How do section 186, section 186-a, and the real estate transfer tax apply to LILCO's restructuring -- under threat of condemnation by LIPA -- including asset exchanges, redemption distributions, and transfers to disregarded LLCs?
Plain-English summary
Long Island Lighting Company (LILCO) is restructuring under a threat of condemnation by the Long Island Power Authority (LIPA): LILCO will exchange its gas and generation assets for stock of a holding company (BL Holding) and assume-liabilities, distribute BL Holding stock to its shareholders (the Redemption Distribution), and have LIPA acquire the rest of LILCO's public shares for cash (the LIPA Merger). Various utility operations move into wholly owned Transferee LLCs (Genco, Gasco, Servecos). LILCO asked nine corporate-tax questions and several real-estate-transfer-tax questions. This is the foundational "LILCO-II" opinion later opinions repeatedly cite.
Section 186 (Issues 1-3). Because the asset exchange is forced by the condemnation threat, LILCO does not employ its capital within the meaning of section 186 (Con Ed), so the consideration is not gross earnings. The Redemption Distribution and LIPA-Merger cash are how LIPA buys out the public shareholders -- a complete termination of their interests -- so they are treated as payment for redeemed shares, not dividends subject to the excess dividends tax.
Section 186-a (Issues 4-5, 9). LILCO realizes gross income only to the extent of profit -- fair market value of the BL Holding stock plus assumed liabilities over the assets' original cost (no depreciation), with all assets aggregated as one sale and sale expenses deductible (LILCO-I). A PSC-supervised Transferee LLC is taxed on gross income; an unregulated one on gross operating income (only its gas/electricity sales, not service receipts).
Disregarded LLCs (Issues 6-8). The wholly owned Transferee LLCs are disregarded for federal purposes and so are not separate taxable entities for section 186 -- their receipts combine with BL Holding's to test whether BL Holding is "principally engaged" in supplying gas/electricity (more than 50% of gross receipts, intercompany transactions disregarded, only gas/electricity sales in the numerator). But the LLCs are "persons" taxable under section 186-a.
Real estate transfer tax. The conveyances qualify for the section 1405(b)(6) "mere change of identity or form" exemption (no change in beneficial ownership), except as to the change in beneficial interest; the LIPA acquisition is exempt as a transfer to a public authority under section 1405(b)(1).
What this means for you
Condemnation-forced transfers are not gross earnings
Disposing of capital under a condemnation threat is not "employing capital," so the consideration is outside section 186 gross earnings.
Buyout distributions are redemptions, not dividends
Distributions that completely terminate shareholders' interests as part of a public-authority buyout are payment for redeemed shares, not excess dividends.
Disregarded LLCs follow federal classification
A single-member LLC disregarded federally is not a separate entity for section 186 (its receipts roll up to the owner), yet it is still a "person" taxed under section 186-a.
Common questions
Q: Is the asset exchange taxed under section 186?
A: No. Because it is forced by the condemnation threat, it is not gross earnings.
Q: Are the Transferee LLCs taxed separately?
A: Not for section 186 (their receipts combine with the holding company's), but they are persons taxable under section 186-a.
Q: Do the property transfers owe real estate transfer tax?
A: They are exempt as a mere change of form, except the change in beneficial interest, and the LIPA acquisition is exempt as a transfer to a public authority.
Citations and references
Statutes, regulations, and authorities:
- Tax Law section 186 (franchise tax on gas and electric utilities; gross earnings and excess dividends)
- Tax Law section 186-a (tax on gross income or gross operating income of utilities)
- Tax Law section 1402 (real estate transfer tax)
- Tax Law section 1405(b)(1) (transfer tax exemption for conveyances to public authorities)
- Tax Law section 1405(b)(6) (exemption for a mere change of identity or form of ownership)
- Matter of Consolidated Edison Co. v State Tax Commission, 24 NY2d 114
- Long Island Lighting Company, TSB-A-95(9)C (LILCO-I)
- FGIC CMRC Corp, TSB-A-96(11)C (April 1, 1996)
- Long Island Lighting Company, TSB-A-98(3)C / TSB-A-98(1)R (Feb. 27, 1998)
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1998.htm
- Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a98_3c_1r.pdf
Original ruling text
New York State Department of Taxation and Finance
Taxpayer Services Division
Technical Services Bureau
TSB-A-98(3)C
Corporation Tax
TSB-A-98(1)R
Real Estate
Transfer Tax
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. Z971001B
On October 1, 1997, a Petition for Advisory Opinion was received from Long
Island Lighting Company, 175 East Old Country Road, Hicksville, New York 11801.
The issues raised by Petitioner, Long Island Lighting Company, are:
1. Will LILCO's exchange of the Gas and Generation Assets for BL
Holding common and preferred stock and the assumption by BL Holding
of certain of LILCO's liabilities result in the imposition of gross
earnings tax on LILCO under section 186 of the Tax Law?
2. Will the distribution by LILCO of the BL Holding common stock in
the Redemption Distribution be treated as a dividend subject to the
excess dividends tax imposed by section 186 of the Tax Law?
3. Will the distribution of cash in the LIPA Merger be treated as a
dividend subject to the excess dividends tax imposed by section 186
of the Tax Law?
4. With respect to the Gas and Generation Assets Exchange, will
LILCO realize taxable profits to the extent, if any, that the fair
market value of the BL Holding common and preferred stock received
by LILCO plus the amount of LILCO's liabilities assumed by BL
Holding exceed the original cost of the Gas and Generation Assets,
without deduction for depreciation, computed on an aggregate basis
(i.e., treating the Gas and Generation Assets Exchange as a single
"sale"), for purposes of the gross income tax imposed under section
186-a of the Tax Law?
5. With respect to the Redemption Distribution, will LILCO realize
taxable profits to the extent, if any, that the fair market value of
the LILCO stock deemed received by LILCO exceeds the original cost
of the BL Holding common stock exchanged therefor, for purposes of
the gross income tax imposed under section 186-a of the Tax Law?
6. Will the Transferee LLCs that, on a stand-alone basis, meet the
definition of a "utility" under sections 186 and 186-a of the Tax
Law be treated as separate taxable entities, distinct from each
other and from BL Holdings, for purposes of the gross earnings and
gross income taxes imposed under those provisions, such that the
income and deductions of such Transferee LLCs are excluded from the
income and deductions of BL Holding?
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- Will distributions to BL Holding from Transferee LLCs that are
taxable as separate utility entities under section 186 of the Tax
Law be subtracted from BL Holding's entire net income as income from
subsidiary capital to the extent such distributions would constitute
dividends if the Transferee LLCs had been organized as corporations? - If the Transferee LLCs are not treated as separate taxable
entities under section 186 of the Tax Law, distinct from each other
and from BL Holding, how are the receipts of BL Holding and the
Transferee LLCs characterized for purposes of determining whether BL
Holding is "principally engaged" in the business of supplying gas or
electricity and thus taxable under section 186 of the Tax Law rather
than Article 9-a of the Tax Law? - What receipts of the Transferee LLCs will be subject to tax under
section 186-a of the Tax Law?
10.
(a) Does the transfer of the Gas and Generation Assets from
LILCO to BL Holdings and the Transferee LLCs constitute a mere
change in the form of ownership such that the transfer is exempt
from the New York State Real Estate Transfer Tax?
(b) Similarly, does the Brooklyn Union Merger fail to
constitute a transfer of a controlling interest in BL Holding such
that the New York State Real Estate Transfer Tax will not be imposed
on the Gas and Generation Assets?
(c) Is the sale of the stock of LILCO to LIPA exempt from the
New York State Real Estate Transfer Tax?
Facts:
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Long Island Lighting Company ("LILCO" or the "Company") is a publicly-held
utility corporation subject to the supervision of the New York State (the
"State") Department of Public Service (the "PSC"). As such, LILCO is required
to pay taxes on its gross earnings and gross income pursuant to sections 186 and
186-a of the Tax Law, respectively.
This Advisory Opinion concerns two proposed transactions.
The first
transaction (the "LIPA Transaction") involves the acquisition of the stock of
LILCO by the Long Island Power Authority ("LIPA") pursuant to an agreement dated
as of June 26, 1997 (the "LIPA Agreement") and the transfer of certain of LILCO's
assets to a new corporation ("BL Holding") that will (prior to the second
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transaction described below) be owned by LILCO's former shareholders. LIPA is
a corporate municipal instrumentality and political subdivision of the State of
New York that was organized for the purpose of acquiring some or all of the stock
or assets of LILCO.
The second transaction (the "Brooklyn Union Merger") involves a
contemplated business combination between BL Holding and the Brooklyn Union Gas
Company ("Brooklyn Union"), also a publicly-held utility corporation subject to
the supervision of the PSC.1 The Brooklyn Union Transaction is only relevant to
the real estate transfer tax issues discussed below.
The LIPA transaction and the Brooklyn Union Merger are independent
transactions. Since both transactions are subject to various contingencies and
approvals, it is not possible at this time to determine with certainty the order
of the transactions.
However, it is presently anticipated that the LIPA
Transaction will be consummated first and the Brooklyn Union Merger immediately
thereafter, substantially as described below.
Shortly before the LIPA Transaction and the Brooklyn Union Merger are to
be consummated, BL Holding will be formed. Although the initial ownership of BL
Holding has not been finally determined, it is anticipated that BL Holding will
initially have 100 shares of common stock outstanding, of which 66 will be owned
by LILCO and 34 by Brooklyn Union. BL Holding will form one or more subsidiary
entities that are presently expected to be limited liability companies (the
"Transferee LLCs") for the purpose of holding and operating certain assets to be
acquired from LILCO.2
The Transferee LLCs will be wholly owned by BL Holding. For federal income
tax purposes, the Transferee LLCs will be ignored as separate entities and
treated as operating branches or divisions of BL Holding. As such, their income,
deductions, credits, etc., will be included on BL Holding's federal income tax
returns. See Treas. Regs. §301.7701-3(b)(1)(ii). It is presently expected that
at least three Transferee LLCs will be formed: (1) Serviceco, which will perform
management services both for BL Holding and, under contract, LIPA; (2) Genco,
which will receive and operate LILCO's non-nuclear generating plants; and (3)
Gasco, which will receive and operate LILCO's gas business.
LILCO will transfer its non-nuclear electric generation, gas and common
1
It is expected that, prior to the Brooklyn Union Merger, Brooklyn Union
will consummate an internal restructuring in which an unregulated Holding
company, Keyspan Energy Corporation, would become the common parent of the
Brooklyn Union consolidated group.
Upon that event, references herein to
Brooklyn Union should be read as referring to Keyspan Energy Corporation.
2
If BL Holding instead forms corporate subsidiaries, the issues discussed
below relating to the treatment of the Transferee LLCs will be moot.
For
example, for non-tax reasons, Gasco may need to be a corporation.
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assets (the "Gas and Generation Assets") to the Transferee LLCs designated by BL
Holding in exchange for approximately 53 million newly issued shares of BL
Holding common stock, approximately $75 million of a class of newly issued
nonvoting BL Holding preferred stock and the assumption by BL Holding of certain
of LILCO's liabilities (the "Gas and Generation Assets Exchange").
LILCO will sell this nonvoting preferred stock in a pre-arranged sale to
an unrelated third person and will retain the proceeds. LIPA will then acquire
the balance of the LILCO common stock through a reverse subsidiary cash merger
in which a wholly owned subsidiary of LIPA will merge with and into LILCO (the
"LIPA Merger").3
The cash consideration to be paid by LIPA in the LIPA Merger will be
remitted to an Agent for LILCO's public shareholders (the "LILCO Shareholder
Agent").
The LILCO Shareholder Agent will use this cash to purchase
approximately 53 million additional shares of BL Holding common stock. The LILCO
Shareholder Agent will then distribute this stock to LILCO's former common
stockholders, together with the approximately 53 million BL Holding common shares
received by LILCO in exchange for the Gas and Generation Assets (i.e., a total
of approximately 106 million BL Holding common shares). For federal income tax
purposes, the distribution of the BL Holding common shares received in exchange
for the Gas and Generation Assets will be treated as a distribution by LILCO in
redemption of a portion of the LILCO common shares held by each shareholder (the
"Redemption Distribution") and the distribution of the cash in the LIPA Merger
will be treated as a purchase by LIPA of the balance of the LILCO common shares
outstanding.
Immediately after the Gas and Generation Assets Exchange and before the
LIPA Merger and the Brooklyn Union Merger, LILCO will hold all of the
approximately 53 million then-outstanding shares of BL Holding common stock
except for the 34 shares held by Brooklyn Union. Thus, immediately after the
transfer of the Gas and Generation Assets from LILCO to BL Holding and/or the
Transferee LLCs (which will be wholly-owned by BL Holding), LILCO will own
approximately 99.99994% of BL Holding's voting stock.
Following the completion of the LIPA Transaction, it is expected that
Brooklyn Union will merge with and into a newly-formed subsidiary of BL Holding
in a tax-free reverse subsidiary merger (the "Brooklyn Union Merger"). In the
Brooklyn Union Merger, Brooklyn Union's outstanding common shares will be
converted one-for-one into BL Holding common shares and Brooklyn Union will
become a wholly-owned subsidiary of BL Holding. Following the Brooklyn Union
Merger, Brooklyn Union's former common shareholders will own approximately 32%
of the common stock of BL Holding and LILCO's former commons shareholders will
own the remaining 68% of such common stock.
3
Prior to or as part of the LIPA Merger, LILCO's existing preferred stock
will either be redeemed or canceled.
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In addition, in connection with the LIPA Merger, LIPA, BL Holding and the
Transferee LLCs will enter into various agreements, including a Management
Services Agreement, pursuant to which Serviceco will manage LIPA/LILCO's electric
transmission and distribution system; a Power Supply Agreement, pursuant to which
LILCO (now a wholly owned subsidiary of LIPA) will purchase electricity generated
by LILCO's former non-nuclear power plants (now owned by Genco); and an Energy
Management Agreement, pursuant to which BL Holding or a Transferee LLC will
manage LILCO's fuel and power purchase requirements.
With respect to the LIPA Transaction for federal income tax purposes,
Petitioner states that LILCO will recognize gain upon the exchange of the Gas and
Generation Assets for BL Holding common and preferred stock and the assumption
by BL Holding of LILCO's liabilities to the extent that the fair market value of
the BL Holding stock plus the liabilities of LILCO assumed by BL Holding exceed
LILCO's adjusted tax basis in the Gas and Generation Assets.4
In the LIPA Merger, the LILCO common stock held by LILCO's public
shareholders will be canceled and converted into the right to receive cash, and
the common stock of the LIPA acquisition subsidiary will be converted into LILCO
common stock.
Petitioner states that for federal income tax purposes, this
transaction will be treated as a taxable sale of LILCO common stock from the
public common shareholders to LIPA. See, Revenue Ruling 73-427, 1973-2 CB 301.
Petitioner states that it is anticipated that the distribution of the BL
Holding common stock received in exchange for the Gas and Generation Assets to
the LILCO Shareholder Agent in the Redemption Distribution, in conjunction with
the sale of the balance of LILCO shares in the LIPA Merger, will constitute a
redemption pursuant to section 302(b)(3) of the Internal Revenue Code (i.e., a
complete termination of the shareholders' interests in LILCO). Consequently, for
federal income tax purposes, the Redemption Distribution will not be taxed as a
dividend but will instead be treated as payment for the LILCO shares that are
deemed to have been redeemed. See, section 302(a) of the Internal Revenue Code
and Zenz v Quinlivan, 213 F 2d 914. Petitioner states that accordingly, for
federal income tax purposes, LILCO's common shareholders will realize a capital
gain or loss as if they had sold their LILCO common shares and will not be
treated as having received dividend income.5
4
The exchange will not qualify as a tax-free exchange with a controlled
corporation under section 351 of the Internal Revenue Code because of the
prearranged sale by LILCO of the BL Holding preferred stock. See, Intermountain
Lumber Co v Commissioner, 65 TC 1025 (1976).
5
Shareholders may be eligible to defer the recognition of such gain for
federal income tax purposes on the ground that the sale of their LILCO stock is
occurring under threat of condemnation, provided that such shareholders acquire
qualifying replacement property and otherwise meet the requirements of section
1033 of the Internal Revenue Code.
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Section 1020-f(e) of the New York Public Authorities Law (the "LIPA Act")
authorized the formation of LIPA and specifically granted it the power to acquire
the assets or securities of LILCO through the exercise of the power of eminent
domain. Petitioner states that the LIPA Transaction is the result of extensive
negotiations, and that during the course of the negotiations, LIPA indicated at
various times that it would consider using its power of eminent domain to acquire
LILCO if LIPA and LILCO could not reach an agreement. The LIPA Agreement itself
states:
WHEREAS, the [LIPA] Act confers upon [LIPA] the power to condemn the
securities and/or assets of [LILCO], including the common stock of
[LILCO] to be acquired in the proposed transaction, and [LIPA] has
previously publicly announced its intention to consider exercising
its condemnation power to acquire the common stock or assets of
[LILCO] if a negotiated transaction cannot be achieved ....
Applicable Law -- sections 186 and 186-a
Section 186 of the Tax Law imposes a franchise tax upon every corporation,
joint-stock company or association formed for or principally engaged in the
business of supplying water, steam or gas, when delivered through mains or pipes,
or electricity, "for the privilege of exercising its corporate franchise or
carrying on its business in such corporate or organized capacity in this state".
The tax is three-quarters of one percent on the taxpayer's gross earnings from
all sources within New York State, and four and one-half percent on the amount
of dividends paid during each year ending on the thirty-first day of December in
excess of four percent on the actual amount of paid-in capital employed in New
York State by the taxpayer.
When section 186 of the Tax Law was enacted in 1896, it provided for a
franchise tax measured by "gross earnings from all sources within this state".
In 1907, the Legislature amended section 186 by providing a statutory definition
of gross earnings.
Gross earnings is defined as "all receipts from the
employment of capital without any deduction."
The definition of gross earnings was added to overcome the effect of a 1906
New York State Appellate Division decision holding that in order to arrive at
taxable “gross earnings”, the cost of raw materials used in producing the utility
service had to be deducted from the company’s gross receipts. (See People ex rel
Brooklyn Union Gas Co. v Morgan, 114 App Div 266, affd 195 NY 616).
In 1969, the New York State Court of Appeals stated that "the 1907
amendment [of section 186] did not contemplate a substitution of 'capital' or
'gross receipts' for 'gross earnings' as the basis for taxation. It merely
sought to include that portion of capital which the Brooklyn Union Gas Co. case
[supra] required to be deducted from 'gross earnings' to arrive at the proper
basis.
This is only that portion of 'gross earnings' which represents the
'employment of capital' to manufacture, distribute and sell various public
utility services." (Matter of Consolidated Edison Co. of NY v State Tax
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Commission, 24 NY2d 114, 119). In the Con Ed case, the court determined that the
proceeds received by the company for property damage and insurance claims and
from the sale of capital assets no longer employed in its business, consisting
of real property, scrap and used machinery, are amounts realized from the
destruction or confiscation of capital, not from the employment of capital.
Section 2.5 of the Tax Law defines an LLC as a domestic limited liability
company or a foreign limited liability company, as defined in section 102 of the
Limited Liability Company Law.
It has been established that the classification of an LLC for New York
State tax purposes will follow the classification accorded the LLC for federal
income tax purposes under section 301.7701-3 of the Treasury Regulations. (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.)
Where a single member LLC does not make the election to be treated as an entity
separate from its owner for federal income tax purposes, pursuant to section
301.7701-3 of the Treasury Regulations, it would not be classified as an entity
separate from its owner for New York State tax purposes. If the owner is a
corporation, the single member LLC would be considered a branch or division of
the owner corporation. (See, McDermott, Will & Emery, Adv Op Comm T & F, July
24, 1996, TSB-A-96(19)C.)
For purposes of section 186 of the Tax Law, the term "corporation" includes
an association, within the meaning of section 7701(a)(3) of the Internal Revenue
Code. This includes an LLC that is treated as an association under the Internal
Revenue Code. Where a single member LLC is treated as a branch or division of
the owner corporation for federal income tax purposes, the LLC is not an
association within the meaning of section 7701(a)(3) of the Internal Revenue Code
and is not a taxpayer under section 186 of the Tax Law.
However, if the owner
corporation is principally engaged in the business of supplying gas and/or
electricity, the corporation is subject to tax under section 186 of the Tax Law.
The owner corporation is principally engaged in supplying gas and/or electricity
if more than 50 percent of its gross receipts are derived from those activities.
(See, e.g. Re Joseph Bucciero Contracting Inc., Adv Op St Tax Commn, July 23,
1981, TSB-A-81(5)C.) When making this determination, the economic activity of
the LLC branch or division, including its gross receipts, are combined with the
gross receipts of the other activities of the owner corporation in determining
the total corporate gross receipts.
Section 186-a of the Tax Law imposes a tax on the furnishing of utility
services that is equal to three and one-half percent of the gross income of a
utility that is subject to the supervision of the PSC or the gross operating
income of every other utility. For purposes of section 186-a of the Tax Law, a
"utility" includes a person subject to the supervision of the PSC and every
person (whether or not such person is subject to such supervision) who sells gas
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or electricity, by means of mains, pipes, or wires; regardless of whether such
activities are the main business of such person or are only incidental thereto.
The word "person" is defined in section 186-a.2(b) of the Tax Law and includes
corporations, companies, associations, joint-stock companies or associations,
partnerships and LLCs.
Gross income, as defined in section 186-a.2(c) of the Tax Law, consists of
the following elements:
1.
receipts from any sale made or service rendered for
consumption or use by the purchaser in New York State;
ultimate
2.
profits from the sale of securities;
3.
profits from the sale of real property;
4.
profits from the sale of personal property (other than inventory);
5.
receipts from interest, dividends, and royalties, derived from
sources within New York State; and
6.
profits from any transaction (except sales for resale and rentals)
within New York State whatsoever.
Gross operating income, as defined in section 186-a.2(d) of the Tax Law,
means and includes receipts received in or by reason of any sale, conditional or
otherwise, made for ultimate consumption or use by the purchaser of gas or
electricity, or in or by reason of the furnishing for such consumption or use of
gas or electric service in New York State, without any deductions.
Accordingly, under section 186-a of the Tax Law, a utility subject to the
supervision of the New York State Department of Public Service includes in gross
income the profits from the sale of real property and the profits from the sale
of personal property, other than inventory.
For purposes of section 186-a, the
basis for computing the profit from the sale of real or personal property, other
than inventory, is the original cost of the property, without the deduction for
depreciation attributable to such property. If the sale of the real or personal
property results in a loss, rather than a profit, such loss may not be deducted
from the taxpayer’s other gross income.
In an Advisory Opinion of the Commissioner of Taxation and Finance to
LILCO, dated May 19, 1995, TSB-A-95(9)C, it was determined that in the sale
leaseback transactions presented, the gain, rather than the entire proceeds, on
the sale of equipment (machinery and equipment used in the production,
transmission and distribution of electricity and natural gas, such as an
undivided interest in one of LILCO's electricity generating plants, or certain
diesel generators manufactured by Colt Industries, together with associated spare
parts, accessories and related equipment and structures) is a receipt from the
employment of capital and as such, the gain constitutes gross earnings under
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section 186 of the Tax Law. When determining the gain or loss from the sale of
the equipment for purposes of section 186, depreciation and other expenses
attributable to the equipment are not deducted from the original cost. It was
also determined that the profit from the sale of LILCO's equipment is required
to be included in gross income for purposes of section 186-a of the Tax Law.
When determining whether there is a profit or loss on the sale of the equipment,
for purposes of section 186-a, depreciation attributable to the equipment is not
deducted from the original cost. The profit is determined by subtracting from
the receipts from the sale of the equipment, the original cost of the equipment
along with the expenses incurred in making the sale.
If the sale of such
equipment results in a loss, such loss may not be deducted from LILCO's other
gross income.
For purposes of section 186-a of the Tax Law, the word "person" includes
an LLC. Accordingly, an LLC that is subject to the supervision of the PSC is
subject to the tax imposed under section 186-a on its gross income and any other
LLC is subject to the tax imposed under section 186-a on its gross operating
income.
Conclusions:
Issue 1: The Gas and Generation Assets exchange is part of a series of
transactions being entered into by LILCO under a threat of condemnation by LIPA
in the LIPA Agreement. Like Con Ed, supra, LILCO does not employ its capital
within the meaning of section 186 of the Tax Law for the purpose of being forced
to dispose of such capital under threat of condemnation.
Accordingly, the
consideration received by LILCO for the Gas and Generation Assets does not
constitute "receipts from the employment of capital" and is therefore not taxable
under the gross earnings tax imposed by section 186 of the Tax Law.
Issues 2 and 3: The distribution by LILCO of the BL Holding common stock
in the Redemption Distribution and the distribution of cash in the LIPA Merger
are also part of a series of transactions being entered into by LILCO under a
threat of condemnation by LIPA. LIPA is acquiring LILCO and these transactions
are the means by which LIPA will purchase the balance of the LILCO common stock
held by LILCO's public shareholders. These transactions constitute a complete
termination of the shareholders' interests in LILCO and are considered as payment
for the LILCO shares that are deemed to have been redeemed rather than treated
as a dividend. Accordingly, these distributions are not treated as dividends
subject to the excess dividends tax imposed by section 186 of the Tax Law.
Issue 4: With respect to the Gas and Generation Assets Exchange, LILCO will
realize gross income taxable under section 186-a of the Tax Law to the extent
that a profit is generated. The profit, if any, would equal the amount that the
fair market value of the BL Holding common and preferred stock received by LILCO
plus the amount of LILCO's liabilities assumed by BL Holding exceed the original
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cost of the Gas and Generation Assets, without deduction for depreciation.
Expenses of the sale are allowed to be deducted. It is appropriate in this
situation to consider the distribution of the assets as one transaction or sale.
Accordingly, the profit would be determined based on the sale of the aggregate
of all the assets, not the sale of each asset separately.
Issue 5: With respect to the Redemption Distribution, LILCO will realize
gross income taxable under section 186-a of the Tax Law to the extent that a
profit is generated. The profit, if any, would equal the amount that the fair
market value of the LILCO stock deemed received by LILCO exceeds the original
cost of the BL Holding common stock exchanged therefor.
Issue 6: The Transferee LLCs that will be wholly owned by BL Holding will,
for federal income tax purposes, be ignored as separate entities and treated as
operating branches or divisions of BL Holding. Pursuant to FGIC CMRC, supra, and
McDermott, supra, the classification of an LLC for New York State tax purposes
follows the classification accorded the LLC for federal income tax purposes.
Therefore, the Transferee LLCs will not be treated as separate taxable entities
distinct from each other or from BL Holdings for purposes of the gross earnings
tax imposed under section 186 of the Tax Law.
The Transferee LLCs are "persons" under section 186-a of the Tax Law and
the Transferee LLCs will be subject to the tax imposed under section 186-a.
Issue 7: Since the Transferee LLCs will not be treated as entities separate
from BL Holding for purposes of section 186 of the Tax Law, this question is
moot.
Issue 8: Where the Transferee LLCs are not treated as entities separate
from BL Holding, the Transferee LLCs' gross receipts will be included with the
gross receipts of BL Holding's other activities in determining BL Holding's total
corporate gross receipts.
If more than 50 percent of BL Holding's total
corporate gross receipts are from the business of supplying gas and/or
electricity, BL Holding will be subject to the tax imposed under section 186 of
the Tax Law; otherwise, it will be subject to tax under Article 9-A of the Tax
Law. For purposes of this computation, the denominator of the fraction will
include the gross receipts of BL Holding as well as the gross receipts of the
Transferee LLCs. However, transactions between BL Holding and the Transferee
LLCs would be disregarded. The numerator of the fraction will include only the
gross receipts from the distribution and sale of gas and/or electricity. The
gross receipts of BL Holding from its investments and the dividends from its
corporate subsidiaries would not be included in the numerator of the fraction.
The gross receipts of the Transferee LLCs will retain their character in the
hands of BL Holding. Therefore, the gross receipts of Genco from the operation
of the non-nuclear electric generating plants will be included in the numerator
of the fraction, as well as the gross receipts of Gasco from the operation of the
gas utility business. Other gross receipts of Genco and Gasco would not be
included in the numerator of the fraction. With respect to a Serveco acting as
an electric or gas marketer, the gross receipts from the sale of electricity or
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gas would be included in the numerator of the fraction. However, the gross
receipts of a Serveco from the provision of administrative and other services,
including the management of the electric transmission and distribution system for
LIPA/LILCO would not be included in the numerator of the fraction. The character
of the gross receipts from the disposition of assets by either BL Holding or the
Transferee LLCs would depend on the nature of the asset.
Issue 9: If a Transferee LLC is subject to the supervision of the PSC, for
purposes of section 186-a of the Tax Law, the Transferee LLC will be subject to
tax on it gross income as defined in section 186-a.2(c)of the Tax Law. The
following would be included in gross income: receipts from any sale made or
service rendered for ultimate consumption or use by the purchaser in New York
State; profits from the sale of securities; profits from the sale of real
property; profits from the sale of personal property (other than inventory);
receipts from interest, dividends, and royalties, derived from sources within New
York State; and profits from any transaction (except sales for resale and
rentals) within New York State whatsoever. If a Transferee LLC is not subject
to the supervision of the PSC, for purposes of section 186-a of the Tax Law, it
will be subject to tax on its gross operating income as defined in section 186
a.2(d)of the Tax Law (that is, receipts received in or by reason of any sale,
conditional or otherwise, made for ultimate consumption or use by the purchaser
of gas or electricity, or in or by reason of the furnishing for such consumption
or use of gas or electric service in New York State, without any deductions).
Therefore, Servecos that are not regulated by the PSC but that sell gas or
electricity in addition to providing services (e.g., a gas or electricity
marketing company that also provides management or other services) will only
include in gross operating income the receipts from the sales of gas or
electricity for ultimate consumption, not the receipts from the provision of the
management or other services.
Issue 10:
Additional Relevant Facts-Real Estate Transfer Tax
For purposes of the real estate transfer tax, Petitioner requests that the
following scenarios be considered.
Scenario A (LIPA Transaction Precedes Brooklyn Merger)
Step 1: LILCO will transfer the Gas and Generation Assets to BL Holding in a
taxable exchange for approximately 53 million BL Holding common shares and
approximately $75 million of BL Holding preferred shares and the assumption by
BL Holding of certain liabilities of LILCO. Immediately following the exchange,
Brooklyn Union will own 34 common shares of BL Holding and LILCO will own
approximately 53,000,066 common shares of BL Holding.
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Step 2: In the LIPA Merger, LILCO will distribute the approximately 53 million
BL Holding common shares received in exchange for the Gas and Generation Assets
to the LILCO Shareholder Agent in a deemed redemption of a portion of the LILCO
common shares held by LILCO’s public shareholders. The cash paid by LIPA to
acquire the remaining LILCO shares will also be distributed to the LILCO
Shareholder Agent.
Step 3: The LILCO Shareholder Agent will use the cash received in the LIPA Merger
to purchase an additional approximately 53 million common shares of BL Holding
and will distribute those shares, together with the approximately 53 million BL
Holding shares received by LILCO in exchange for the Gas and Generation Assets
and distributed to the Shareholder Agent in the LIPA Merger, to LILCO’s former
common shareholders, each in proportion to the LILCO common shares previously
owned by the respective former LILCO shareholders. At this point in time, BL
Holding will own the Gas and Generation Assets formerly owned by LILCO, and the
former shareholders of LILCO will own all but 34 of the approximately 106,000,100
outstanding common shares of BL Holding
Step 4: BL Holding will then acquire Brooklyn Union. In the Brooklyn Union
Merger, Brooklyn Union will become a wholly-owned subsidiary of BL Holding in a
tax-free merger pursuant to sections 368(a)(1)(A) and 368(a)(2)(E) of the
Internal Revenue Code. Following this merger, Brooklyn Union’s former common
shareholders will own approximately 32%, and LILCO’s former common shareholders
will own approximately 68%, of the common stock of BL Holding.
Scenario B: (Brooklyn Union Merger Precedes LIPA Transaction)
Step 1: LILCO would become a subsidiary of BL Holding in a binding share exchange
in which the common stockholders of LILCO would exchange their LILCO common stock
for BL Holding common stock. At this time, Brooklyn Union would own 34 shares
of BL Holding common stock and the former common shareholders of LILCO would own
approximately 106,000,066 BL Holding common shares.
Step 2: The Brooklyn Union Merger would then occur, in which Brooklyn Union would
become a wholly-owned subsidiary of BL Holding in a tax-free merger pursuant to
sections 368(a)(1)(A) and 368(a)(2)(E) of the Internal Revenue Code. Following
the Brooklyn Union Merger, the former common shareholders of Brooklyn Union would
own approximately 34% of BL Holdings common stock, and LILCO’s former common
shareholders would own approximately 66% of BL Holding’s common shares.
Step 3: LILCO would distribute the Gas and Generation Assets to BL Holding, or
to the Transferee LLCs owned by BL Holding or to corporate subsidiaries wholly
owned by BL Holding.
Step 4: LIPA would acquire the common stock of LILCO from BL Holding in the LIPA
Merger.
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Step 5: Additional BL Holding common shares would be issued to LILCO’s former
common shareholders, increasing their ownership interest in BL Holding common
stock from approximately 66% to approximately 68% and reducing the ownership
interest of Brooklyn Union’s former common shareholders from approximately 34%
to approximately 32%.
Applicable Law
Section 1402 of the Tax Law imposes the real estate transfer tax on each
conveyance of real property or interest therein when the consideration exceeds
five hundred dollars. The term "Conveyance" is defined in section 1401(e) of the
Tax Law. Included in the definition of conveyance is the transfer or transfers
of any interest in real property by any method, including the transfer or
acquisition of a controlling interest in any entity with an interest in real
property.
Section 1401(b) of the Tax Law defines the term "controlling interest".
This section provides, in the case of a corporation, that controlling interest
means either fifty percent or more of the total combined voting power of all
classes of stock or fifty percent or more of the capital, profits or beneficial
interest in such voting stock.
Also, section 1405(b)(6) of the Tax Law sets forth that conveyances are
exempt from the real estate transfer tax to the extent that they "effectuate a
mere change of identity or form of ownership or organization where there is no
change in beneficial ownership".
In addition, subdivision (1) of section 1020-c of the Public Authorities
Law provides as follows:
For the purpose of effectuating the policy declared in section one
thousand twenty-a of this title, there is hereby created a corporate
municipal instrumentality of the state to be known as the "Long
Island Power Authority", which shall be a body corporate and politic
and a political subdivision of the state, exercising essential
governmental and public powers.
Also, section 1405(b)(1) of the Tax Law provides that the transfer tax
shall not apply to "Conveyances to the United Nations, the United States of
America, the state of New York, or any of their instrumentalities, agencies or
political subdivisions (or any public corporation, including a public corporation
created pursuant to agreement or compact with another state or the Dominion of
Canada)."
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Conclusion-If Scenario A Occurs:
The conveyance of the Gas and Generation Assets from LILCO to BL Holding
as described in Step 1 of Scenario A and the purchase of the additional
approximately 53 million common shares of BL Holding by the LILCO Shareholder
Agent as described in Step 3 of Scenario A would result in a change in beneficial
interest only to the extent of the 34 shares of BL Holding common stock owned by
Brooklyn Union.
Therefore, except as to the change in beneficial interest
related to Brooklyn Union’s acquisition of the 34 shares of BL Holding, this
conveyance is exempt pursuant to the exemption provided by section 1405(b)(6) of
the Tax Law as a conveyance which results in a mere change of identity or form
of ownership or organization with no change in beneficial interest.
The conveyance which results because of the acquisition of a controlling
interest in LILCO by LIPA as described in Step 2 of Scenario A is a conveyance
which is exempt as a conveyance to an agency or an instrumentality of the State
of New York pursuant to section 1020-c of the Public Authorities Law and section
1405(b)(1) of the Tax Law.
The Brooklyn Union Merger described in Step 4 of Scenario A will result,
in part, in the former shareholders of Brooklyn Union acquiring 32% of the common
shares of BL Holding. Thus, Step 4 does not result in a transfer or acquisition
of a controlling interest in BL Holding and is not a conveyance subject to the
transfer tax.
It is noted that this Advisory Opinion does not address the
application of the transfer tax to BL Holding’s acquisition of Brooklyn Union.
Conclusion-If Scenario B Occurs:
The transaction pursuant to which LILCO becomes a subsidiary of BL Holding
under the binding share exchange as described in Step 1 of Scenario B results in
an acquisition of a controlling interest by BL Holding and is therefore a
conveyance subject to transfer tax. This conveyance is exempt from the transfer
tax pursuant to the mere change of identity exemption provided at section
1405(b)(6) of the Tax Law except as to the change in beneficial interest related
to Brooklyn Union’s acquisition of the 34 shares of BL Holding.
The Brooklyn Union Merger described in Step 2 of Scenario B does not result
in an acquisition of a controlling interest in BL Holding by the former
shareholders of Brooklyn Union and is therefore not a conveyance of real property
subject to the transfer tax.
Any conveyance of real property that results from the distribution of the
Gas and Generation Assets to BL Holding or to corporate subsidiaries or limited
liability companies wholly owned by BL Holding as described in Step 3 of Scenario
B would be exempt pursuant to the mere change of identity exemption provided by
section 1405(b)(6) of the Tax Law.
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The acquisition of LILCO common stock by LIPA as described in Step 4 of
Scenario B is exempt from the transfer tax as a conveyance to an agency or
instrumentality of the State of New York pursuant to section 1020-c of the Public
Authorities Law and section 1405(b)(1) of the Tax Law.
The issuance of additional BL Holding common shares to LILCO’s former
shareholders as described in Step 5 of Scenario B does not result in the transfer
or acquisition of a controlling interest in an entity with an interest in real
property and therefore would not incur transfer tax.
DATED: February 27, 1998
NOTE:
/s/
John W. Bartlett
Deputy Director
Technical Services Bureau
The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.