The Office of General Counsel issued the following opinion on November 21, 2003, representing the position of the New York State Insurance Department.

Re: Relocation of Principal Business under N.Y. Tax Law § 11(d)(2)

Question:

Will ABC Venture Fund’s ("ABCVF") cumulative investments, for the purpose of distributions, be reduced by the initial $250,000 qualified investment in DEF, Inc. ("DEF")?

Conclusion:

No, ABCVF’s cumulative investments, for the purpose of distributions, will not be reduced by the initial $250,000 qualified investment in DEF, Inc.

Facts:

ABCVF made an investment of $250,000 in DEF on June 18, 2002. Approximately three months later DEF acquired its contract manufacturer, GHI, a Vermont corporation. As a result of this transaction, DEF had one employee in New York and 13 located in Vermont. This is viewed by the Department as a relocation of its principal business under the Certified Capital Companies ("CAPCO") statute.1   On November 22, 2002, ABCVF made a qualified investment of $500,000 in GSD, Inc. ("GSD"), a qualified business located in New York State.

The inquirer is writing to ascertain whether there will be a reduction in ABCVF’s cumulative investments for the purpose of distributions as a result of the DEF acquisition of GHI. The inquirer maintains that ABCVF’s later investment in GSD should preclude such a reduction.

Analysis:

Under the CAPCO law, if a qualified business in which a CAPCO makes a qualified investment should relocate its principal business operations outside of New York State, the CAPCO’s qualified investments will be reduced (for the purposes of calculating the amounts of distributions it may make) by the amount of the investment made in the business that relocated its principal operations. This result is avoided if the CAPCO either makes another qualified investment within six months that is at least equal in size to the amount invested in the relocated business or if the relocated business returns its principal business operations to New York State within three months. The applicable provision of the CAPCO law provides as follows:

In the event that a business in which a qualified investment is made relocates its principal business operations to another state during such investment, or within three months after the termination of such investment, the cumulative amount of qualified investment shall be reduced by the amount of such qualified investment, for the purposes of this subdivision only, unless

(A) the certified capital company invests an amount at least equal to the investment of certified capital in the relocated business in a qualified business located in New York state within six months of the relocation or

(B) unless the business demonstrates that it has returned its principal business operations to New York state within three months of such relocation.

A business shall be deemed to have relocated its principal business operations outside New York state if the primary workplace of more than fifty percent of the employees of such business within the state is relocated to another state.

N.Y. Tax Law § 11(d)(2) (McKinney Supp. 2003).

In the case of ABCVF, a qualified investment of $500,000 was made in GSD within six months of the relocation of DEF. Accordingly, the requirement of N.Y. Tax Law § 11(d)(2)(A) was satisfied, and there should be no reduction of ABCVF’s qualified investments.

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

1 In August 2003 DEF moved the Vermont operations to New York.