Is a newly formed LLC that buys the assets of a former Article 9-A taxpayer a new business eligible for the refundable economic development zone investment tax credit?
Plain-English summary
Fred Drasner asked whether New Elmira Company L.L.C. -- a new Delaware LLC formed to buy the printing assets of Elmira Litho, Inc. (a New York Article 9-A taxpayer in bankruptcy) and operate in the Elmira Economic Development Zone -- will be a "new business" under Tax Law section 210.12, which matters for the refundable economic development zone investment tax credit (EDZ-ITC).
First, because an LLC treated as a corporation federally is a corporation for New York (Tax Law section 208.1), New Elmira (assumed to be a federal corporation) is an Article 9-A taxpayer. A corporation is a new business under section 210.12(j) unless it is (1) over-50% owned by an existing Article 9/9-A/32/33 taxpayer, (2) substantially similar in operation AND ownership to a previously taxable entity, or (3) already taxed under Article 9-A for more than four years.
New Elmira is similar in operation to Elmira Litho (it continues the same printing business) but not in ownership (the two were unaffiliated before the deal). It is similar in ownership to an affiliate ("APT") but, on the assumed facts, not in operation. Because it is never similar in both operation and ownership to any single prior taxpayer, it does not fail the similarity test -- so, assuming it is not similar in operation to APT, New Elmira is a new business eligible for the EDZ credits and refunds.
What this means for you
An LLC taxed as a corporation is an Article 9-A taxpayer
An LLC's New York classification follows its federal one. An LLC treated as a corporation federally is taxed as a corporation under Article 9-A; one treated as a partnership is a partnership for New York.
"New business" status drives the refundable EDZ investment tax credit
Only a new business may elect to treat 50% of an unused EDZ-ITC carryover as a refundable overpayment. A corporation is a new business unless it is controlled by an existing taxpayer, is substantially similar in operation and ownership to a prior taxpayer, or has been taxed under Article 9-A for more than four years.
Similarity must be in BOTH operation and ownership
Buying a former taxpayer's business and continuing it makes the buyer similar in operation -- but if the buyer and seller were unaffiliated beforehand, they are not similar in ownership, so the buyer is not disqualified. Similarity in only one dimension does not defeat new-business status.
Common questions
Q: What makes a corporation a "new business" for the EDZ investment tax credit?
A: It is a new business unless it is over-50% owned by an existing Article 9/9-A/32/33 taxpayer, is substantially similar in both operation and ownership to a previously taxable entity, or has been an Article 9-A taxpayer for more than four years.
Q: Does buying a former taxpayer's assets make the buyer not new?
A: Not by itself. Continuing the seller's business makes the buyer similar in operation, but if they were unaffiliated before the sale they are not similar in ownership, so the buyer can still be a new business.
Q: Did the opinion definitively find new-business status?
A: It did, but only on assumed facts -- whether the LLC is similar in operation to its affiliate APT is a fact question. Assuming it is not, New Elmira is a new business eligible for the EDZ credit and refund.
Citations and references
Statutes, regulations, and authorities:
- Tax Law section 2 (definitions of limited liability company and partnership/partner)
- Tax Law section 208.1 (corporation includes an association, including an LLC)
- Tax Law section 209.1 (Article 9-A franchise tax)
- Tax Law section 210.12 / 210.12(j) (investment tax credit; new business definition)
- Tax Law section 210.12-B (economic development zone investment tax credit; refund election)
- FGIC CMRC Corp, TSB-A-96(11)C (April 1, 1996) (LLC classification follows federal)
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1997.htm
- Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a97_18c.pdf
Original ruling text
New York State Department of Taxation and Finance
Taxpayer Services Division
Technical Services Bureau
TSB-A-97(18)C
Corporation Tax
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. C970513E
On May 13, 1997, a Petition for Advisory Opinion was received from Fred
Drasner, 450 West 33rd Street, New York, New York 10001.
The issue raised by Petitioner, Fred Drasner, is whether New Elmira Company
L.L.C. will be a "new business" within the meaning of section 210.12 of Article
9-A of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
New Elmira Company L.L.C. will be a newly formed Delaware limited liability
company ("LLC"). The members of the company and their membership interests are:
Mortimer B. Zuckerman, 99 percent interest and Fred Drasner, one percent
interest.
New Elmira Company L.L.C. has been formed for the purpose of
purchasing the assets of Elmira Litho, Inc., a New York corporation ("Elmira
Litho"), a subsidiary of Meehan-Tooker, Inc., a New Jersey corporation which is
presently in Chapter 11.
Mortimer B. Zuckerman and Fred Drasner have no
ownership interest in Meehan-Tooker, Inc. It is assumed for purposes of this
advisory opinion that Mortimer B. Zuckerman and Fred Drasner have no ownership
interest in Elmira Litho. Elmira Litho presently conducts a printing business
employing approximately 180 people at the Horseheads Industrial Center in the
Village of Horseheads, Chemung County, New York. The Elmira Litho business is
located in the Elmira Economic Development Zone.
Elmira Litho produces 100
percent full-web long run printing using 2 M-1000 full-web long run presses. It
produces approximately 20 jobs per month with an average per job of 5,000,000
impressions and sales of $104,000. It has equipment capable of in-line finishing
and extensive off-line finishing. Elmira Litho has contracts with many of its
customers for special minimum impression requirements. New Elmira Company L.L.C.
will conduct a printing business at the Horseheads location similar to that
conducted by Elmira Litho using the equipment and customer list it will purchase
from Elmira Litho.
Applied Printing Technologies ("APT") is a limited partnership which is
owned 92.5 percent by Mortimer B. Zuckerman or entities he controls and 7.5
percent by Fred Drasner.
Applied Printing Technologies is engaged in the
printing business at 77 Moonachie Avenue, Moonachie, New Jersey.
APT is
primarily a sheetfed printer with half-web and some full-web short run capability
with equipment consisting of eight sheetfed presses, 2 M-100 half-webs and one
short-run full-web.
APT produces approximately 500 jobs per month with an
average per job of 500,000 impressions and sales of $10,000.
APT has only
limited, primarily off line, finishing capabilities. APT completes its jobs on
a job by job basis. From 1988 through April 1996, APT conducted an additional
printing operation in New York City and as a result during that period, was a New
York State taxpayer. APT no longer has any operations in New York State.
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Petitioner states that Elmira Litho and APT are distinct and dissimilar
types of printing operations located in different states. Also, they have a
completely different customer base; there is no overlap between material sales
by APT to APT customers and material sales by Elmira Litho to Elmira Litho
customers.
Petitioner also states that New Elmira Company L.L.C. is not a corporation
in which over 50 percent of the shares of stock entitling its holders to vote for
the election of directors or trustees is owned or controlled directly or
indirectly by taxpayers subject to the provisions of Articles 9, 9-A, 32 or 33
of the Tax Law.
It is not a corporation that is substantially similar in
operation and ownership to a business entity taxable or previously taxable under
Articles 9, 9-A, 23, 32, or 33 of the Tax Law.
Section 2 of the Tax Law provides the definition of certain terms used in
the Tax Law, and was amended by Chapter 576 of the Laws of 1994 which added the
following:
5. The term “limited liability company” means a domestic limited
liability company or a foreign limited liability company, as defined
in section one hundred two of the limited liability company law.
6. “Partnership and partner,” unless the context requires otherwise,
shall include, but shall not be limited to, a limited liability
company and a member thereof, respectively.
Section 208.1 of the Tax Law provides that the term “corporation” includes
an association within the meaning of section 7701(a)(3) of the Internal Revenue
Code, including an LLC.
Section 209.1 of Article 9-A of the Tax Law imposes the business
corporation franchise tax on every corporation, unless specifically exempt, for
the privilege of exercising its franchise, or of doing business, or of employing
capital, or of owning or leasing property in New York State in a corporate or
organized capacity, or of maintaining an office in New York State.
An LLC that is treated as a corporation for federal income tax purposes is
treated as a corporation for New York State tax purposes. An LLC that is treated
as a partnership for federal income tax purposes, is treated as a partnership for
New York State tax purposes. (See, FGIC CMRC Corp, Adv Op Comm T & F, April 1,
1996, TSB-A-96(11)C; and Department of Taxation and Finance Memorandum, TSB-M
94(6)I and (8)C, October 25, 1994.)
Assuming that New Elmira Company L.L.C. is treated as a corporation for
federal income tax purposes, it will be treated as a corporation for New York
State tax purposes and will be subject to tax under Article 9-A of the Tax Law.
Section 210.12-B of the Tax Law provides for an economic development zone
investment tax credit ("EDZ-ITC"). Section 210.12-B(d) of the Tax Law provides
that the amount of the EDZ-ITC allowed for any taxable year shall not reduce the
tax due for the year to less than the higher of the amounts prescribed in section
210.1(c) and (d) of the Tax Law. Provided, however, that if the amount of EDZ
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ITC allowed reduces the tax to such amount, any amount of credit not deductible
in the taxable year may be carried over to the following year or years. In lieu
of the carryover, a taxpayer which qualifies as a new business under section
210.12(j) of the Tax Law may elect, on its report for its taxable year with
respect to which the credit is allowed, to treat 50 percent of the amount of
carryover as an overpayment of tax to be credited or refunded in accordance with
the provisions of section 1086 of the Tax Law.
Section 210.12(j)
corporation except:
of
the
Tax
Law
defines
a
"new
business"
as
any
- a corporation in which over 50% of the number of shares of stock
entitling their holders to vote for the election of directors or
trustees is owned or controlled, either directly or indirectly, by
a taxpayer subject to tax under Article 9-A; section 183, 184, 185,
186 of Article 9; Article 32 or 33 of the Tax Law; or - a corporation that is substantially similar in operation and in
ownership to a business entity or entities taxable, or previously
taxable under Article 9-A; section 183, 184, 185, or 186 of Article
9; Article 32 or 33; or Article 23 or that would have been subject
to tax under Article 23, as such article was in effect on January 1,
1980, or the income (or losses) of which is (or was) includable
under Article 22 of the Tax Law whereby the intent and purpose of
section 210.19(e) of the Tax Law with respect to refunding of credit
to new business would be evaded; or - a corporation that has been subject to tax under Article 9-A for
more than four years (excluding short periods) before each tax year
during which the taxpayer becomes eligible for the EDZ investment
tax credit or EDZ wage tax credit (that is, the year for which the
credit is allowed).
Based on the facts presented, it appears that: - New Elmira Company L.L.C. will not be a corporation owned or controlled,
either directly or indirectly by a taxpayer subject to tax under Article 9, 9-A,
32 or 33 of the Tax Law. - New Elmira Company L.L.C. will be similar in operation to an entity
previously taxable under Article 9-A, because it will acquire Elmira Litho which
was an Article 9-A taxpayer that will be continuing its operations in New York
under the new ownership. However, New Elmira Company L.L.C. will not be similar
in ownership to Elmira Litho, a business entity previously taxable under Article
9-A, because even though Elmira Litho was an Article 9-A taxpayer, Elmira Litho
and New Elmira Company L.L.C. will not be affiliated prior to the acquisition,
and the ownership of New Elmira Company L.L.C. after the acquisition is not
substantially similar to the ownership of Elmira Litho prior to the acquisition.
New Elmira company L.L.C. will be similar in ownership to APT.
However,
Petitioner states that Elmira Litho and, subsequently, New Elmira Company L.L.C.
will not be similar in operation to APT. The determination of whether these
entities are similar in operation is a factual question that is not susceptible
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of determination in an Advisory Opinion. An Advisory Opinion merely sets forth
the applicability of pertinent statutory and regulatory provisions to "a
specified set of facts." Tax Law, §171.Twenty-fourth; 20 NYCRR 2376.1(a). For
purposes of this Advisory Opinion, it is assumed that New Elmira Company L.L.C.
and APT will not be similar in operation.
3. New Elmira Company L.L.C. is a new LLC that was not previously subject
to tax under Article 9-A of the Tax Law.
Accordingly, assuming that New Elmira Company L.L.C. will be treated as a
corporation for federal income tax purposes, it will be treated as a corporation
for New York franchise tax purposes and a taxpayer under Article 9-A of the Tax
Law.
Assuming, further, that New Elmira Company L.L.C. is not similar in
operation to APT's operations, New Elmira Company L.L.C. will be a "new business"
pursuant to section 210.12(j) of the Tax Law and will also be considered a "new
business" pursuant to section 210.12(e) of the Tax Law for purposes of the EDZ
credits and refunds for those taxable years that it meets the requirements of
section 210.12(j)(3) of the Tax Law.
DATED: July 16, 1997
NOTE:
/s/
John W. Bartlett
Deputy Director
Technical Services Bureau
The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.