After a shell corporation acquires a target company's assets by merger and inherits its investment tax credit, can it claim the follow-on employment incentive tax credit using its own pre-merger employment level (zero employees) as the statutory baseline?

Plain-English summary

Petitioner was incorporated in Delaware in 1977, as "Kennecott Industries, Inc.," a wholly-owned shell subsidiary of Kennecott Copper Corporation, for the sole purpose of making a tender offer for the original Carborundum Company ("Old Carborundum"). By January 1978, the shell had acquired over 90% of Old Carborundum's stock and then merged Old Carborundum into itself (an upstream IRC § 334(b)(2) liquidation), immediately renaming itself The Carborundum Company. During 1977 -- before the merger -- the shell had no employees of its own; its four officers were actually Kennecott Copper employees, and it operated out of Kennecott Copper's New York City office. Through the merger, the shell inherited Old Carborundum's assets (qualifying for New York's investment tax credit) and, with them, a substantial New York workforce.

The question was whether Petitioner could then claim the employment incentive tax credit for 1979 and 1980 -- a credit worth 50% of the investment tax credit, available in each of the three years after the year the investment credit was allowed, but only if average employment in the credit year is at least 101% of average employment in the immediately preceding year. Petitioner's 1979-1980 employment (inherited from Old Carborundum via the merger) comfortably exceeded 101% of its own 1977 employment level -- which was zero, since the shell had no employees before the merger. But its employment never reached 101% of Old Carborundum's own pre-merger 1977 workforce. The Department concluded the statute's test is mechanical and looks only at the taxpayer's own year-over-year employment change: because Petitioner's average employment in 1979 and 1980 was at least 101% of Petitioner's own 1977 level, and it had properly claimed the investment tax credit for 1978 on the merger-acquired assets, it qualified for the full employment incentive credit in both years -- regardless of how its workforce compared to the company it had just acquired and absorbed.

What this means for you

Corporations that acquire another company's assets via merger

When you inherit an investment tax credit through a merger, the follow-on employment incentive credit is tested against the surviving/acquiring corporation's own prior-year employment baseline -- not the acquired company's pre-merger headcount. A shell or newly formed acquirer with no employees before the merger gets a very favorable (zero) baseline.

Tax professionals structuring or advising on acquisitions

This ruling illustrates that New York's employment incentive credit test, as written, doesn't ask whether the transaction "actually increased" employment relative to the target's prior workforce -- it asks whether the surviving entity's own employment grew year over year by the statutory percentage. Structuring the acquiring entity (rather than the target) as the surviving corporation can materially affect the baseline used for this test.

Common questions

Q: Would the answer differ if Old Carborundum (not the shell) had survived the merger?
A: This ruling doesn't address that scenario; it only rules on the facts presented, where the shell corporation was the surviving entity and its own 1977 employment (zero) became the baseline.

Q: Can another company rely on this ruling for a similar merger?
A: No. It binds the Department only for this petitioner's specific facts and can't be relied upon by other taxpayers.

Q: Does the regulation still contain the "Example 4" referenced in the underlying regulations?
A: No -- the ruling notes Example 4 of Regulation § 5-3.5 was repealed by the September 29, 1987 amendment to the Business Corporation Franchise Tax Regulations.

Citations and references

Statutes and regulations:

• Tax Law § 210.12-A (employment incentive tax credit); § 210.12 (investment tax credit)
• Business Corporation Franchise Tax Regulations § 5-3.5 (as amended September 29, 1987)
• IRC § 334(b)(2) (upstream liquidation/merger)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1987.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a87_28c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-87 (28) C
Corporation Tax
October 27, 1987

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C851126A

On November 26, 1985, a Petition for Advisory Opinion was received from The
Carborundum Company, 20600 Chagrin Blvd., Cleveland, Ohio 44122.
The issue raised is whether, for taxable years 1979 and 1980, Petitioner is entitled to the
employment incentive tax credit provided for in section 210.12-A of Article 9-A of the Tax Law
with respect to the assets acquired by merger of its subsidiary, The Carborundum Company
(hereinafter "Old Carborundum").
Petitioner, incorporated as Kennecott Industries, Inc., a wholly-owned subsidiary of
Kennecott Copper Corporation, was incorporated under the laws of Delaware in 1977 for the
purpose of making a tender offer for the shares of Old Carborundum, a Delaware corporation.
The public tender offer commenced on November 29, 1977, and before it expired on January 4,
1978, Petitioner had acquired over 90% of the outstanding shares of the+ common stock of Old
Carborundum. Petitioner thereupon acquired the assets of Old Carborundum by a merger of Old
Carborundum into Petitioner effective January 12, 1978. Immediately after the merger, Petitioner
changed its name to The Carborundum Company.
During 1977, Petitioner had no employees of its own. The four persons who served as
directors and executive officers of Petitioner were officers of Kennecott Copper Corporation.
Petitioner's offices were at 161 East 42nd Street, New York City, the principal executive office of
Kennecott Copper Corporation. Such office was listed in the Offer to Purchase circular dated
November 29, 1977 as the principal executive office of Petitioner. During 1977, Petitioner's
books and records were kept and accounting was performed at this location. Petitioner has filed
a New York State franchise tax return for 1977 reporting capital allocable to New York State and
tax payable thereon.
Upon the upstream merger (Internal Revenue Code 334(b)(2) liquidation) of Old
Carborundum in 1978, Petitioner acquired assets with respect to which an investment tax credit
is allowable pursuant to section 210.12 of the Tax Law. By this transaction, Petitioner became
the employer of a substantial number of employees within New York State.
Based upon its interpretation of the law, Petitioner believes that it is eligible for the
employment incentive tax credit for taxable years 1979 and 1980 based on the investment tax
credit claimed in 1978. This position is based on the fact that the employment level of Petitioner
for taxable years 1979 and 1980 exceeded 101% of the employment level of Petitioner in 1977
when Petitioner had no employees. However, it should be noted that the employment level of
Petitioner for taxable years 1979 and 1980 was less than 101% of the employment level of Old
Carborundum in 1977.

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

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

-2­
TSB-A-87 (28) C
Corporation Tax
October 27, 1987
Section 210.12-A of the Tax Law provides for an employment incentive tax credit of 50%
of the amount of investment tax credit allowed under section 210.12 of the Tax Law for each of
the three years next succeeding the taxable year for which the investment tax credit is allowed
with respect to property, the acquisition, construction, reconstruction or erection of which
commenced on or after January 1, 1976 and prior to January 1, 1987. Provided, that the
employment incentive tax credit for any taxable year shall only be allowed if the average number
of employees during such taxable year is at least 101% of the average number of employees
during the taxable year immediately preceding the taxable year for which the investment tax
credit is allowed.
Section 5-3.5 of the Business Corporation Franchise Tax Regulations as amended on
September 29, 1987 provides, in part, the following example:
Example 1: A calendar year taxpayer acquired property which qualified for the
investment tax credit on June 2, 1981 for $100,000.00 with a useful life of 10 years. The
taxpayer's average number of employees within New York State are as follows:
1980

1982

1983

1984

200

205

201

202

The taxpayer would be allowed credits against the tax due based on such property as
follows:
1981 - Investment tax credit (5% x $100,000)
$5,000.
1982 - Employment incentive tax credit (50% x $2,000)
1983 - No credit

2,500.
-0­

1984 - Employment incentive tax credit (50% x $5,000)

2,500.

It is noted that Example 4 of section 5-3.5 was repealed by the September 29, 1987
amendment to the Business Corporation Franchise Tax Regulations.
Based upon the provisions of section 210.12-A of the Tax Law and the regulations
promulgated thereunder, Petitioner qualifies for the employment incentive tax credit with respect
to the assets acquired by merger of its subsidiary, Old Carborundum, for taxable years 1979 and
1980 inasmuch as it qualified for the investment tax credit pursuant to section 210.12 of the Tax
Law for taxable year 1978 and inasmuch as its average number of employees during taxable
years 1979 and 1980 was at least 101% of its average number of employees during 1977.

DATED: October 27, 1987

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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