tangible property
will be placed in service on portions of the Site and those portions of the Site will receive
Certificates of Occupancy and have tangible property placed in service prior to the CoC being
issued.
Analysis
The brownfield redevelopment tax credit is comprised of several discrete components
authorized by Tax Law § 21. The main issues here involve the timing of tangible property
being “placed into service” and the implications of that timing on Petitioner’s eligibility for
two components of the Brownfield Redevelopment Tax Credit. Specifically: (1) will tangible
property be considered to have been placed in service if a portion of the Site continues to be
occupied and used while other portions of the Site undergo remediation and redevelopment; (2)
will tangible property be considered to have been placed in service if certain portions of the
Site are occupied and used after remediation and redevelopment occurs on those portions,
while other portions of the Site are still undergoing redevelopment or modification; and (3) if
tangible property is placed in service on a portion of the Site prior to the issuance of the CoC,
will eligibility for the tangible property component be affected. Petitioner also seeks
confirmation that costs incurred for certain activities will be eligible for either the site
preparation or tangible property components.
The tangible property credit component “…shall be allowed for the taxable year in
which such qualified tangible property is placed in service on a qualified site with respect to
which a certificate of completion has been issued to the taxpayer for up to ten taxable years
after the date of the issuance of such certificate of completion.” Tax Law § 21(a)(3). An
advisory opinion of the Department of Taxation and Finance, TSB-A-11(9)C, October 31,
2011, clarifies that, when tangible property is placed in service prior to the issuance of a CoC,
a taxpayer can still claim the tangible property component as long as the CoC is issued in the
same year that the tangible property is placed in service.
The phrase “placed in service” is not defined by New York State statute, regulation, or
case law, but is found in the Internal Revenue Code (“IRC”) and federal regulations addressing
depreciation. Although New York is not bound by federal interpretation of similar provisions,
in the absence of clear legislative intent or compelling reasons to the contrary, it is appropriate
to look to federal authority for guidance in interpreting similar or analogous State tax
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provisions. See Matter of John Grace & Co., Tax Appeals Tribunal, May 10, 1990; Matter of
Accessories By Pearl, Tax Appeals Tribunal, February 24, 1989.
Pursuant to federal regulations regarding depreciation, 26 CFR 1.167(a)-11(e)(1):
Property is first placed in service when first placed in a condition
or state of readiness and availability for a specifically assigned
function, whether in a trade or business, in the production of
income, in a tax-exempt activity, or in a personal activity…. In
the case of a building which is intended to house machinery and
equipment and which is constructed, reconstructed, or erected by
or for the taxpayer and for the taxpayer's use, the building will
ordinarily be placed in service on the date such construction,
reconstruction, or erection is substantially complete and the
building is in a condition or state of readiness and availability.
Thus, for example, in the case of a factory building, such
readiness and availability shall be determined without regard to
whether the machinery or equipment which the building houses,
or is intended to house, has been placed in service.
There are several federal court decisions that interpret and apply the IRC regulations in
determining whether property has been placed in service for purposes of depreciation and
eligibility for tax credits. See, e.g., Brown v. C.I.R., TC Memo 2013-275 (December 3, 2013)
(an airplane was not placed in service until a conference table and enhanced display screens
were installed because, even though the airplane could fly, the plane was not ready for its
specifically assigned function until it was affixed with the conference table and enhanced
display screens required by the owner); Podraza v. C.I.R., TC Summ. Op. 2015-67 (November
19, 2015) (a car was not ready and available for full operation on a regular basis for its
specifically assigned function, and therefore was not placed in service, where the car had not
yet been delivered to the taxpayers, making it impossible for the vehicle to be available for use
until that date); Consumers Power Company v. C.I.R., 89 TC 710 (September 30, 1987) (a
hydroelectric power plant with 6 power generating units was not placed in service where only
one unit was operated during the tax year for pre-operational testing, and the amount of
electrical power generated was insufficient to establish the plant as available for full operation
on a regular basis); c.f. Armstrong World Industries, Inc. v. C.I.R., 974 F2d 422 (3rd Cir.
1992) (“…courts appear to agree that individual components will be considered as a single
property for tax purposes when the component parts are functionally interdependent - when
each component is essential to the operation of the project as a whole and cannot be used
separately to any effect. The converse, thus, should be equally valid in this case. Accordingly,
if a project has component parts which can function as planned in a wholly independent
manner, then a court may find that each component is a ‘property ... placed in a condition or
state of readiness and availability for a specifically assigned function.’”)
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As is evidenced by the Petitioner’s desire to have certain portions of the Site occupied
and used while other portions are still undergoing remediation or redevelopment, there are
multiple projects on the Site for which the components may apply. The Site first will be
considered to have been placed in service when renovations to the first of the separately
occupied and used portions of the building are substantially complete and that separately
occupied portion of the building is ready for its specifically assigned function. In the event that
the Site is placed in service prior to the issuance of the CoC, the CoC must be issued in the
same taxable year that the Site is placed in service for the Petitioner to be eligible for the
tangible property component for the costs incurred prior to issuance of the CoC. See Tax Law §
21(b)(3)(A) (qualified tangible property must have a situs on a qualified site in New York
State); Tax Law § 21(b)(1) (a “qualified site” is a site with respect to which a CoC has been
issued).
After the CoC is issued and the first part of the Site is placed in service, the taxpayer
may be eligible to claim additional tangible property components when the other separately
occupied portions of the Site are placed in service, during the ten taxable years after the Coc is
issued.
Site preparation costs are defined as all amounts properly chargeable to a capital
account: (1) that are paid or incurred in connection with a site’s qualification for a CoC; and
(2) all other site preparation costs paid or incurred in connection with preparing a site for the
erection of a building or a component of a building, or otherwise to establish a site as usable
for its industrial, commercial (including the commercial development of residential housing),
recreational or conservation purposes. Tax Law § 21(b)(2). Site preparation costs include work
such as excavation, temporary electric wiring, scaffolding, demolition, fencing, and security.
Id.
Qualified tangible property is defined, in relevant part, as property which: (1) is
depreciable pursuant to IRC § 167; (2) has a useful life of four years or more; (3) has been
acquired by purchase as defined in IRC § 179(d); (4) has a situs on a qualified site in New
York State; and (5) is principally used by the taxpayer for industrial, commercial, recreational
or environmental conservation purposes. Tax Law § 21(b)(3)(A).
Costs incurred that are associated with the following activities will fall within the
definition of “site preparation costs” if they are paid or incurred in connection with the Site’s
qualification for the CoC or to establish the Site as usable for its industrial and/or commercial
purpose: (1) excavation and removal of contaminated soil; (2) placement of one foot or more of
site cover; (3) ongoing soil vapor intrusion investigation; (4) preparation of an environmental
easement on the property; (5) preparation of a site management plan; (6) preparation of
periodic review reports; (7) installation of a sub-slab depressurization system; (8) asbestos
removal; and (9) demolition and removal of dilapidated buildings on the Site.
Costs incurred for the conversion of building space from warehouse to office space, and
for the modification and renovation of existing fire suppression, plumbing, HVAC and
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electrical systems, may qualify for the tangible property credit component if they are costs
included in the cost or basis for federal income tax purposes of the tangible property that meets
the requirements set forth in Tax Law § 21(b)(3)(A).
DATED: March 7, 2018
/S/
DEBORAH LIEBMAN
Deputy Counsel
NOTE:
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.