A food manufacturer incorporated in 1976 does a public stock offering that shifts about 36.5% of its shares to public investors -- founders still hold 63.5% -- does that ownership change make it a 'new business' eligible to cash out its unused investment tax credits as an immediate refund, instead of just carrying them forward?

Plain-English summary

Pasta & Cheese Inc., a domestic corporation incorporated April 16, 1976, manufactures food products for retail and wholesale distribution and makes significant purchases of manufacturing machinery and equipment, some of it eligible for New York's investment tax credit. On March 11, 1985, Petitioner completed a "public offering" in which approximately 36.5% of its outstanding shares were sold to the general public, and Petitioner says effective control shifted from the founding private stockholders to a newly designated Board of Directors. Petitioner argued this represented a "substantial change in ownership" making it a "new business" under section 210.12(j) -- which would let it elect to treat any unused investment tax credit carryover as an immediate REFUND under section 210.12(e), rather than merely carrying it forward year to year.

Section 210.12(j) excludes from "new business" status any corporation "substantially similar in operation and in ownership" to a business previously taxable under Article 9-A. The Department found Petitioner failed on BOTH counts: it had "continued to operate in substantially similar fashion" from 1976 to the present (same food manufacturing business), and -- critically -- the founding private stockholders STILL held 63.5% of the shares after the public offering, a controlling interest, even with a newly designated Board. The Department held that this retained majority ownership meant Petitioner remained substantially similar in ownership to its prior self, disqualifying it as a "new business" despite the public offering and board turnover.

The practical consequence: Petitioner may NOT elect to treat its unused investment tax credit carryover as an overpayment to be refunded now. It may, however, continue to carry the credit forward to future years and apply it against tax due in those years -- the ordinary (non-refund) treatment available to any taxpayer with excess credits.

This ruling pairs with the companion TSB-A-85(27)C, issued about six weeks later, which addresses the flip side of the same "substantially similar in ownership" test -- there, a COMMON PARENT's majority stakes in two different subsidiaries (rather than a founder retaining control after a partial public sale) similarly defeated "new business" status.

What this means for you

Established companies going public and hoping to cash out unused tax credits

A partial public offering -- even one that shifts board control -- won't make your company a "new business" eligible for New York's investment-tax-credit refund election if your founders/original owners retain a controlling ownership stake (over 50%) and your operations continue unchanged. Both the operational-continuity AND ownership-continuity prongs of section 210.12(j) must be broken, not just one.

Planning around the "new business" investment tax credit refund

If cashing out an unused investment tax credit as a refund (rather than carrying it forward) matters to your tax planning, the ownership shift needs to go well beyond a minority public float -- retaining founder control defeats the test regardless of how much day-to-day management changes.

Common questions

Q: Does a change in the Board of Directors, by itself, make a company a "new business"?
A: No -- the Department looked past board composition to who actually CONTROLS the company through stock ownership; founders retaining 63.5% of shares meant no substantial ownership change occurred.

Q: What's the practical difference between carrying forward an investment tax credit versus getting it refunded?
A: A carryforward only offsets FUTURE tax liability, while a "new business" refund election converts the unused credit into cash now, as an overpayment refund -- a meaningfully better outcome when available.

Q: Can another company that went through a partial public offering rely on this specific ruling?
A: No. It binds the Department only for this petitioner's specific facts and can't be relied upon by other companies, even those with similarly structured public offerings.

Citations and references

Statutes and regulations:

• Tax Law § 210.12, § 210.12(e), § 210.12(j)

Related rulings:

• TSB-A-85(27)C -- the companion "substantially similar in ownership" ruling, addressing common-parent ownership rather than retained founder control

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1985.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a85_24c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85 (24) C
Corporation Tax
October 16, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C850826A

On August 26, 1985 a Petition for Advisory Opinion was received from Pasta & Cheese Inc.,
21-51 Borden Avenue, Long Island City, New York, New York 11101.
The issue presented is whether Petitioner is a "new business" for purposes of section
210.12(j) of Article 9-A of the Tax Law and thus, is eligible for a refund of unused investment tax
credits as provided in section 210.12(e) of the Tax Law.
Petitioner, a domestic corporation, was incorporated on April 16, 1976 and has continued to
operate in substantially similar fashion up to the present time. It manufacturers food products for
distribution on both a retail and wholesale level and makes significant purchases of machinery and
equipment for use in the manufacturing process. A portion of this equipment is eligible for the
investment tax credit.
On March 11, 1985, Petitioner was involved in a "public offering" at which time
approximately 36.5% of its presently outstanding shares of stock were acquired by the general
public. Petitioner states that, at that time, effective control of the corporation shifted from the hands
of the founding private stockholders to the newly designated Board of Directors.
Petitioner contends that the sale of 36.5 of its outstanding shares of stock represents a
substantial change in ownership, thus, making Petitioner a "new business" eligible for a refund of
unused investment tax credits.
Section 210.12 of the Tax Law provides for a credit against the tax imposed by Article 9-A
based upon a percentage of the cost or other basis for federal income tax purposes of tangible
personal property and other tangible property, including buildings and structural components of
buildings, which:

1. is acquired, constructed, reconstructed or erected by the taxpayer after December 31,
   1968;
2. is depreciable pursuant to section 167 of the Internal Revenue Code or recovery property
   with respect to which a deduction is allowable under section 168 of the Internal Revenue Code;
3. has a useful life of four years or more;
4. is acquired by the taxpayer by purchase as defined in section 179(d) of the Internal
   Revenue Code;
5. has a situs in New York State; and
   RODERICK G. W. CHU, COMMISSIONER
   TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-85 (24) C
Corporation Tax
October 16, 1985

6. is principally used by the taxpayer in the production of goods by manufacturing,
   processing or other specified activities.
   Section 210.12(e) of the Tax Law, applicable with respect to taxable years beginning on or
   after January 1, 1982, provides that where a new business as defined in section 210.12(j) of the Tax
   Law is entitled to an investment tax credit carryover, it may elect to treat the carryover as an
   overpayment of tax to be refunded.
   Section 210.12(j) of the Tax Law, in pertinent part, provides that a new business shall include
   any corporation, except a corporation which:
   "...(2) is substantially similar in operation and in ownership to a business entity (or
   entities) taxable, or previously taxable, under this article;...".
   Petitioner has stated that the operation of its business has continued in substantially similar
   fashion from its incorporation in 1976 up to the present time. In addition, the founding private
   stockholders of Petitioner continue to hold 63.5% of its shares of stock. Although there is a newly
   designated Board of Directors, the founding private shareholders have retained a controlling interest
   in Petitioner. Accordingly, Petitioner is a corporation which is substantially similar in operation and
   in ownership to a business entity taxable under Article 9-A of the Tax Law and, thus, is not a "new
   business" for purposes of section 210.12(j) of the Tax Law. Petitioner may not elect to treat an
   investment tax credit carryover as an overpayment of tax to be refunded. However, pursuant to
   section 210.12(e) of the Tax Law, Petitioner may continue to carry over the investment tax credit to
   the following year or years to be deducted from its tax for such year or years.

DATED: October 15, 1985

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth herein.