May a subsidiary's unused investment tax credit carryover survive after its parent is bought by an unrelated corporation and the subsidiary is later merged into the acquirer?

Plain-English summary

Bayer Corporation (as Miles' successor) asked whether a subsidiary's unused investment tax credit (ITC) carryover survives a two-step history. Instruments was a wholly owned subsidiary of Diagnostics (they filed combined). In 1989, Miles, an unrelated corporation, bought all of Diagnostics' stock for cash; afterward Miles, Diagnostics, and Instruments were one federal affiliated group. At that time Instruments had unused New York ITC carryovers under section 210.12. Later -- separately -- Diagnostics merged into Miles, and shortly after, Instruments merged into Miles.

New York limits ITC carryovers in two situations: after a corporate acquisition (section 210.12(e)(2)) and after a corporate merger (section 210.12(e)(3)). The Department worked through both:

• A "corporate acquisition" under section 208.15 is the purchase of the stock of a target corporation that takes a buyer from 50%-or-less to more than 50%. When Miles bought Diagnostics, the target was Diagnostics -- not Instruments (Diagnostics still owned Instruments). So Instruments was not the target, and its ITC carryover was not limited by section 210.12(e)(2).
• The later merger of Instruments into Miles was an "excluded transaction" under section 208.16 -- a merger of affiliated-group members -- so it was not a "corporate merger" that would limit the carryover under section 210.12(e)(3).

Because neither limit applied, Miles, the surviving corporation, may carry over the ITC attributable to Instruments and allowed before the merger.

What this means for you

Buying the parent does not make the subsidiary the "target"

Only the corporation whose stock is purchased is the target; a subsidiary that comes along with it is not, so the acquisition carryover limit does not reach the subsidiary's credits.

Affiliated-group mergers are excluded transactions

A merger among members of an affiliated group is an excluded transaction, so it is not a corporate merger that limits the ITC carryover.

The survivor inherits the credit

Where neither limit applies, the surviving corporation may carry over the acquired subsidiary's pre-merger investment tax credit.

Common questions

Q: Was Instruments the target when Miles bought Diagnostics?
A: No. Diagnostics was the target; Instruments merely remained Diagnostics' subsidiary, so its carryover was not limited.

Q: Did the merger into Miles kill the carryover?
A: No. It was an excluded transaction (an affiliated-group merger), so the merger carryover limit did not apply.

Q: Who can use the credit now?
A: Miles, as the surviving corporation, may carry over the ITC attributable to Instruments.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 210.12 (investment tax credit and carryover)
- Tax Law section 210.12(e)(2) (carryover limit after a corporate acquisition)
- Tax Law section 210.12(e)(3) (carryover limit after a corporate merger)
- Tax Law section 208.15 (definition of corporate acquisition)
- Tax Law section 208.16 (excluded transaction -- merger of affiliated-group members)
- Bayer Corporation, TSB-A-98(9)C (July 1, 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/corporation/a98_9c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(9)C
Corporation Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C980130A

On January 30, 1998, a Petition for Advisory Opinion was received from
Bayer Corporation, 1884 Miles Avenue, P.O. Box 400, Elkhart, Indiana 46515.
The issue raised by Petitioner, Bayer Corporation, is whether, for purposes
of Article 9-A of the Tax Law, a first tier subsidiary's investment tax credit
may be carried over after its parent is acquired by an unrelated corporation and
the subsidiary is later, and separately, merged into the acquirer after having
been part of the acquirer's affiliated group.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Technicon Instruments Inc ("Instruments") was owned 100 percent by Cooper
Technicon Inc (which later changed its name to Technicon Diagnostics Inc
("Diagnostics") and they filed on a combined basis. On June 29, 1989, all of the
stock of Diagnostics was sold by Diagnostics' parent corporation to Miles Inc
("Miles"), an unrelated corporation. Miles purchased the stock of Diagnostics
for cash. Following this acquisition, Miles, Diagnostics, and Instruments were
all part of the same affiliated group for federal income tax purposes. At the
time of the acquisition of Diagnostics by Miles, Instruments had unused New York
State investment tax credits that had been carried over from earlier years
pursuant to section 210.12 of the Tax Law.
Petitioner, Miles parent corporation, states that subsequent and
independent of Miles' acquisition of Diagnostics, Diagnostics merged into Miles
and shortly thereafter Instruments, at that time a wholly owned subsidiary of
Miles, merged into Miles.
Petitioner states that the mergers were separate, apart and distinct from
the initial acquisition of Diagnostics by Miles.
At the time of this
acquisition, there was no plan, written or otherwise, to execute the mergers.
The acquisition was at all times independent of the subsequent mergers. It was
only after Miles acquired Diagnostics that it was able to recognize the
operational inefficiencies that could be remedied by merging the companies into
one entity.
Section 210.12 of the Tax Law allows an investment tax credit against the
tax imposed under Article 9-A of the Tax Law. For taxable years beginning after
1990, section 210.12(a) allows an investment tax credit equal to five percent
with respect to the first $350 million of the investment credit base and four
percent with respect to the investment credit base in excess of $350 million.
The investment credit base is the cost or other basis for federal income tax
purposes of qualified tangible personal property and other tangible property,
including buildings and structural components of buildings.

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TSB-A-98(9)C
Corporation Tax

Section 210.12(e)(1) of the Tax Law provides that the investment tax credit
allowed under section 210.12 for any taxable year shall not reduce the tax due
for such year to less than the higher of the amounts prescribed under the minimum
taxable income base and the fixed dollar minimum. However, if the amount of
credit allowable for a taxable year commencing prior to January 1, 1987 and not
deductible in such year may be carried over to the following year or years and
may be deducted from the taxpayer's tax for such year or years but in no event
shall such credit be carried over to taxable years beginning on or after January
1, 2002, and any amount of credit allowed for a taxable year beginning on or
after January 1, 1987 and not deductible in such year may be carried over to the
15 taxable years next following such taxable year and may be deducted from the
taxpayer's tax for such year or years.
Section 210.12(e)(2) of the Tax Law provides that a taxpayer may not carry
over any amount of credit or credits allowed under section 210.12 to a taxable
year during which a corporate acquisition with respect to which it was a target
corporation occurred ("acquisition year"), or to any subsequent taxable year,
where such credit was allowed for a taxable year prior to the acquisition year.
Section 210.12(e)(3) of the Tax Law provides that in the case of a
corporate merger or corporate consolidation, the surviving or consolidated
corporation, as the case may be, may not carry over any amount of credit or
credits allowed under section 210.12 which is attributable to any constituent
corporation to the taxable year during which such corporate merger or corporate
consolidation occurred ("merger or consolidation year"), or to any subsequent
taxable year, where such credit was allowed for a taxable year prior to the
merger or consolidation year.
Section 208.13 of the Tax Law defines a "corporate merger" as a procedure
comprised of the merging of, two or more constituent corporations into a single
corporation which is one of the constituent corporations, under Article 9 of the
Business Corporation Law, the corresponding statutes of other states and/or the
corresponding statutes of foreign nations. In the case of a corporate merger,
"acquiring person" means the constituent corporation the stockholders of which,
after the merger, own the largest proportion of the total voting power in the
surviving corporation, and "target corporation" means all other constituent
corporations. A corporate merger does not include an excluded transaction as
defined in section 208.16 of the Tax Law or a procedure described hereinabove
which was completed prior to the effective date of section 208.13.
Section 208.15 of the Tax Law defines a "corporate acquisition" as the
acquisition on an "acquisition date" by purchase and/or otherwise (including
redemption), by a person (the "acquiring person"), as the term person is defined
in section 7701(a)(1) of the Internal Revenue Code ("IRC"), of stock of a
corporation (the "target corporation"), such that immediately prior to such
acquisition such person owned 50 percent or less, and immediately thereafter
owned more than 50 percent of the total voting power in the target corporation.
A corporate acquisition does not include an excluded transaction as defined in
section 208.16 of the Tax Law or an acquisition described hereinabove which
occurred prior to the effective date of section 208.15.

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TSB-A-98(9)C
Corporation Tax

Section 208.16 of the Tax Law provides that an "excluded transaction"
means, in part, "a merger or consolidation where all the constituent corporations
are members of an affiliated group as defined in section 1504 of the IRC, except
that the term "common parent corporation" shall be deemed to mean any person, as
defined in section 7701(a)(1) of the IRC, and except that references to 'at least
eighty percent' in such section 1504 shall be read as 'more than fifty percent'".
In this case, prior to June 29, 1989, Diagnostics wholly owned Instruments.
Miles, an unrelated corporation, acquired all of the stock of Diagnostics on June
29, 1989 for cash. Pursuant to section 208.15 of the Tax Law, a "corporate
acquisition" is the acquisition by purchase "of the stock of a corporation ("the
target corporation"), such that immediately prior to such acquisition such person
owned 50 percent or less, and immediately thereafter owned more than 50 percent
of the total voting power in the target corporation" ("emphasis added).
Therefore, the target corporation in this corporate acquisition by Miles, was
Diagnostics. After the acquisition, Diagnostics still held all of the stock of
Instruments. Therefore, Instruments was not the target corporation pursuant to
section 208.15, even though Diagnostics and Instruments filed on a combined basis
prior to the acquisition.
Accordingly, Instruments' investment tax credit
carryover was not limited by section 210.12(e)(2) of the Tax Law. Instruments
was still allowed to carry over its unused investment tax credit to future
taxable years.
After Miles acquired Diagnostics, Miles, Diagnostics and Instruments were
all part of the same affiliated group for federal income tax purposes.
Subsequently, Diagnostics was merged into Miles and shortly thereafter,
Instruments, as a subsidiary of Miles, was merged into Miles.
Pursuant to
section 208.16 of the Tax Law, the merger of Instruments into Miles was an
excluded transaction for purposes of determining what constitutes a corporate
merger under section 208.13 of the Tax Law, because it was the merger of
affiliated corporations. Therefore, Instruments' investment tax credit carryover
was not limited by section 210.12(e)(3) of the Tax Law. Accordingly, Miles, the
surviving corporation, may carry over the investment tax credit that was
attributable to Instruments and allowed for a taxable year prior to the merger
into Miles.

DATED: July 1, 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.