A foreign parent corporation owns 100% of one New York subsidiary and 79% of a second, different New York subsidiary engaged in a related but distinct business -- does common majority ownership by the same parent make the second subsidiary 'substantially similar in ownership' to the first, disqualifying it as a 'new business' for the investment tax credit refund election, even though the two subsidiaries aren't owned in identical percentages or by identical shareholders?

Plain-English summary

This ruling addresses a HYPOTHETICAL fact pattern presented by an attorney (Paul M. Edgette) rather than a specific company's own return. Corporation A is a foreign corporation that doesn't itself transact business in New York. Corporation B, a New York corporation wholly owned (100%) by Corporation A, is engaged in the wholesale distribution of widgets. Corporation C, ALSO a subsidiary of Corporation A (79% owned, with the remaining 21% held by an unrelated third party), is engaged in the RETAIL distribution of widgets -- a related but distinct business from Corporation B. The question: assuming Corporation C acquires property otherwise eligible for the investment tax credit, is Corporation C "substantially similar in ownership" to Corporation B -- and therefore disqualified from "new business" status under section 210.12(j), which would otherwise let it cash out an unused investment tax credit carryover as an immediate refund?

The Department focused narrowly on CONTROL rather than identical ownership structure: Corporation A holds an "absolute controlling interest" in both Corporation B (100%) and Corporation C (79%) -- even though the entities are in different lines of business, have different minority ownership (Corporation C has an unrelated 21% shareholder; Corporation B apparently has none), and aren't owned in matching percentages. The Department held that this shared ultimate control by the same parent is sufficient to make Corporation C "substantially similar in ownership" to Corporation B for purposes of section 210.12(j) -- meaning Corporation C does NOT qualify as a "new business" and cannot elect the immediate-refund treatment for its investment tax credit carryover.

This ruling is a useful companion to TSB-A-85(24)C (Pasta & Cheese Inc., issued about six weeks earlier), which addresses the same "substantially similar in ownership" test from a different angle: there, a single company's FOUNDERS retaining 63.5% after a partial public offering defeated new-business status; here, a common PARENT's majority stakes in two SEPARATE subsidiary corporations defeats new-business status for the newer one. Both rulings converge on the same underlying principle -- retained or shared CONTROLLING ownership, not the precise mechanics of how that control arose, is what matters.

What this means for you

Corporate groups forming new subsidiaries to claim investment tax credit refunds

Simply incorporating a NEW subsidiary for a different line of business doesn't make it a "new business" eligible for the investment-tax-credit refund election if the SAME parent corporation holds a controlling stake in both the new subsidiary and an existing, previously taxable affiliate -- even with different minority co-investors and different day-to-day operations.

Structuring minority co-investment to preserve "new business" status

If preserving new-business eligibility matters, be aware that even a meaningful minority stake held by an unrelated party (here, 21%) doesn't overcome common-parent control when the parent's stake in each entity independently exceeds 50%.

Common questions

Q: Does having different minority shareholders in each subsidiary matter to the "substantially similar in ownership" test?
A: Not decisively, according to this ruling -- the Department focused on the common parent's controlling interest in both entities, not on whether the minority ownership matched.

Q: Does operating in a different line of business (wholesale vs. retail) change the analysis?
A: No -- the ruling turned entirely on ownership/control, not on the operational similarity between the two subsidiaries.

Q: Can another corporate group with a similarly structured subsidiary rely on this specific ruling?
A: No. It binds the Department only for the petitioner's specific (hypothetical) facts and can't be relied upon by other corporate groups, even those with similar parent/subsidiary ownership structures.

Citations and references

Statutes and regulations:

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

Related rulings:

• TSB-A-85(24)C -- the companion "substantially similar in ownership" ruling, addressing retained founder control after a partial public offering rather than common-parent ownership

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_27c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85 (27) C
Corporation Tax
November 26, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C850828A

On August 28, 1985 a Petition for Advisory Opinion was received from Paul M. Edgette,
Esq., 174 Meadowview Lane, Williamsville, New York 14221.
The issue presented by Petitioner is whether two corporations are "substantially similar in
ownership" for purposes of qualifying as a "new business" as defined in section 210.12(j) of the Tax
Law, thus, becoming eligible for a credit or refund of unused investment tax credits as provided in
section 210.12(e) of the Tax Law.
Petitioner has presented the following hypothetical situation for purposes of this advisory
opinion. Corporation A is a foreign corporation that does not transact business in New York State.
Corporation B, a New York corporation, is a wholly owned subsidiary of Corporation A engaged in
the business of wholesale distribution of widgets. Corporation C, also a subsidiary of Corporation
A, is engaged in the retail distribution of widgets. Corporation A owns 79% of the stock of
Corporation C. The remaining stock of Corporation C is owned by a person unrelated to either
Corporation A or Corporation B. Petitioner inquires whether Corporation C is substantially similar
in ownership to Corporation B and therefore does not qualify as a "new business" as defined in
section 210.12(j) of the Tax Law.
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
6. is principally used by the taxpayer in the production of goods by manufacturing,
   processing or other specified activities.
   RODERICK G. W. CHU, COMMISSIONER
   TP-8 (3/83)

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

-2­
TSB-A-85 (27) C
Corporation Tax
November 26, 1985

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;...."
For purposes of this advisory opinion it will be assumed without deciding, that Corporation
C has acquired property which meets the criteria set forth for the investment tax credit. In particular,
the property must be principally used by the taxpayer in the production of goods by manufacturing,
processing, or other specified activities.
Corporation A owns 100% of the stock of Corporation B and 79% of the stock of
Corporation C. Corporation A, thus, has an absolute controlling interest in both Corporations B and
C. Accordingly, Corporation C is substantially similar in ownership to Corporation B for purposes
of qualifying as a "new business" for purposes of section 210.12(j) of the Tax Law.

DATED: November 26, 1985

s/ANDREW F. MARCHESE
Chief of Advisory Opinions

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