NY TSB-A-93(7)C Corporation Tax 1993-02-10

Does transferring a division's assets to a subsidiary in a Section 351/368 reorganization trigger investment tax credit recapture or forfeit the credit carryover?

Short answer: No recapture, and the carryover survives. Transferring all of a division's assets to a wholly owned subsidiary in a tax-free transaction under IRC sections 351, 368, and 381(a) -- where the property stays in New York and in qualified use -- is not a 'disposition' under Tax Law section 210.12(g) or 20 NYCRR 5-2.8(e). So no investment tax credit add-back (recapture) is required, and the related investment tax credit carryover under section 210.12(e) is not lost. Because the New York recapture rule parallels IRC sections 50 and 38, federal precedent on credit carryovers applies. The acquiring corporation generally cannot claim a fresh credit (it takes the property at carryover basis, not by purchase), and the holding periods of both corporations are combined in measuring qualified use.

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

Milton Roy Company files New York franchise tax returns and has a $241,000 New York investment tax credit carryover generated entirely by its APD manufacturing division in Rochester. It planned to transfer all of APD's assets and liabilities to SLM Instruments, Inc., a wholly owned subsidiary, in a transaction qualifying as a tax-free transfer under IRC section 351 and a reorganization under section 368 to which section 381(a) applies. APD stays in Rochester in qualified use. The question: does the transfer trigger investment tax credit recapture or forfeit the credit carryover?

Neither. Under section 210.12(g) and 20 NYCRR 5-2.8(e), property transferred as part of a transaction to which IRC section 381(a) applies (such as a section 368 reorganization or a section 332 liquidation) is not a "disposition." Because there is no disposition -- and the property stays in qualified use with a corporation subject to Article 9-A -- no add-back (recapture) is required. And because the New York recapture rule in section 210.12(g) is parallel to IRC sections 50 and 38, federal precedent governs the carryover: the investment tax credit carryover is not lost. The opinion follows Coats & Clark, TSB-A-88(16)C.

Two practical points: the acquiring corporation generally cannot claim a fresh credit, because it takes the property at the transferor's carryover basis rather than "by purchase" (IRC section 179(d)); and in measuring whether the property stays in qualified use long enough, the holding periods of both the transferor and the acquirer are combined (and a later early disposal would trigger recapture from the acquirer).

What this means for you

A 381(a) reorganization is not a disposition

Moving property in a section 351/368 reorganization to which section 381(a) applies does not trigger New York investment tax credit recapture, as long as the property stays in qualified use within Article 9-A.

The credit carryover follows the property

Because New York's recapture rule parallels federal sections 50 and 38, the unused investment tax credit carryover survives the reorganization rather than being forfeited.

The acquirer takes carryover basis, not a new credit

The receiving corporation usually cannot claim a new credit on the same property (no "purchase"), and the two corporations' holding periods are combined for the qualified-use test.

Common questions

Q: Does moving a division's assets into my subsidiary trigger ITC recapture?
A: Not if it is a section 351/368 transfer to which section 381(a) applies and the property stays in qualified use in New York -- that is not a disposition.

Q: Do I lose the unused credit carryover?
A: No. Because the New York rule parallels federal sections 50 and 38, the carryover survives the reorganization.

Q: Can the subsidiary claim a new credit on the transferred property?
A: Generally no -- it takes the property at carryover basis, not by purchase, and the two corporations' holding periods are combined for measuring qualified use.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 210.12(g) (investment tax credit recapture on disposition)
- Tax Law section 210.12(e) (investment tax credit carryover)
- 20 NYCRR 5-2.8(e) (no disposition where IRC section 381(a) applies)
- IRC section 351 (tax-free transfer to a controlled corporation) and section 368 / section 381(a) (reorganization carryover)
- IRC section 50 and section 38 (federal investment credit recapture and carryover)

Source

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-93 (7) C
Corporation Tax
February 10, 1993

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C921007B

On October 7, 1992, a Petition for Advisory Opinion was received from Milton Roy
Company, 4949 Harrison Avenue, Rockford, Illinois 61125.
The issue raised by Petitioner, Milton Roy Company, is how to treat for corporation franchise
tax purposes an investment tax credit carryover generated by a division of Petitioner, when all of the
division's assets and liabilities are transferred to a subsidiary of Petitioner.
Petitioner has nexus in New York State and files corporation franchise tax returns. Petitioner
has six divisions: FCD, APD, HTL, PAD, CEL, and Corporate. The APD division is a
manufacturing facility in Rochester, New York. Petitioner has a New York investment tax credit
carryover available in the amount of $241,000. This New York investment tax credit carryover was
generated entirely by the APD division of Petitioner. SLM Instruments, Inc. located in Champaign,
Illinois is a wholly-owned subsidiary of Petitioner. Petitioner plans to transfer all of the assets and
liabilities of its APD division to SLM Instruments, Inc. This transfer will be made in compliance
with the provisions of section 351 of the Internal Revenue Code of 1986, as amended (hereinafter
"IRC"). In addition, the proposed transaction will be a reorganization under section 368 of the IRC
and section 381(a) of the IRC will apply. The proposed transaction will not constitute a purchase
pursuant to section 179(d) of the IRC. APD will remain in Rochester, New York as a manufacturing
facility after its assets are transferred to SLM Instruments, Inc. SLM Instruments, Inc. will remain
in Champaign, Illinois. No assets of APD will be moved from Rochester, New York to Champaign,
Illinois.
Section 210.12(g) of the Tax Law and section 5-2.8(a) of the Business Corporation Franchise
Tax Regulations (hereinafter "Article 9-A Regulations") provide that if property on which
investment tax credit has been claimed is disposed of or ceases to be in qualified use prior to the end
of its useful life, the difference between the credit taken and the credit allowed for actual use must
be added back to the tax otherwise due in the year of disposition or disqualification.
Section 5-2.8(e) of the Article 9-A Regulations provides that:
a disposition does not occur where property is transferred from a corporation as part
of a transaction to which section 381(a) of the Internal Revenue Code applies; e.g.,
a complete liquidation of a subsidiary under section 332 of the Internal Revenue
Code, or a reorganization under section 361 and section 368(a)(1)(A) (statutory
merger or consolidation), section 368(a)(1)(C) (certain acquisitions of property from
one corporation by another), section 368(a)(1)(D) (certain transfers of assets), section
368(a)(1)(F) (mere change in identity, form or place of organization, however
effected) or section 368(a)(1)(G) (bankruptcy reorganizations).
TP-9 (9/88)

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TSB-A-93 (7) C
Corporation Tax
February 10, 1993

As there is no disposition in these cases, an add back is not required provided that the
property continues in qualified use and is acquired by a corporation subject to tax
under article 9-A. Generally, in these cases, the acquiring or surviving corporation
cannot claim an investment tax credit because it takes over such property at the
adjusted basis of the transferor and the transfer therefore does not qualify as a
purchase pursuant to Internal Revenue Code, section 179(d)(2). If the property in the
hands of the acquiring corporation is not in qualified use for its entire life or for more
than 12 consecutive years, a recovery from the acquiring corporation is required. In
measuring the period of qualified use, the period during which the property was held
by the transferor corporation and the acquiring corporation are to be taken into
account.
Section 351(a) of the IRC states: "[n]o gain or loss shall be recognized if property is
transferred to a corporation by one or more persons solely in exchange for stock in such corporation
and immediately after the exchange such person or persons are in control las defined in section
368(c)) of the corporation."
A tax-free transfer pursuant to section 351 of the IRC, that for federal income tax purposes
does not require the recapture of the investment tax credit taken on section 38 of the IRC property,
does not constitute a "disposition" as contemplated in section 210.12(g) of the Tax Law. See Coats
& Clark Inc., Adv Op Comm T & F, August 11, 1988, TSB-A-88(16)C. Where a disposition does
not occur, a recapture of the investment tax credit taken is not required and an investment tax credit
carryover is not lost.
Herein, Petitioner's proposed transaction is similar to Coats & Clark Inc., supra, in that it is
a tax free transfer under section 351 of the IRC. Additionally, Petitioner states that the proposed
transaction will be a reorganization under that section 368 of the IRC and that section 381(a) of the
IRC will apply. Accordingly, Petitioner's proposed transaction will not be a "disposition" for
purposes of section 210.12(g) of the Tax Law and section 5-2.8 of the Article 9-A Regulations and
any investment tax credit taken with respect to such property will not be required to be recaptured
by Petitioner in the year of the proposed transaction.
There is no specific provision contained in either the Tax Law or the Regulations
promulgated thereunder with respect to the effect of the proposed transaction on the investment tax
credit carryover that Petitioner has been allowed pursuant to section 210.12(e) of the Tax Law.
Herein, the language of section 210.12(g) of the Tax Law is parallel to that contained in
section 50 of the IRC. Therefore, when determining the effect of the proposed transaction on the
investment tax credit carryover pursuant to section 210.12(e) of the Tax Law, it is appropriate to
apply precedent set under the IRC for federal income tax purposes.

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TSB-A-93 (7) C
Corporation Tax
February 10, 1993

Section 381(a) of the IRC states that:
GENERAL RULE.--In the case of the acquisition of assets of a corporation
by another corporation-
...
(2) in a transfer to which section 361 (relating to
nonrecognition of gain or loss of corporations) applies, but only if the
transfer is in connection with a reorganization described in
subparagraph (A), (C), (D), (F), or (G) of section 368(a)(1),
the acquiring corporation shall succeed to and take into account, as of the close of the
day of distribution or transfer, the items described in subsection (c) of the distributor
or transferor corporation, subject to the conditions and limitations specified in
subsections (b) and (c). For purposes of the preceding sentence, a reorganization
shall be treated as meeting the requirements of subparagraph (D) or (G) of section
368(a)(1) only if the requirements of subparagraphs (A) and (B) of section 354(b)(1)
are met.
Section 381(c) of the IRC states that:
ITEMS OF THE DISTRIBUTOR OR TRANSFEROR CORPORATION.-The items referred to in subsection (a) are:
...
(24) CREDIT UNDER SECTION 38.--The acquiring
corporation shall take into account (to the extent proper to carry out
the purposes of this section and section 38, and under such
regulations as may be prescribed by the Secretary) the items required
to be taken into account for purposes of section 38 in respect of the
distributor or transferor corporation ....
Petitioner states that section 381(a) of the IRC will apply to Petitioner's proposed transaction
to transfer the assets of the APD division to SLM Instruments, Inc. Accordingly, for federal income
tax purposes, any unused investment tax credit that Petitioner has been allowed as a carryover on
section 38 property that is included in the transfer will follow the property and will be allowed as an
investment tax credit carryover for SLM Instruments, Inc. Further, if a recapture of the investment
tax credit taken on such section 38 property is required, SLM Instruments, Inc., will be required to
make the recapture.

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TSB-A-93 (7) C
Corporation Tax
February 10, 1993

Accordingly, herein, Petitioner's proposed transaction will result in Petitioner's loss of the
investment tax credit carryover attributable to such transferred assets computed pursuant to section
210.12(e) of the Tax Law. However, such investment tax credit carryover will follow the property
that generated such credit carryover and will be allowed as an investment tax credit carryover
pursuant to section 210.12(e) of the Tax Law for SLM Instruments, Inc.
Further, if, pursuant to Petitioner's proposed transaction, the property transferred to SLM
Instruments, Inc. is not in qualified use for its entire life or for more than 12 consecutive years, a
recovery from SLM Instruments, Inc. will be required pursuant to section 5-2.8(e) of the Article 9-A
Regulations. In measuring the period of qualified use, the period during which the property was held
by Petitioner and SLM Instruments, Inc. would be taken into account.

DATED: February 10, 1993

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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