The Office of General Counsel issued the following opinion on February 5, 2003, representing the position of the New York State Insurance Department.

Re: Proposed Investment - Empire Zone.

Question Presented:

Would an investment made during the administrative process necessary to effect a change in the boundaries of an Empire Zone qualify as an Empire Zone investment under the Certified Capital Company ("CAPCO") program?

Conclusion:

Yes, under the facts described, an investment made in a business shortly before its location is included in an Empire Zone will qualify as an Empire Zone investment once the boundaries of the Empire Zone are officially redesignated so as to include that location. The investment in question, however, shall only qualify as an Empire Zone investment upon the Department’s receipt of documentation of the boundary change.

Facts:

ABC Company ("ABC") is contemplating making a qualified investment in DEF Company ("DEF"). The proposed investment is planned for February, 2003. The principal business location of DEF is 123 Anystreet, Anycity, New York. This location is currently not part of an Empire Zone but it is represented that the boundaries of a nearby Empire Zone will be expanded shortly after the making of the proposed investment to include the principal business location of DEF. In this connection, it is noted that this process is already underway in that Anycity has already accepted DEF’s application for inclusion of its plant site in the Empire Zone and has included it in its Preliminary Empire Zone Boundary Amendment application to New York State.

Analysis:

Under N.Y. Tax Law §11(c)(1)(C)(McKinney Supp. 2003), a CAPCO, in order to maintain its certification, is required to invest at least fifty percent of its certified capital in qualified businesses within four years of the starting date of the CAPCO program for which the certified capital was allocated. At least fifty percent of such investment must be placed in "early stage businesses", but in the event investments are made in a business located in an Empire Zone,1 the requirement for qualified investments in early stage businesses shall not apply. With respect to CAPCO program three, N.Y. Tax Law § 11(h)(3)(McKinney Supp. 2003) further mandates that one-third of the certified capital raised by a CAPCO "…shall be used to make qualified investments in qualified businesses located in [Empire Zones] … ." These sections provide, in pertinent part, as follows:

Within four years after the starting date of a specific certified capital company program of a certified capital company, at least fifty percent of its certified capital allocable to such certified capital company program must be placed in qualified investments, at least fifty percent of which must have been placed in early stage businesses, except that in the case of qualified investments made in qualified businesses located in empire zones established pursuant to article eighteen-B of the general municipal law under the provisions of certified capital company program three from allocations of certified capital made specifically for such targeted investments in such zones, the requirement for qualified investments in early stage businesses shall not apply.

N. Y. Tax Law §11(c)(1)(C) (McKinney Supp. 2003) (emphasis supplied).

Certified capital may be raised by each certified capital company with respect to certified capital company program three at any time subsequent to its certification date, and credits shall be allocated to and vested in certified investors at the time of each such investment as provided in this paragraph, although such credits shall not be first allowed or incurred for state tax purposes, until, at the earliest, tax years beginning in two thousand two. One-third of the certified capital raised by each certified capital company with respect to certified capital company program three shall be used to make qualified investments in qualified businesses located in empire zones established pursuant to article eighteen-B of the general municipal law, and one-third of such certified capital shall be used to make qualified investments in qualified businesses located in underserved areas outside such empire zones.

N.Y. Tax Law § 11(h)(3) (McKinney Supp. 2003) (emphasis supplied).

It is the Department's position that the characterization of an investment (i.e., whether or not it "counts" as an investment in an Empire Zone) is to be determined at the time the qualified investment is made. This result follows from the language of both N. Y. Tax Law §11(c)(1)(C) and § 11(h)(3), the former of which provides, in relevant part, "…except that in the case of qualified investments made in qualified businesses located in economic development zones…" and the latter of which states "… shall be used to make qualified investments…" (emphasis supplied). The use of the terms "made" and "make" in the statutes suggests that the qualified business, at the time that the investment occurred, was already located in an Empire Zone.

In a previous opinion, it was held that a subsequent change in the boundaries of an Empire Zone so that a business in which a qualified investment was previously made was later included in the Empire Zone, would not serve to recharacterize the initial investment in that business as an Empire Zone investment. See Office of General Counsel Opinion No. 02-01-11 (January 9, 2002), available at http://sidnynet/internet/prod/rg201093.htm. However, in the present case, the investment will be made during the administrative process necessary to effect the change in the Empire Zone's boundaries. This is unlike the case of the prior opinion, where the investment was originally classified as a non-Empire Zone "qualified investment", thereby necessitating a recharacterization at a later date.

Accordingly, the proposed investment herein, as it is to be made shortly before and expressly in contemplation of the change to the boundaries of an Empire Zone, will qualify as an Empire Zone investment upon the provision of proof to the Department that the boundaries of the Empire Zone have been altered as anticipated. If the proposed change to the Empire Zone's boundaries does not take effect, the investment will be qualified as a non-Empire Zone qualified investment.

For further information you may contact Supervising Attorney Michael Campanelli at the New York City Office.

1 The text of the statute refers to "economic development zone established pursuant to article eighteen-B of the general municipal law… ." The term "empire zone" was substituted for "economic development zone" by chapter 63 of the Laws of 2000, part GG, §15.