Incentives Watch: New York Businesses Denied Empire Zone Credits Due to Lack of Valid Business Purpose

In the past few weeks, New York has denied Empire Zone tax credits to taxpayers because they failed the valid business purpose test. The valid business purpose test requires that a company have a valid business purpose for its reorganization. Based on these decisions, the moral of the story is clear: businesses need to be careful and make sure that their reorganization has a valid business purpose before seeking Empire Zone tax credits. If the sole reason for the reorganization is to claim the credits, there will be difficulties ahead come audit time.

In one decision (In re Dunk & Bright Furniture Co. Inc.), the New York Tax Appeals Tribunal ruled that the taxpayers were not entitled to Empire Zone tax credits because their reorganization into a holding company lacked a valid business purpose and was done solely to receive the credits, according to a Bloomberg BNA Weekly State Tax Reportarticle.

D& B Holdings, and its sole shareholder, claimed certain Empire Zone sales and use and real property credits pursuant to D& B Holdings' acquisition of the assets, liabilities and name of the shareholder's existing furniture business in a tax–free reorganization. D& B Holdings had essentially the same ownership and the same operations as the predecessor furniture business.

Because of a lack of contemporaneous evidence supporting segregation of liabilities as a motive for the reorganization, and taxpayers' failure to establish that the reorganization caused a change in their economic position, the taxpayers failed to satisfy the valid business purpose test.

In another decision (In re Falso), the New York Division of Tax Appeals concluded that the taxpayers were not entitled to a qualified empire zone enterprise (QEZE) credit for real property taxes because the two certified Empire Zone enterprises through which taxpayers claimed the credit were, in one instance, not a party to the payment in lieu of tax (PILOT) agreement and in the other, lacked a valid business purpose, according to a Bloomberg BNA Weekly State Tax Reportarticle.

The taxpayers claimed QEZE credits for real property taxes against their personal income tax through their ownership of two entities, Falso Holding Co., LLC and Seneca Data Distributors Inc., an S corporation. Both entities are QEZEs. Seneca Data was a successor corporation to an entity that had entered into a written agreement with the county industrial development agency to make payments in lieu of taxes (PILOT agreement). Falso Holding had entered into a “reaffirmation agreement” with Seneca Data, whereby it agreed to pay all real property taxes of Seneca, including the payments in lieu of taxes owed under previously existing PILOT agreement.

The ALJ addressed whether taxpayers could claim QEZE credits through Seneca Data. For Seneca Data to qualify for the credits, the reorganization that led to Seneca's creation required a valid business purpose—the primary purpose of which cannot have been to obtain QEZE benefits. Finding no change from the predecessor corporation, the ALJ concluded that Seneca Data failed to prove the reorganization was for a valid business purpose.

In other developments . . .

Pennsylvania enacted legislation that amended the definition of “Keystone special development zone” to include properties that have no permanent vertical structures affixed to them or which had permanent vertical structures which have deteriorated or been abandoned for at least 20 years, according to a recent Bloomberg BNA Weekly State Tax Reportarticle.

By: Kathleen Caggiano

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