When a New York corporation with unused investment tax credit and employment incentive credit is statutorily merged into an out-of-state parent, can the surviving out-of-state corporation carry those unused credits forward, and does the merger trigger recapture of credits already claimed?

Plain-English summary

A New York corporation taxable under Article 9-A had unused investment tax credit (Tax Law § 210.12) and unused employment incentive tax credit (§ 210.12-A) sitting on its books. It planned to acquire 100% of the stock of an Ohio corporation that wasn't doing business in New York, then be statutorily merged INTO that Ohio corporation, with the surviving entity renamed back to the original New York corporation's name and all operations (including the New York operations) continuing unchanged. Alcan Aluminum Corporation, presenting this fact pattern, asked whether the surviving (formerly Ohio) corporation could use the unused credits as a carryforward, and whether the merger itself would trigger recapture of credit already claimed on property being transferred.

Both credit statutes allow unused amounts to "be carried over to the following year or years." The Business Corporation Franchise Tax regulations (§ 5-2.8(e)) specify that a "disposition" triggering investment tax credit recapture does NOT occur where property is transferred as part of a transaction described in IRC section 381(a) -- which expressly includes a statutory merger or consolidation under IRC section 368(a)(1)(A). Assuming the merger qualifies as such a statutory merger, and the property continues in qualified use in New York after being acquired by a corporation subject to Article 9-A tax, there's no "disposition," so no recapture is triggered by the merger itself.

But two important limits apply. First, the surviving corporation inherits the merged corporation's UNUSED credit carryforwards and continues using them -- but it cannot generate NEW investment tax credit on the property it acquired from the merger, because acquiring property via a tax-free reorganization doesn't qualify as a "purchase" under IRC section 179(d)(2) (the surviving corporation simply takes over the transferor's adjusted basis in the property, rather than paying a purchase price for it). Second, the merger doesn't make the property recapture-proof forever: if the property later ceases to be in qualified use before the end of its useful life, or before it's been in qualified use for more than 12 consecutive years, the SURVIVING corporation will be required to recapture the credit at that point -- counting both the transferor's and the acquirer's periods of qualified use toward that 12-year measurement.

What this means for you

Corporations planning a statutory merger that carries New York tax attributes

Unused New York investment tax credit and employment incentive credit carryforwards survive a genuine statutory merger under IRC section 368(a)(1)(A) -- the merger itself is not treated as a "disposition" that would claw back credit already used, as long as the property stays in qualified use in New York with a corporation subject to Article 9-A tax.

Accountants structuring post-merger credit claims

Don't try to claim a fresh investment tax credit on property acquired through the merger -- since the surviving corporation takes the transferor's carryover basis rather than purchasing the property, it doesn't meet the IRC section 179(d) purchase requirement. And keep tracking the property's qualified-use period across BOTH the pre-merger and post-merger corporations, since the 12-consecutive-year recapture clock doesn't reset at the merger.

Compare: what happens to a merged subsidiary's net operating loss

This ruling addresses INVESTMENT and EMPLOYMENT INCENTIVE tax credit survival through a merger. For the separate (and more restrictive) question of whether a merged subsidiary's unused NET OPERATING LOSS survives a merger, see TSB-A-85(20)C (Charrette Corporation) -- there, the loss only carries over for periods the merged subsidiary was actually subject to New York tax.

Common questions

Q: Does a statutory merger cause recapture of investment tax credit already claimed on transferred property?
A: No, if the merger qualifies under IRC section 368(a)(1)(A) (or certain other reorganization types under section 381(a)) and the property continues in qualified use in New York with a corporation subject to Article 9-A tax.

Q: Can the surviving corporation claim a new investment tax credit on property it received in the merger?
A: No -- since the property was acquired via reorganization rather than purchased, it doesn't meet the IRC section 179(d) purchase requirement for a new credit claim.

Q: Is the property permanently protected from recapture after the merger?
A: No -- if it later ceases to be in qualified use before the end of its useful life or before 12 consecutive years of qualified use (counting time held by both the transferor and the surviving corporation), the surviving corporation must recapture the credit.

Q: Can another merging corporation rely on this Opinion?
A: No. It binds the Department only as to this petitioner's own facts and cannot be relied upon by other taxpayers, even in a similar merger structure.

Citations and references

Statutes and regulations:

• Tax Law § 210.12(e), § 210.12-A(c), § 210.12(b), § 210.12(g), § 208.2
• Business Corporation Franchise Tax Regulations § 5-2.4, § 5-2.8(e), § 5-3.4
• Internal Revenue Code § 179(d)(2), § 332, § 368(a)(1)(A), (C), (D), (F), § 381(a)

Related rulings:

• TSB-A-85(20)C -- Charrette Corporation, the related but more restrictive question of net operating loss survival through a merger

Date note: The document header reads "May 1, 1985," while the sign-off line reads "DATED: April 30, 1985" -- a one-day gap consistent with internal signing before the header/publication date; issued_date uses the header date without correction.

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_6c.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-85 (6) C
Corporation Tax
May 1, 1985

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C840920A

On September 20, 1984 a Petition for Advisory Opinion was received from Alcan Aluminum
Corporation, P.O. Box 511, Warren, Ohio 44482.
At issue is whether, under Article 9-A of the Tax Law, the unused New York State
investment tax credit (section 210.12) and employment incentive tax credit (section 210.12-A) of
a merged corporation may be used as a carry forward by the surviving corporation after a statutory
merger.
Petitioner presents the following statement of facts. A corporation organized under the laws
of the State of New York currently taxable under Article 9-A of the Tax Law has unused investment
tax credit and unused employment incentive tax credit. The New York corporation proposes to
acquire 100 percent of all the shares of stock of a corporation organized under the laws of the State
of Ohio. The Ohio corporation is not doing business in New York State. Subsequent to the
acquisition of the Ohio corporation, the New York corporation proposes to be statutorily merged into
the Ohio corporation and thereafter the surviving corporation's name will be changed to that of the
former New York corporation. After the merger, all the operations, including the New York
operations, will continue as they were prior to the merger.
Sections 210.12(e) and 210.12-A(c) of the Tax Law states, in part:
". . .any amount of credit not deductible in such taxable year may be
carried over to the following year or years and may be deducted from
the taxpayer's tax for such year or years."
Section 208.2 of the Tax Law defines the term "taxpayer" as any corporation subject to
tax under Article 9-A.
Section 210.12(b) of the Tax Law states, in part:
"A credit shall be allowed under this section with respect to tangible
personal property and other tangible property, . . . which . . . are
acquired by purchase as defined in section one hundred seventy-nine
(d) of the internal revenue code, . . ."
Section 210.12(g) of the Tax Law provides for the recapture of investment tax credit when
property on which investment tax credit was claimed is disposed of or ceases to be in qualified use
prior to the end of its useful life. The recapture of such investment tax credit is further explained by
Business Corporation Franchise Tax regulation section 5-2.8. Such regulation section 5-2.8(e)
states,
RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

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

-2­
TSB-A-85 (6) C
Corporation Tax
May 1, 1985

"For purposes of this section, a disposition does not occur where
property is transferred from a corporation as part of a transaction to
which section 381(a) of the Internal Revenue Code applies; e.g., a
complete liquidation of a subsidiary under section 332 of the Internal
Revenue Code, or a reorganization under section 361 and section
368(a)(1)(A) (statutory merger or consolidation), section 368(a)(1)(C)
(certain acquisitions of property from one corporation by another),
section 368(a)(1)(D) (certain transfers of assets), or section
368(a)(1)(F) (mere change in identity, form or place of organization,
however effected). As there is no disposition in these cases, an add
back is not required provided that the property continues in qualified
use and is acquired by a corporation subject to tax under article 9-A.
Generally, in these cases, the acquiring or surviving corporation
cannot claim an investment tax credit because it takes over such
property at the adjusted basis of the transferor and the transfer does
not qualify as a purchase pursuant to Internal Revenue Code section
179(d)(2). If the property in the hands of the acquiring corporation
is not in qualified use for its entire life or for more than 12
consecutive years, a recovery from the acquiring corporation is
required. In measuring the period of qualified use, the period during
which the property was held by the transferor corporation and the
acquiring corporation are to be taken into account."
Section 5-3.4 of the Business Corporation Franchise Tax regulations provides for the
recapture of the employment incentive tax credit when property on which the investment tax credit
was claimed is disposed of or ceases to be in qualified use prior to the end of its useful life.
Assuming that the merger of the New York Corporation is a statutory merger under section
368(a)(1)(A) of the Internal Revenue Code and the property continues in qualified use in New York
State and is acquired by a corporation subject to tax under Article 9-A of the Tax Law, there would
be no diposition of property and the merged corporation when filing its final New York State
Corporation Franchise Tax Report would not be required to recapture the investment tax credit or
the employment incentive tax credit. The surviving corporation would be allowed to use the unused
investment tax credit and employment incentive tax credit acquired from the merged corporation.
However, the surviving corporation would not be allowed to compute any additional investment tax
credit or employment incentive tax credit on property acquired from the merged corporation, since
such property would not qualify as a purchase as defined in section 179(d) of the Internal Revenue

-3­
TSB-A-85 (6) C
Corporation Tax
May 1, 1985

Code. Furthermore, the surviving corporation would be required to recapture the investment tax
credit and the employment incentive tax credit if the property it acquired from the merged
corporation ceases to be in qualified use before the end of its useful life or before it has been in
qualified use for more than 12 consecutive years.

DATED: April 30, 1985

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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