OGC Opinion No. 06-11-08: N.Y. Tax Law § 11(c)(1)(C) Investments in "Start-Up Businesses"

OGC Op. No. 06-11-08

The Office of General Counsel issued the following opinion on November 13, 2006 representing the position of the New York State Insurance Department.

Re: N.Y. Tax Law § 11(c)(1)(C) Investments in "Start-Up Businesses"

Question:

Will investments in empire zones reduce the base upon which the requirement for investments in start up businesses is determined?

Conclusion:

Yes, investments in empire zones reduce the base upon which the requirement for investments in start up businesses is determined.

Facts:

The inquiry was general in nature and provided no particular facts.

Analysis:

An earlier Opinion of this Office [O.G.C. Opinion 01-06-08 (June 11, 2001), hereinafter, the "2001 Opinion"] addressed, among other inquiries, the question of how investments in empire zones would reduce the amount required to be invested in early stage qualified businesses. The 2001 Opinion concluded that investments in empire zones would not reduce the amount to be invested in early stage businesses on a dollar for dollar basis, but that such investments would only reduce the base upon which the requirement for investments in early stage businesses is determined. The present inquiry is now focused on the how that conclusion should be updated given the amendment of the CAPCO statute by the introduction of the additional category of "start up businesses" for CAPCO Programs 4 and 5 by L. 2004, Ch. 59, Part D, §1.

At the time of the issuance of the 2001 Opinion, the applicable statute read 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. 2001).

Following the amendment, the statute now provides 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 program four and any subsequent program, at least twenty-five percent of which must have been placed in early stage businesses and an additional twenty-five percent of which must have been placed in start-up businesses, and 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, program four and program five from allocations of certified capital made specifically for such targeted investments in such zones, the requirement for qualified investments in early stage and start-up businesses shall not apply.

N.Y. Tax Law § 11(c)(1)(C)(McKinney Supp. 2006).

The 2001 Opinion interpreted the then current statute as requiring that any amounts invested in an empire zone would reduce the 50% requirement only insofar as such amounts are subtracted from the base upon which the 50% requirement is calculated, i.e., that if a CAPCO has invested $2 million in qualified investments, then $1 million of that shall have been placed in early stage business. If, however, $1 million of the $2 million total were invested in empire zones, then $500,000 out of the $2 million total would be required to be invested in early stage businesses.

It is suggested that the change in the law requires start up businesses to be treated in the same manner as early stage businesses under the statute, so that investments in empire zone businesses should reduce the base upon which the requirement for investments in start up businesses is determined just as it is for early stage businesses and that any such reduction should apply half to early stage businesses and half to start up businesses. The following example, based on the one used in the 2001 Opinion, illustrates the application of this view:

If a CAPCO has invested $2 million in qualified investments, then $500,000 of that shall have been placed in early stage business and $500,000 shall have been placed in start up businesses. If, however, $1 million of the $2 million total were invested in empire zones, then $250,000 out of the $2 million total would be required to be invested in early stage businesses and an additional $250,000 out of the $2 million would be required to be invested in start up businesses.

Nothing in the legislative history of L. 2004, Ch. 59 provides any guidance regarding the question raised. Nevertheless, the amended wording of the statute strongly indicates that start up business should be treated the same way as early stage businesses for purposes of the application of N.Y. Tax Law § 11(c)(1)(C). Accordingly, this Office agrees that this interpretation is consistent with the 2001 Opinion and that it represents the proper application of the statute as amended.