New York Advisory Opinion TSB-A-89 (8)I: Issue raised is whether, for purposes of Article 22 of the Tax Law, the gain on the sale of a business in New York State and the subsequent purchase of another business would qualify for the exclusion of a capital gain under section 612(o) or the deferral of a capital gain under section 612(p).

Plain-English summary

Robert Goodheart bought 15% of the stock of Low Surgical and Medical Supply Co. between February 1983 and February 1984 and held it four to five years. Low Surgical never filed a "Tax Incentive Certificate for New Business" (Form DTF-90), either when Goodheart bought in or afterward. In February 1988, Goodheart and the other shareholders sold the company to a completely unrelated buyer, realizing a federal long-term capital gain on stock that was a capital asset under IRC § 1221 (not property used in a trade or business under IRC § 1231). The buyer then invited Goodheart to buy back in - 5% of a newly formed New York corporation, all of whose assets were in New York - and Goodheart reinvested within one year of the sale. But the new business looked quite different from the old one: more than 80% new personnel, new locations, a 90% ownership change, all new procedures, and new professionals. Goodheart argued that the substance of his transaction still matched what sections 612(o) and 612(p) were meant to reward, even though he couldn't check every box.

The Department disagreed on both fronts. For the section 612(o) exclusion, Tax Law § 612(c)(20) and § 612(o) only exclude gain from selling a "new business investment" - stock issued by a corporation that met a detailed six-part test under § 612(o)(1)(B), including filing a new business certificate with the State Tax Commission within 90 days of adopting its business plan (or its first return, whichever came sooner) and then annually for four years. Low Surgical never filed that certificate, and Goodheart didn't show the company ever met the test's substantive requirements either. Since the company Goodheart sold was never a qualifying "new business," his gain from selling it wasn't a "new business investment gain" at all - the substance-over-form argument couldn't rescue an exclusion that never had a qualifying investment to begin with.

For the section 612(p) deferral, two independent problems arose. First, Tax Law § 612(p) only applies to taxable years beginning before January 1, 1988, and Goodheart's gain was realized in February 1988 - too late, whether he reports on a calendar year or a fiscal year that includes that month. Second, even setting the timing aside, § 612(p)(3) defines a "New York new business" to exclude any business "substantially similar in operations" to a previously taxable entity - and Goodheart's own facts described the new business as substantially similar to the old one. Either problem alone would have been enough to deny the deferral; together, they left no path to relief.

What this means for you

If you sold a business and reinvested the proceeds in a similar one

Reinvesting within a year of the sale, by itself, does not qualify you for the section 612(p) deferral (which in any case only ever applied to gains realized in taxable years beginning before January 1, 1988). If the business you invest in is substantially similar - in industry, ownership, operations - to the one you sold, the statute treats that similarity as disqualifying, regardless of how quickly or completely you reinvested.

Business owners weighing the now-mostly-historical new-business tax breaks

Sections 612(o) and 612(p) were New York incentives tied to businesses formed in the early-to-mid 1980s; the deferral's own window closed for tax years beginning in 1988 and later. If you are looking at an old transaction involving these provisions, the outcome will typically turn on paperwork (was a new business certificate actually filed, on time, every year required) and on how different the reinvestment target really was from what came before - not on whether the taxpayer's overall intent lined up with the incentive's purpose.

Accountants checking DTF-90 filing history before advising on these provisions

Before advising a client that a gain qualifies for either the section 612(o) exclusion or the section 612(p) deferral, confirm the underlying company's Form DTF-90 filing history - both the initial certificate (due within 90 days of adopting its business plan or its first required return) and the annual certificates for the following four years. A missing certificate is fatal to the exclusion on its own, independent of whether the company might otherwise have satisfied the substantive new-business tests.

Common questions

Q: Does it matter that Goodheart reinvested within one year of the sale?
A: No. The one-year reinvestment window is a feature of section 612(p)'s deferral mechanism, but it doesn't overcome the two separate problems that doomed the deferral here: the deferral provisions had already stopped applying to taxable years beginning on or after January 1, 1988 (and Goodheart's gain was realized in February 1988), and the new business he reinvested in was substantially similar to the old one, which section 612(p)(3) expressly disqualifies from "New York new business" status.

Q: Why did the missing DTF-90 certificate matter so much?
A: The section 612(o) exclusion only applies to gain from selling a "new business investment," and section 612(o)(1)(B) makes filing a new business certificate with the State Tax Commission one of the required elements of qualifying as a "new business" in the first place - due within 90 days of adopting the business plan (or the first required return, whichever is sooner), and then with each return for four years. Low Surgical never filed that certificate. Because the company was never a qualifying "new business," the stock Goodheart sold was never a "new business investment," so there was no exclusion to substantiate regardless of any other facts.

Q: Could the Department have excused the missing certificate under a substance-over-form theory?
A: The Petitioners raised exactly that argument, contending the Legislature couldn't have intended to deny relief where the substance of the transaction was otherwise met. The Department rejected it: the certificate-filing requirement is one of several specific, independent conditions in section 612(o)(1)(B), and the Petitioners also failed to show Low Surgical met the other substantive requirements. The opinion treats the statutory test as a checklist rather than a general purpose to be satisfied in spirit.

Q: Would the outcome have been different if Goodheart had sold in an earlier year, before 1988?
A: Possibly, on the deferral side alone. Section 612(p) applied only to taxable years beginning before January 1, 1988, so an earlier sale might have cleared that hurdle. But the "substantially similar business" exclusion in section 612(p)(3) would still have applied on these facts, since Goodheart himself described the new business as substantially similar to the old one - so an earlier sale date would not have fixed both problems.

Q: Is this exclusion or deferral something a taxpayer could use today?
A: No. Section 612(p)'s deferral only ever applied to taxable years beginning before January 1, 1988. Section 612(o)'s exclusion was likewise tied to businesses that adopted a qualifying plan on or after July 1, 1981 and met the certificate-filing and other requirements within specific early-1980s windows. Both provisions are now historical; this opinion is useful mainly for understanding old transactions or disputes involving that era's investments.

Citations and references

• Tax Law § 612(c)(20) - computes the modification for new business investment gains under section 612(o)
• Tax Law § 612(o) - excludes from federal adjusted gross income all or part of a "new business investment gain" realized on selling a "new business investment"
• Tax Law § 612(o)(1)(B) - defines "new business," including the plan-adoption date, first-taxable-period, 90%-assets/80%-employees, certificate-filing, and income-source requirements, and excludes businesses substantially similar to a previously taxable entity
• Tax Law § 612(o)(1)(C) - defines "new business investment" as certain investments issued by a new business
• Tax Law § 612(c)(23) - computes the modification for the new business investment deferral under section 612(p)
• Tax Law § 612(p) - defers reinvested long-term capital gain where reinvested in a "New York new business," applicable only to taxable years beginning before January 1, 1988
• Tax Law § 612(p)(3) - defines "New York new business" to exclude a business substantially similar in operations and ownership to a previously taxable entity
• IRC § 1221 - defines "capital asset," under which the Low Surgical stock was classified
• IRC § 1231 - governs gain from property used in a trade or business, which the Department found did not apply to this stock sale

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1989.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a89_8i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-89 (8) I
Income Tax
September 21, 1989

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I890621A

On June 21, 1989, a Petition for Advisory Opinion was received from Robert and Maureen
Goodheart, 63 Peony Road, Levittown, New York 11756.
The issue raised is whether, for purposes of Article 22 of the Tax Law, the gain on the sale
of a business in New York State and the subsequent purchase of another business would qualify for
the exclusion of a capital gain under section 612(o) or the deferral of a capital gain under section
612(p). In addition, where a "Tax Incentive Certificate for New Business (DTF-90)" has not been
filed, would favorable treatment under these sections be denied.
Petitioner, Robert Goodheart, acquired 15 percent of the stock of Low Surgical and Medical
Supply Co. He purchased this stock between February 1983 and February 1984 and owned the stock
at least four years but less then five years. At the time the stock was purchased, no "Tax Incentive
Certificate for New Business (DTF-90)" was filed by Low Surgical and Medical Supply Co. and no
such certificate was filed subsequent to Petitioner's purchase of the stock.
Petitioner, Robert Goodheart, and the other shareholders sold the business in February of
1988. As a result of the sale of the company stock, a federal long term gain was realized. The
property sold was a capital asset under section 1221 of the Internal Revenue Code. The property sold
was not property used in a trade or business and did not result in a gain under section 1231 of the
Internal Revenue Code.
The buyer of Low Surgical and Medical Supply Co. is completely unrelated to any of the
prior shareholders. However, the buyer asked Petitioner, Robert Goodheart, if he would be
interested in working with him and in buying five percent of the stock of the new business. In
February of 1988, he did buy five percent of the stock.
The new business is a new corporation formed under the Laws of New York State and is
taxed as such. All of the corporation's assets are located in New York State. It should be noted, that
Petitioner, Robert Goodheart, reinvested an amount in a New York business within one year after
the date of sale of a business. This new business is different from the old business in the following
ways: more then 80 percent of the personnel are new; new locations are now being used to do
business; there was a 90 percent ownership change; all new procedures are now employed; and new
professionals have been engaged.
Based on the facts, Petitioners contend that the conditions of section 612(o) and (p) of the
Tax Law have been substantially met except for two substance over form issues: the business
certificate filing and the similar business rule. Petitioners feel that it is not the intention of the
Legislature to deny Petitioner, Robert Goodheart, favorable treatment under such section

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TSB-A-89 (8) I
Income Tax
September 21, 1989
when, in fact, the substance of the transaction was met.
Section 612(c)(20) of the Tax Law provides that the amounts that may be subtracted from
federal adjusted gross income for the modifications for new business investment gains and certain
new business investments are computed pursuant to section 612(o) of the Tax Law.
Section 612(o) provides for the full or partial exclusion from federal adjusted gross income
for a "new business investment gain" realized upon the sale of a "new business investment". Section
612(o)(1)(C) provides that a "new business investment" means and includes certain investments
issued by a new business. Section 612(o)(1)(B) specifies the requirements a corporation must meet
to qualify as a new business for purposes of section 612(o). Section 612(o)(1)(B) provides that a
"new business" means a corporation or partnership, organized or formed under the laws of any state,
which:
(a)

adopts a plan on or after July 1, 1981 to conduct a new business and to issue new
business investments,

(b)

is subject to taxation for the first time by corporation tax (Article 9, excluding
Section 182), or franchise tax on business corporations (Article 9-A),

(c)

is subject to tax the first time on and after July 1, 1981 and the first taxable period
includes the date of the adoption of such plan (or the first taxable period of the
business enterprise begins within one year from the date of adoption of such plan),

(d)

is conducted (or will be conducted) with at least 90 percent of the assets being
located and employed in New York State and 80 percent of the employees are
principally employed in New York State,

(e)

files a new business certificate with the State Tax Commission within 90 days after
the adoption of the plan or when the first tax return is required to be filed, whichever
is sooner, and files a new business certificate with any tax return required to be filed
during the first four taxable years of such new business (where no tax return is
required, the certificate shall be filed annually), and

(f)

for any taxable period, must have derived more than 60 percent of its total income
from sources other than royalties, rents, dividends, interest, annuities and sales or
exchanges of stock or securities.

A new business does not include:
(a)
(b)

any new business in which 25 percent or more of the stock is owned by a corporation
which is subject to the franchise tax on business corporations or,
a business which is substantially similar in operation and in ownership to a business
entity that was previously taxable or is taxable.

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TSB-A-89 (8) I
Income Tax
September 21, 1989
Herein, Low Surgical and Medical Supply Co. does not meet the requirements of section
612(o)(1)(B). The corporation never filed a new business certificate and, in addition, Petitioners
have not shown that Low Surgical and Medical Supply Co. ever met any of the requirements of
section 612(o)(1)(B) qualifying the corporation as a new business. Therefore, Petitioner, Robert
Goodheart's, capital gain from the sale of Low Surgical and Medical Supply Co. stock is not a gain
from the sale of a new business investment, and such capital gain does not qualify for the exclusion
contained in section 612(c)(20) and 612(o) of the Tax Law.
Section 612(c)(23) of the Tax Law provides that the amounts that may be subtracted from
federal adjusted gross income for the modification for new business investment deferral are
computed pursuant to section 612(p) of the Tax Law. The provisions of section 612(p) provide for
a deferral of a reinvested amount of long term capital gain realized from the sale of a capital asset
that is not a new business investment where such amount is reinvested in a "New York new
business". However, such provisions are applicable only to taxable years beginning before January
1, 1988. Assuming Petitioners are calendar year taxpayers, a capital gain realized in February 1988,
does not qualify for the deferral. Even if they are fiscal year taxpayers, the capital gain would not
qualify for deferral in the fiscal year that includes February 1988 because they state that the "new
business"is substantially similar to the old business and there is no provision in the Tax Law to allow
such a similar business to be considered a "New York new business" for purposes of section 612(p)
of the Tax Law. Section 612(p)(3) of the Tax Law provides that a "New York new business" is a
business enterprise which among other requirements "is not substantially similar in operations ... to
a business entity ... previously taxable" under Article 9-A.
Therefore the capital gain Petitioner, Robert Goodheart, realized from the sale of Low
Surgical and Medical Supply Co. does not qualify for either the exclusion of a capital gain under
612(c)(20) and 612(o) or the deferral of a capital gain under 612(c)(23) and 612(p) of the Tax Law.

DATED: September 21, 1989

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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