Does an aluminum manufacturer that began doing business in New York through a merger qualify as a new business eligible for the refundable investment tax credit?

Plain-English summary

Scepter, Inc., a Tennessee aluminum-ingot manufacturer, began doing business in New York on June 30, 1997 when a related company (SICI) merged into it. It asked whether it is a "new business" eligible for the refundable investment tax credit under section 210.12(j).

A corporation is a new business unless it is (1) more than 50% owned by an Article 9/9-A/32/33 taxpayer, (2) substantially similar in operation and ownership to an existing or prior taxable business, or (3) already an Article 9-A taxpayer for more than four years. The Department applied these to Scepter:

• Ownership (test 1). Scepter is not more than 50% owned by an Article 9/9-A/32/33 taxpayer.
• Substantially similar (test 2). Scepter is similar in ownership to SICI (a prior Article 9-A entity, same owner), but not similar in operation. Crucially, reading the statute to serve its purpose of encouraging New York investment, the "substantially similar operation" test looks only at operations conducted in New York by a related company. SICI's New York activities were metal trading (not aluminum processing); its aluminum-processing operations, and those of affiliate SII, were conducted out of state. So Scepter is not substantially similar in operation to a New York operation of a related company.
• Four-year test (test 3). Having started in New York only in 1997, Scepter will not have been an Article 9-A taxpayer for more than four years until after 2001.

So Scepter qualifies as a new business for the refundable investment tax credit for years it meets the section 210.12(j)(3) timing requirement.

What this means for you

The "substantially similar operation" test is New York-focused

Similar operations a related company runs outside New York do not disqualify a new business. Only substantially similar operations conducted in New York by a related company count.

Ownership similarity alone is not enough to disqualify

Being commonly owned with a prior New York taxpayer matters only if the operations are also substantially similar -- and, here, the similar operations were out of state.

Refundability rewards genuinely new New York investment

The statute's purpose -- drawing new investment into New York -- drives the narrow reading of the operations test.

Common questions

Q: Do a related company's out-of-state similar operations disqualify a new business?
A: No. The substantially-similar-operation test looks only at operations conducted in New York by a related company.

Q: Was Scepter disqualified by common ownership with a prior New York taxpayer?
A: No. Ownership similarity alone is not enough; the operations were not substantially similar in New York.

Q: Why does the four-year test not bar Scepter?
A: It began doing business in New York only in 1997, so it had not been an Article 9-A taxpayer for more than four years.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 210.12 (investment tax credit)
- Tax Law section 210.12(e) (refund of investment tax credit for a new business)
- Tax Law section 210.12(j) (definition of new business)
- International Imaging Materials, Inc., TSB-D-95(4)C (June 8, 1995)
- Scepter, Inc., TSB-A-99(18)C (April 7, 1999)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1999.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a99_18c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-99(18)C
Corporation Tax
April 7, 1999

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C981026C

On October 26, 1998, a Petition for Advisory Opinion was received from Scepter, Inc., 1485
Scepter Lane, Waverly, Tennessee 37185.
The issue raised by Petitioner, Scepter, Inc., is whether it qualifies as a "new business" for
purposes of the refundable investment tax credit as defined in section 210.12(j) of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner was incorporated in Tennessee on April 19, 1988, and began doing business in
New York State on June 30, 1997. The principal business activity of Petitioner is processing and
manufacturing of aluminum ingots. Petitioner is an S corporation for federal income tax purposes
and is a C corporation (a non-electing S corporation) for New York State franchise tax purposes.
On June 30, 1997, a merger was effected between Petitioner, Scepter Ingot Casting, Inc.
("SICI"), a Tennessee corporation, and Scepter Industries, Inc. ("SII"), an Oklahoma corporation,
with Petitioner being the surviving corporation. Petitioner, SICI and SII are all commonly owned
by a single individual who is a nonresident of New York State. This individual has never held an
interest in any metal manufacturing business that was taxable in New York State prior to June 30,
1997.
While in existence, SII did not conduct any activities in New York State. However, SICI
through a division, Scepter Resources ("SR"), did business in New York State from September 1,
1994, until the date of the merger, June 30, 1997. As of the date of the merger, SR became a
division of Petitioner. SR has approximately two employees, is located in Rye, New York and
conducts metal trading activities. SR's trading activities are not performed on any Board or
Exchange, rather, such trading is accomplished through and among SR's contacts in the metal
industry.
SICI, in addition to SR, had another division located in Waverly, Tennessee ("WT"), which
became a division of Petitioner as of the date of the merger. WT is in the business of converting
dross, scrap aluminum and raw materials into molten aluminum. SII had a division located in
Bicknell, Indiana ("BI") that performed the same business activities as WT. As of the date of the
merger, WT is also a division of Petitioner.

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TSB-A-99(18)C
Corporation Tax
April 7, 1999

Due to SR's activities in New York, SICI filed New York State franchise tax returns under
Article 9-A of the Tax Law for the short period from September 1, 1994 through December 31,
1994, for the calendar years ended December 31, 1995, and 1996, and for the short period from
January 1, 1997 through June 30, 1997. As of the date of the merger, Petitioner, due to SR's
activities in New York, is subject to Article 9-A of the Tax Law. Petitioner filed its tax return for
the short period from June 30, 1997 through December 31, 1997.
Petitioner is proposing to construct a facility in Seneca Falls, New York on what was
formerly a vacant lot. This Seneca Falls facility ("SFF") will be a division of Petitioner in addition
to BI, SR and WT. SFF will be a state-of-the-art aluminum processing facility. When complete, the
facility will consist of an office building, 100,000 square feet of building space to house furnaces,
and a salt cake building on 29 acres. In order to construct the facility Petitioner will employ
approximately 50 to 60 workers. When complete, SFF will have approximately 30 full time
personnel that will work 4 shifts, 24 hours per day, 7 days per week.
In addition to creating new jobs in upstate New York, SFF will provide services to large New
York State aluminum companies and aluminum freight companies also located in upstate New York
State. These aforementioned New York State aluminum companies will benefit from having SFF's
aluminum processing facilities located in New York State. The closest facilities that provide similar
services are located outside of New York State in Ohio and Quebec, Canada.
Petitioner states that for purposes of this advisory opinion, it should be assumed that the
assets that have been acquired and any future asset acquisitions by Petitioner for SFF will qualify
for the investment tax credit under section 210.12(b)(i) of the Tax Law as property principally used
by Petitioner in the production of goods by manufacturing.
Discussion
Section 210.12(e)(1) of the Tax Law, provides, in part, that:
if the amount of credit allowable under this subdivision for any taxable year
reduces the tax to [the higher of the amounts prescribed in section 210.1(c) and (d)
of the Tax Law] ... any amount of credit allowed for a taxable year commencing on
or after [January 1, 1987] and not deductible in such year may be carried over to the
fifteen taxable years next following such taxable year and may be deducted from the
taxpayer's tax for such year or years. In lieu of such carryover, any such taxpayer
which qualifies as a new business under [section 210.12(j) of the Tax Law] may elect
to treat the amount of such carryover as an overpayment of tax to be credited or
refunded in accordance with the provisions of [section 1086 of the Tax Law],
provided, however, the provisions of [section 1088(c) of the Tax Law]
notwithstanding, no interest shall be paid thereon.

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TSB-A-99(18)C
Corporation Tax
April 7, 1999

Section 210.12(j) of the Tax Law provides that for purposes of section 210.12(e) of the Tax
Law, a "new business" shall include any corporation except:
1. 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
2. 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
3. a corporation that has been subject to tax under Article 9-A for more than
four years (excluding short periods) prior to the taxable year during which the
taxpayer first becomes eligible for the investment tax credit.
Chapter 103 of the Laws of 1981, created the refundable investment tax credit at issue. A
review of the legislative history discloses that this law was intended to accomplish the following:
"It expands and enriches various investment incentives to assure continued economic growth in the
State" (Memorandum In Support, Governor's Bill Jacket, L 1981, ch 103). The Budget Report
Memorandum (Governor's Bill Jacket, L 1981, ch 103) noted the following "brief recapitulation"
of the sessions law: "To encourage business investments in New York State by liberalizing and
increasing certain investment incentives and credits under the corporate franchise and personal
income taxes." (See also, International Imaging Materials, Inc, Dec Tax App Trib, TSB-D-95(4)C,
June 8, 1995.)
The settled purpose of the statute at issue was to encourage business investments in New
York State. An expansive interpretation of "substantially similar operations", without regard to
whether such substantially similar operations were conducted by a company related to the taxpayer
in New York, would defeat such purpose. (cf., Symphony Space v Tishelman, 60 NY2d 33;
Brooklyn Union Gas v Commr of Dept of Fin., 108 AD2d 74, revd on other grounds 67 NY2d
1036). Therefore, in order to give effect to the Legislature's purpose, the statute should be
interpreted so that a refundable investment tax credit would not be disallowed to a taxpayer related
to a corporation that had conducted substantially similar operations outside of New York State.

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TSB-A-99(18)C
Corporation Tax
April 7, 1999

Based on the facts presented, it appears that:
1. Petitioner is not 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.
2. Petitioner will be similar in ownership to SICI, a business entity previously taxable under
Article 9-A, because the same individual owned both entities before the merger. However, based
on legislative history, it is determined that Petitioner will not be similar in operation to SICI, because
Petitioner's principal business activity is the processing and manufacturing of aluminum ingots, and
SICI's activities in New York, conducted through SR, were metal trading activities that do not
involve the processing and manufacturing of aluminum, and its activities conducted through WT,
in converting dross, scrap aluminum and raw materials into molten aluminum, while similar to
Petitioner's activities, were not conducted in New York State. Further, SII had no activities in New
York, and although the activities of BI, a division of SII, were similar to Petitioner's activities, BI's
activities, like WT, were not conducted in New York State.
3. Petitioner began doing business in New York State on June 30, 1997 when SICI was
merged into it. Therefore, Petitioner, as a calendar year taxpayer, would not be a corporation that
is subject to tax under Article 9-A for more than four years through calendar year ending December
31, 2001.
Accordingly, Petitioner will be considered a "new business" pursuant to sections 210.12(j)
and 210.12(e) of the Tax Law, for purposes of the refundable investment tax credit, for those taxable
years that it meets the requirements of section 210.12(j)(3) of the Tax Law.

DATED: April 7, 1999

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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