New York Advisory Opinion TSB-A-88 (5)I: Issue raised is whether for personal income tax purposes the general partners and the corporate limited partner of Petitioner may claim an investment tax credit, pursuant to section 606(a)(1) of the Tax Law, with respect to Petitioner's investment in equipment to be used in a hydroelectric facility that will manufacture electric energy.

Plain-English summary

Newport Hydro Associates, a New York limited partnership, planned to build a hydroelectric power plant in the Village of Newport, Herkimer County, at the site of an existing dam, under a lease of development rights from the Village. The facility would use two Voith Hydro horizontal Mini-Pit turbine/generators plus a minimum-flow turbine generator - equipment acquired by purchase, depreciable, and with a useful life over four years - to generate about 7.8 million kilowatt-hours of electricity a year, sold to Niagara Mohawk Power Corporation through an adjacent substation. Petitioner asked whether its general partners and its corporate limited partner could claim the Tax Law § 606(a)(1) investment tax credit for this equipment.

The Department first confirmed a threshold point: a partnership itself doesn't pay New York personal income tax; instead, each partner is taxed individually on their distributive share, whether or not it's actually distributed. It also confirmed that the personal income tax credit under § 606(a) (Article 22) and the corporate credit under § 210.12(a) (Article 9-A) have essentially identical qualifying requirements: the property must be acquired after December 31, 1968; be depreciable under IRC § 167 or recovery property under § 168; have a useful life of four years or more; be "acquired by purchase" as IRC § 179(d) defines that term; have a New York situs; and be "principally used ... in the production of goods by manufacturing, processing, assembling, refining, mining, extracting, farming, agriculture, horticulture, floriculture, viticulture or commercial fishing." Because tangible property a partnership purchases is deemed purchased by each partner to the extent of their distributive share, the "acquired by purchase" requirement was satisfied even though the partnership, not the individual partners, made the actual purchase.

That left only one real question: does generating electricity count as "production of goods by manufacturing, processing, etc."? The Department said no. "Manufacturing" under § 606(a)(2)(B)(i) means working raw materials into wares, or giving new shape, quality, or combination to already-processed matter, using machinery or equipment. "Processing," per the Tax Commission's own earlier definition in Matter of Hudson Cold Storage and Freezer Corp. (TSB-H-83(40)C), means subjecting raw material to special treatment that transforms its form, state, or condition. Both concepts, and the parallel corporate-credit language in § 210.12(b), are built around working raw materials into goods - tangible matter with a new shape or quality. Electric energy, the Department reasoned, is neither "goods" nor "matter" in that sense; it's a form of energy, not a tangible product fashioned from raw materials. Because the hydroelectric facility's whole output failed that basic categorization, it made no difference how industrial or capital-intensive the generating process was - neither the individual partners (against their Article 22 tax under § 606(a)) nor the corporate limited partner (against its Article 9-A tax under § 210.12(a)) could claim any credit for their share of the equipment's cost or basis.

This opinion is one of a small cluster of late-1980s rulings applying the same "production of goods by manufacturing, processing, etc." test under Tax Law § 606(a) to very different kinds of equipment, with contrasting results. A companion opinion from the same era held that diagnostic-imaging equipment used to produce X-ray film images DID qualify, treating the production of the film image as "processing" or "manufacturing" analogous to producing video tape. Another held that equipment used to prepare frozen custard for retail sale did NOT qualify, because preparing food for retail sale isn't industrial "processing" in the statutory sense. This hydroelectric ruling supplies a third, distinct outcome: even highly industrial, capital-intensive equipment fails the test if what it produces - electric energy - isn't "goods" or "matter" at all, regardless of how the production process itself might otherwise look.

What this means for you

Renewable-energy and power-generation partnerships evaluating the investment tax credit

If your partnership or corporation is building a power-generation facility - hydroelectric, and by the same logic likely solar, wind, or other electricity-generating equipment - don't assume that capital-intensive, industrial-looking generating equipment automatically qualifies for the Tax Law § 606(a) or § 210.12(a) investment tax credit. The Department's reasoning turns on what the equipment produces, not on how sophisticated or "manufacturing-like" the process looks. Because the output is electric energy rather than a tangible good, this opinion indicates the credit is unavailable regardless of the facility's scale or the equipment's cost.

Accountants distinguishing "production of goods" from energy generation

When advising clients who claim the investment tax credit for industrial equipment, use this opinion as a data point for where the line falls: equipment that transforms raw materials into a tangible product (with a new shape, quality, or combination) can qualify as "manufacturing" or "processing," but equipment whose output is energy - rather than goods or matter - does not, no matter how industrial the underlying process. Confirm what the equipment's end output actually is before assuming credit eligibility.

Investors in hydroelectric, solar, or wind power partnerships

As a limited partner or corporate partner in a power-generation partnership, your distributive share of an investment tax credit for generating equipment may not be available even if the partnership's offering materials assumed it would be. This opinion shows the Department applying the "acquired by purchase" pass-through rule favorably (each partner is treated as having purchased their share of partnership property), but that favorable analysis doesn't help if the underlying activity - generating electric energy - fails the separate "production of goods" requirement altogether.

Common questions

Q: Does generating electricity count as "manufacturing" for the investment tax credit?
A: No. The Department held that generating electric energy is not "production of goods by manufacturing, processing, assembling, refining, mining, extracting, farming, agriculture, horticulture, floriculture, viticulture or commercial fishing" under Tax Law § 606(a) and § 210.12(b), because electricity is neither "goods" nor "matter" as those terms are used in the statute - it's a form of energy, not a tangible product manufactured from raw materials.

Q: Why did it matter that Petitioner was a partnership rather than a corporation?
A: It didn't change the outcome, but it did require an extra analytical step. Under Tax Law § 601(f) and Personal Income Tax Regulations § 119.1, a partnership itself doesn't pay New York personal income tax - each partner is taxed individually on their distributive share. The Department confirmed that tangible property a partnership purchases under IRC § 179(d) is deemed purchased by each partner to the extent of their distributive share, so the "acquired by purchase" requirement was satisfied at the partner level even though the partnership made the actual purchase. That analysis applied equally to the general partners (claiming under § 606(a) against their Article 22 tax) and the corporate limited partner (claiming under § 210.12(a) against its Article 9-A tax).

Q: Were the other investment-tax-credit requirements at issue in this opinion?
A: No. Petitioner conceded that the equipment satisfied the requirements that it be acquired after December 31, 1968; be depreciable under IRC § 167 or recovery property under IRC § 168; have a useful life of four years or more; and have a New York situs. The only disputed requirement was whether the equipment was "principally used ... in the production of goods by manufacturing, processing, etc." - and that's where the claim failed.

Q: How does this opinion compare to other rulings applying the same manufacturing/processing test?
A: It's one of three contrasting outcomes from the same era. A companion opinion held that medical diagnostic-imaging equipment DID qualify, because producing an X-ray film image was treated as "processing"/"manufacturing" similar to producing video tape. Another held that equipment for preparing frozen custard for retail sale did NOT qualify, because food preparation for retail sale isn't industrial "processing." This hydroelectric opinion adds a third and different reason for disqualification: even large-scale, capital-intensive generating equipment fails the test because its output - electric energy - isn't "goods" or "matter" in the first place.

Q: Does this opinion mean equipment used to distribute or transmit electricity also can't qualify?
A: The opinion doesn't address transmission or distribution equipment directly - it addresses equipment used to generate electric energy at a hydroelectric facility. But its core reasoning (that electric energy itself isn't "goods" or "matter") would logically extend to any equipment whose end function is producing or moving electricity rather than producing a tangible good.

Citations and references

• Tax Law § 601(f) and Personal Income Tax Regulations § 119.1 - a partnership itself does not pay New York personal income tax; partners are taxed individually on their distributive shares whether or not distributed
• Tax Law § 606(a) and Personal Income Tax Regulations § 103.1(c)(1) - the six-part test for property to qualify for the Article 22 investment tax credit, including the "production of goods by manufacturing, processing, etc." requirement
• Tax Law § 606(a)(2)(B)(i) - defines "manufacturing" as working raw materials into wares, or giving new shape, quality, or combination to matter that has already gone through some artificial process
• Tax Law § 210.12(a) and § 210.12(b) - the essentially identical Article 9-A investment tax credit for corporations, including corporate limited partners
• IRC §§ 167, 168, 179(d) - depreciability, recovery property, and "acquired by purchase" definitions incorporated into the state investment tax credit tests
• Matter of Hudson Cold Storage and Freezer Corp., State Tax Commission, September 9, 1983, TSB-H-83(40)C - defines "processing" as an operation subjecting raw material to special treatment that transforms its form, state, or condition

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a88_5i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88 (5) I
Income Tax
April 29, 1988

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I880127A

On January 27, 1988, a Petition for Advisory Opinion was received from Newport Hydro
Associates, 114 State Street, Boston, Massachusetts 02109.
The issue raised is whether for personal income tax purposes the general partners and the
corporate limited partner of Petitioner may claim an investment tax credit, pursuant to section
606(a)(1) of the Tax Law, with respect to Petitioner's investment in equipment to be used in a
hydroelectric facility that will manufacture electric energy.
Petitioner is a New York limited partnership. Petitioner will build a hydroelectric power plant
("facility") in the Village of Newport, in Herkimer County, New York to manufacture electric
energy. Petitioner is developing the facility in accordance with the terms of a lease agreement with
the Village of Newport which is granting development rights to Petitioner.
The facility, which will be built at the site of an existing dam, will utilize two Voith Hydro,
Inc. horizontal Mini-Pit turbine/generators and a minimum flow turbine generator. The equipment
will be acquired by purchase as defined in section 179(d) of the Internal Revenue Code. The
property will be depreciable pursuant to section 167 of the IRC and have a useful life of more than
four years. Petitioner believes that the equipment will be principally used in the production of goods
by manufacturing. The facility will manufacture approximately 7.8 million KWH of electric energy
per year. The electric power from the facility will be transmitted to an existing substation located
adjacent to the powerhouse for delivery to and purchase by Niagara Mohawk Power Corporation.
Section 601(f) of Article 22 of the Tax Law and section 119.1 of the New York State
Personal Income Tax Regulations (hereinafter "Income Tax Regulations") provide that a partnership
itself does not pay a New York State personal income tax, but the individual partners are taxed on
their respective distributive shares of the partnership income, whether or not such shares are actually
distributed to them.
Section 606(a) of the Tax Law allows an investment tax credit against the ordinary tax
imposed by Article 22 of the Tax Law with respect to certain tangible property. Under Article 9-A
of the Tax Law, corporations are allowed an investment tax credit pursuant to section 210.12(a),
against the tax imposed under Article 9-A. Such investment tax credit provisions are essentially the
same as the investment tax credit provided under section 606(a) and the qualifying requirements
under both section 210.12(a) and section 606(a) are identical.

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Income Tax
April 29, 1988
Section 606(a) and section 103.1(c)(1) of the Income Tax Regulations define property which
qualifies for the investment tax credit as tangible personal property and other tangible property,
including buildings and structural components of buildings, which:
"(i) is acquired, constructed, reconstructed or erected by the taxpayer after December 31,
1968;
(ii) is depreciable pursuant to section 167 of the Internal Revenue Code or is recovery
property with respect to which a deduction is allowable under section 168 of the Internal
Revenue Code;
(iii) has a useful life of four years or more;
(iv) is acquired by the taxpayer by purchase as defined in subsection (d) of section 179 of the
Internal Revenue Code;
(v) has a situs in New York State; and
(vi) is principally used by the taxpayer in the production of goods by manufacturing,
processing, assembling, refining, mining, extracting, farming, agriculture, horticulture,
floriculture, viticulture or commercial fishing."
Section 606(a) clearly requires that all of the above criteria be met before an investment tax
credit is allowed. Petitioner states that the property purchased by the partnership will satisfy the
requirements of criteria (i), (ii), (iii) and (v) above. Therefore, the criteria at issue herein are whether
the property is acquired by the taxpayer (partner) by purchase as defined in section 179(d) of the
Internal Revenue Code and whether such property is principally used by the taxpayer (partner)in the
production of goods by manufacturing, processing, assembling, etc.
Tangible property that a partnership purchases, as defined in section 179(d) of the Internal
Revenue Code, is deemed to be purchased by each partner to the extent of the partner's distributive
share of the partnership's property. Accordingly, tangible property that is deemed to be purchased
by a partner pursuant to section 179(d) of the Internal Revenue Code will be deemed to be acquired
by purchase by the taxpayer (partner) for purposes of section 606(a) of the Tax Law.
Section 606(a)(2)(B)(i) provides that "manufacturing" means the process of working raw
materials into wares suitable for use or which gives new shapes, new quality or new combinations
to matter which already has gone through some artificial process by the use of machinery, tools,
appliances and other similar equipment.
The New York State Tax Commission has defined "processing" as an operation
whereby raw material is subjected to some special treatment, either artificially or naturally,
which results in a transformation or alteration of the raw material's form,

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Income Tax
April 29, 1988
state or condition (Matter of Hudson Cold Storage and Freezer Corp., State Tax Commission,
September 9, 1983, TSB-H-83(40)C.
The language of section 606(a)(2) and section 210.12(b) indicates that the investment tax
credit was intended for machinery and equipment used principally in the production of goods. Such
sections also intended that the manufacturing process include working raw materials thereby giving
new shape, quality or combinations to matter. Herein, Petitioner's hydroelectric power plant will
generate electric energy that is neither goods nor matter as those terms are used in section 606(a)(2)
and section 210.12(b). Therefore, Petitioner's activities do not constitute the production of goods
by manufacturing, processing etc. as required by section 606(a) and section 210.12.
Accordingly, individual partners of Petitioner will not be allowed an investment tax credit
pursuant to section 606(a) of the Tax Law against the tax imposed under section 601 for its
distributive share of the cost or other basis of the tangible personal property used to generate electric
energy.
In addition, a corporate partner of Petitioner will not be allowed an investment tax credit,
pursuant to section 210.12(a), against the tax imposed under Article 9-A for its distributive share of
the cost or other basis of the tangible personal property used to generate electric energy.

DATED: April 29, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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