An insurance company is building an eligible business facility and plans to claim New York's eligible business facility credit under section 1511(d), which is based partly on a 'property percentage' comparing eligible property to ALL of the company's New York-connected real and tangible property. Does real property the insurer acquired through mortgage foreclosure on defaulted loans count toward the denominator of that property percentage, diluting the credit?

Plain-English summary

Security Mutual Life Insurance Company of New York, a domestic insurance corporation subject to New York's Article 33 franchise tax, was constructing and improving depreciable real property that would qualify as an "eligible business facility." It planned to claim the eligible business facility credit under Tax Law § 1511(d), a credit computed by multiplying the tax otherwise due by the average of a "property percentage" and a "wage percentage."

The property percentage, defined in § 1511(d)(2)(A), compares the eligible property's certified value against the average value of ALL real and tangible personal property "connected with the insurance corporation and located within the state" -- a broad denominator that includes property the insurer owns and, for this special purpose, also property it merely RENTS (valued at eight times net annual rent). A bigger denominator means a smaller property percentage, and thus a smaller credit.

Security Mutual asked whether real property it had acquired through mortgage foreclosure on defaulted loans -- essentially, collateral it ended up owning after a borrower defaulted, rather than property it actively uses in its insurance business -- had to be counted in that denominator. The Department said yes: such property is still "real...property connected with the insurance corporation and located within the state" under the statute's plain wording, regardless of how the insurer came to own it or whether it's used in the ordinary conduct of the insurance business. The Department was explicit that this result was "mandated by the plain language of the statute," leaving no room for an argument that foreclosed collateral should be treated differently from operating real estate.

What this means for you

Foreclosed or repossessed collateral doesn't get a special exemption from broad "connected with" property tests

If your insurance company (or any entity subject to a similar all-property-percentage credit computation) has acquired real estate through foreclosure, don't assume that property is excluded from the denominator just because you didn't intentionally acquire it for business use -- broad statutory language like "connected with the insurance corporation and located within the state" tends to sweep it in regardless of how you came to own it.

A larger property base can meaningfully dilute an eligible-business-facility-style credit

If you're planning a facility-based credit claim, account for ALL New York-connected real and tangible property in your denominator estimate -- including any incidental holdings like foreclosed collateral -- rather than assuming only your operating assets count.

Common questions

Q: Does property I acquired unintentionally (like through foreclosure) get excluded from broad statutory property tests?
A: Not under this ruling -- the statute's plain "connected with the insurance corporation and located within the state" language reaches such property regardless of how or why it was acquired.

Q: Does rented property also count in this property-percentage denominator?
A: Yes -- the statute specifically includes rented property in the denominator too, valued at eight times the net annual rental rate.

Citations and references

Statutes and guidance:

• Tax Law § 1511(d)
• Tax Law § 1511(d)(2)(A)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/h81_17c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-H-81(17)C
Corporation Tax
March 5, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C801110A

On November 21, 1980, a Petition for Advisory Opinion was received from
Security Mutual Life Insurance Company of New York, Court House Square,
Binghamton, New York 13902.
The issue raised in the Petition is whether certain real property, acquired
by the Petitioner through mortgage foreclosure on defaulted loans, is required
to be included in the denominator of the property percentage for purposes of the
eligible business facility credit provided for under Section 1511(d) of the Tax
Law.
Petitioner is a domestic insurance corporation subject to the Franchise
Taxes on Insurance Corporations imposed under Article 33 of the Tax Law.
Petitioner is in the process of constructing and improving depreciable real
property included in an eligible business facility which will be made the basis
of a claim for the eligible business facility credit provided for under Section
1511(d) of the Tax Law.
The eligible business facility credit is computed by multiplying the tax
otherwise due by the average of the property and wage percentages. The property
percentage is computed, in accordance with Section 1511(d)(2)(A) of the Tax Law,
by "... ascertaining the percentage which the total of eligible property values
during the taxable year, as defined in paragraph four of this subdivision and as
certified by the New York state job incentive board, bears to the average value,
of all real and tangible personal property connected with the insurance
corporation and located within the state, during such year. For the purposes of
this subparagraph only, real and tangible personal property connected with the
insurance corporation shall include not only such property owned by the insurance
corporation but also property rented to it, and the value of rented property
shall be deemed to be eight times the net annual rental rate, that is, the annual
rental rate paid by the insurance corporation less any annual rental rate
received by it from subrentals."
Property in this State acquired by an insurance corporation through
mortgage foreclosure on defaulted loans is part of "real and tangible personal
property connected with the insurance corporation and located within the state"
and therefore must be included in the denominator of the property percentage.
This conclusion is mandated by the plain language of the statute.

DATED:

February 18, 1981

JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR