Applying principles of federal conformity, the Department of Taxation and Finance has ruled that a parent corporation may succeed to its subsidiary’s New York investment tax credit carryover where the parent sells the subsidiary’s stock in a transaction for which an I.R.C. § 338(h) (10) election has been made. Advisory Opinion, TSB-A-11(3)C (N.Y.S. Dept. of Taxation & Fin., Feb. 18, 2011).
Parent files an Article 9-A return on a combined basis with its affiliated corporations, including its wholly owned subsidiary (“Target”) that engaged in a manufacturing business in New York. Target had previously invested in manufacturing property in the State that qualified for the New York investment tax credit (“ITC”). Target was unable to use all of its ITC, and its unused portion was being carried forward over a 15-year carryover period.
During that carryover period, Parent sold all of its stock in Target to a third party, and the parties made a joint election under I.R.C. § 338(h)(10). Under this commonly used election, the stock sale is disregarded and the transaction is treated as a deemed sale of assets by the Target while it was a member of Parent’s consolidated group. In addition, for federal purposes, the Target is considered to have distributed the proceeds of the deemed asset sale to its Parent in complete liquidation pursuant to I.R.C. §§ 332 and 337.
I.R.C. § 381 provides rules for succeeding to certain tax attributes of another corporation in the case of certain corporate reorganizations. Where a subsidiary is liquidated pursuant to I.R.C. § 332, the acquiring corporation succeeds to various tax items of the subsidiary, including the general business credit available under I.R.C. § 38. Among the credits covered by the general business credit is the former federal investment tax credit, long since repealed, on which the New York ITC was modeled. Had the federal ITC still been in existence, for federal purposes Parent would have succeeded to any unused federal ITC carryover of the Target.
The question presented to the Department was whether Parent would be entitled to succeed to the unused New York ITC carryover of the Target under Article 9-A. The Department ruled that the Parent could succeed to the Target’s unused ITC and remaining carryover period, assuming it could establish the carryover amount.
The Advisory Opinion cited to Matter of AIL Systems, Inc., DTA No. 819303 (N.Y.S. Tax App. Trib., Oct. 21, 2002), where the Tribunal held that in a stock sale for which a § 338(h)(10) election was made, the Department was correct in requiring that the Target “recapture” previously claimed New York ITC because the Target’s deemed asset sale was a disposition requiring recapture. The Tribunal found support for the recapture because it was the same treatment that would have resulted with respect to the former federal ITC. In the Advisory Opinion, the Department continued to apply principles of federal conformity under the New York ITC, this time regarding the succession to tax attributes permitted under I.R.C. § 381.
Additional Insights. The Department’s ruling is consistent with its prior positions, reflected in the AIL Systems decision and elsewhere, interpreting the New York ITC law based on the former federal ITC treatment. The Advisory Opinion does contain a caveat that the Department reaches no conclusion regarding the way Parent and Target will actually be treated for federal purposes under I.R.C. §§ 338 and 381, and the ruling is based on the assumption that the § 381 succession provisions would apply. Although not mentioned in the Advisory Opinion, it is assumed that the deemed asset sale was not a disposition resulting in the recapture of ITC (as was the case in AIL Systems). It also appears likely that the “new” Target that is deemed to purchase the assets should be entitled to claim new ITC on the qualifying property.