For New York's business allocation percentage property factor, does the exclusion for 'real property and related equipment' under construction reach only buildings and building-integrated equipment, or also separate personal property like standalone machinery being installed at the same time?

Plain-English summary

During an audit of its 1982-1984 franchise tax returns, Edward Weck & Company (part of Squibb Corporation) had its property factor for New York's business allocation percentage adjusted by the Department's auditor, who excluded ALL construction in progress -- both real and personal property -- from the factor. That exclusion was based on a 1982 Department memorandum (TSB-M-82(3)C) providing that "real property and related equipment" under construction, not yet occupied or used, is excluded from the property factor's numerator and denominator. The company disagreed with how broadly the auditor read "related equipment": it argued the phrase should mean only real property (buildings) plus equipment genuinely integrated into the building itself (air conditioners, elevators, escalators), while separate machinery and equipment -- which the company viewed as ordinary personal property -- should NOT be excluded just because it happened to be part of a broader construction project. Since its building was leased, the company wanted leasehold improvements treated as excludable "real property," but wanted standalone machinery and equipment included in the property factor even while under construction.

The Department disagreed with the company's narrower reading. It concluded that "real property and related equipment" was intended to be broader than just a building and its integrated fixtures -- it also reaches personal property under construction that is functionally connected to the real property construction itself. The ruling gives two illustrative examples: an assembly line that must be constructed or assembled in conjunction with the building that houses it, and a large turbine that must be installed at a site before the building can be constructed around it. Both are examples of personal property whose construction is intertwined with, and can't practically be separated from, the real property construction project. However, the Department also noted that section 210.8 of the Tax Law separately gives the Tax Commission broad discretionary authority to adjust the allocation percentage (including by excluding specific assets) whenever it doesn't properly reflect a taxpayer's activity in the state -- and whether that discretion should be exercised in the company's specific audit is a factual question that an advisory opinion, by its nature, cannot resolve. The Department noted the question arose in the context of an ongoing audit, so that factual determination would be made there.

What this means for you

Taxpayers with property under construction, especially in leased facilities

Don't assume that only buildings and building-integrated fixtures are excluded from the property factor while under construction. Standalone equipment can also be excluded if its construction/installation is functionally tied to the real property construction -- for example, equipment that must be built together with the building, or that must be installed before the building is finished around it.

Taxpayers in the middle of a franchise tax audit

An advisory opinion is the wrong tool for resolving how a general legal standard applies to your specific facts in an ongoing audit -- that's a factual determination for the audit process itself, even though the Department will confirm the general legal standard (as it did here) in an advisory opinion.

Common questions

Q: Does this mean all machinery purchased during a construction project is excluded from the property factor?
A: No -- only property whose construction is functionally tied to the real property construction (built together with the building, or needed on-site before the building is completed around it). Ordinary machinery acquired separately and not intertwined with the building construction wouldn't necessarily be covered by this reasoning.

Q: Did the Department decide whether Petitioner's specific equipment should be excluded from its property factor?
A: No -- it explained the general legal standard but expressly declined to resolve that specific factual question, since it arose in the context of an ongoing audit where that determination would be made.

Q: Can another taxpayer rely on this specific ruling?
A: No. It binds the Department only for this petitioner's specific facts and can't be relied upon by other taxpayers, though the general "functionally tied" reading of TSB-M-82(3)C reflects the Department's stated policy.

Citations and references

Statutes and regulations:

• Tax Law § 210.3(a)(1) (property factor of the business allocation percentage)
• Tax Law § 210.8 (discretionary allocation percentage adjustment authority)
• TSB-M-82(3)C (Business Allocation Percentage - Construction in Progress)
• Tax Law § 171(24); 20 NYCRR 901.1(a) (scope of advisory opinions -- limited to specified facts, not factual/discretionary determinations)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1987.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a87_19c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-87 (19) C
Corporation Tax
July 20, 1987

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C870326A

On March 26, 1987, a Petition for Advisory Opinion was received from Edward Weck &
Company, Inc., c/o Squibb Corporation, P.O. Box 4000, J306, Princeton, New Jersey 08543­
4000.
At issue is the proper meaning of "real property and related equipment" as used in
Technical Services Bureau Memorandum TSB-M-82(3)C, with regard to the exclusion of
construction in progress from the property factor when computing the business allocation
percentage for purposes of Article 9-A of the Tax Law.
As a result of an audit of Petitioner's franchise tax returns for taxable years 1982, 1983
and 1984, the Tax Department auditor excluded from Petitioner's property factor, all construction
in progress, both real and personal property. This exclusion is based on the auditor's
interpretation of Technical Services Bureau Memorandum TSB-M-82(3)C, Business Allocation
Percentage - Construction in Progress, which states Tax Department policy on this issue.
Petitioner contends that "real property and related equipment" means real property such as
buildings and the equipment related to it, such as air conditioners, elevators, escalators and
improvements, but that machinery and equipment are personal property that are not related
equipment.
Petitioner's building is leased and Petitioner believes that the leasehold improvements
included in construction in progress should be classified as real property excluded from the
property factor and that personal property, such as machinery and equipment, included in
construction in progress should not be excluded from the property factor.
Section 210.3(a)(1) of the Tax Law provides that the property factor of the business
allocation percentage is determined by ascertaining the percentage which the average value of the
taxpayer's real and tangible personal property within New York State during the period covered
by its report bears to the average value of all the taxpayer's real and tangible personal property
wherever situated during such period.
Technical Services Bureau Memorandum TSB-M-82(3)C, states, in pertinent part:
Effective for taxable years beginning on or after January 1, 1982, real property
and related equipment, except inventoriable goods, which is under construction
and is not occupied and used during such construction, shall be excluded from the
numerator and denominator of the property factor when computing the business
allocation percentage. Property or equipment which is partially used by the
taxpayer in the regular course of his trade or business while under construction
should be included in the property factor to the extent used by the taxpayer....
RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-87 (19) C
Corporation Tax
July 20, 1987

The phrase "real property and related equipment" was intended to include real property
under construction and personal property under construction that is related to the real property.
For instance, such personal property includes an assembly line that must be constructed or
assembled in conjunction with the construction of the building which houses the assembly line.
The phrase also includes personal property that cannot be functional until the real property under
construction is completed, such as a large turbine that must be installed at a site before the
building is constructed around it. Accordingly, it is concluded that the phrase "real property and
related equipment" was intended to be more inclusive than suggested by Petitioner.
Furthermore, the authority for the establishment of the policy contained in Technical
Services Bureau Memorandum TSB-M-82(3)C is provided in section 210.8 of the Tax Law
which states that:
If it shall appear to the tax commission that any business... allocation
percentage determined as herein above provided does not properly reflect
the activity, business, income or capital of a taxpayer within the state, the
tax commission shall be authorized in its discretion, in the case of a
business allocation percentage, to adjust it by...(c) excluding one or more
assets....
Therefore, it is always within the discretion of the Tax Commission to exclude assets
from the property factor when justified by the circumstances of the particular case. However, an
Advisory Opinion merely sets forth the applicability of pertinent statutory and regulatory
provisions to "a specified set of facts." Tax Law, section 171, subd. twenty-fourth; 20 NYCRR
901.1(a). It is not within the scope of an Advisory Opinion to determine questions of fact such as
whether a discretionary adjustment under section 210.8 of Article 9-A of the Tax Law should be
granted.
Inasmuch as the question presented here arises within the context of an audit, the
necessary factual determination will be made within such context.

DATED: July 20, 1987

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.