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STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

The Office of General Counsel issued the following informal opinion on June 11, 2001, representing the position of the New York State Insurance Department.

Re: Certified Capital Company ("CAPCO") Tax Law Classification

Questions Presented:

With regard to the targeted investments in economic development zones, can qualified capital be used to move a company into an economic development zone? Will the Insurance Department require that the business be located in an economic development zone before it can receive funding?

At what point in time will the targeted investments established in CAPCO Program 3 be measured? Will the requirement that 1/3 of total certified capital be invested in economic development zones, and 1/3 of total certified capital in underserved areas be tested in years 2, 3 and 4?

How will investments in empire zones reduce the amount to be invested in early stage qualified businesses?

In determining if an early stage business is less than 2 years, is the starting date the date of incorporation?

What is the "starting date of a specific certified capital company program" as used in N.Y. Tax Law §11(c) (A-C) (McKinney 2000)?

Does the restriction that no CAPCO investment exceed 15% of a CAPCO's total certified capital, mean that an investment can not be over 15% of the total certified capital in a particular program, or the total certified capital of the combined programs?

Conclusions:

Qualified Capital cannot be utilized to move a company into an economic development zone. Investments may only be made in a business already located in the zone or started in the zone.

There does not exist a requirement that the level of targeted investments established in CAPCO Program 3 be tested at periodic points. As long as the CAPCO meets the milestones for overall certified capital invested, no specific limit exists for the timing of the targeted area investments.

Investments in empire zones will not reduce the amount to be invested in early stage businesses on a dollar for dollar basis. Rather, such investments will only reduce the base upon which the requirement for investments in early stage businesses is determined.

The starting date of an early stage business will generally be the date of the business incorporation, unless the CAPCO can provide convincing evidence to support the contention that a different date is proper.

The starting date of a specific certified capital company program of a CAPCO is the date at which the CAPCO is notified by the Department that it has been certified to participate in the CAPCO program in question (i.e., Program 1, 2, or 3).

The 15% restriction is applied separately to each CAPCO program. A CAPCO may not aggregate the programs for purposes of meeting the 15% test.

Facts:

No additional facts relating to this inquiry were given.

Analysis:

Use of capital to move an existing business.

N.Y. Tax Law §11 (a)(6)(McKinney Supp. 2001) defines a "qualified business", in pertinent part, as follows:

(A) It is headquartered in New York State, and its principal business operations are located in New York State…

The Department is of the opinion that the statutory language unequivocally requires that the business to be invested in be located in New York at the time of the investment. Therefore, any funds used to relocate a business to New York would not constitute a qualified investment.

Time limit for measurement of targeted investments.

N.Y. Tax Law §11(h)(3)(McKinney Supp. 2001) provides, in pertinent part, as follows:

One-third of the certified capital raised by each certified capital company with respect to certified capital company program three shall be used to make qualified investments in qualified business located in empire zones established pursuant to article eighteen-B of the general municipal law, and one-third of such certified capital shall be used to make qualified investments in qualified business located in underserved areas outside such empire zones.

The statute contains no specific time limit by which a CAPCO needs to invest the full one-third amount in each of the two targeted areas. The timetable or milestones contained in N.Y. Tax Law §11(c)(1) (McKinney Supp. 2001) are applicable only to the overall or total capital invested. The milestones do not set forth any program requirement regarding the targeted area investment amounts.

Empire Zones/Early Stage Business

N.Y. Tax Law §11(c)(1)(C) (McKinney Supp. 2001) provides as follows:

Within four years after the starting date of a specific certified capital company program of a certified company, at least fifty percent of its certified capital allocable to such certified capital company program must be placed in qualified investments, at least fifty percent of which must have been placed in early stage businesses, except that in the case of qualified investments made in qualified businesses located in empire zones established pursuant to article eighteen-B of the general municipal law under the provisions of certified capital company program three from allocations of certified capital made specifically for such targeted investments in such zones, the requirement for qualified investments in early stage businesses shall not apply.

Regarding the above provision, one interpretation is that each dollar invested in an empire zone reduces the amount required to be invested in early stage businesses by one dollar. Another interpretation is that any amounts invested in an empire zone reduce the 50% requirement only insofar as such amounts are subtracted from the base upon which the 50% requirement is calculated. The Department favors the latter interpretation. Therefore, if a CAPCO has invested $2 million in qualified investments, then $1 million of that shall have been placed in early stage business. If, however, $1 million of the $2 million total were invested in empire zones, then $500,000 out of the $2 million total would be required to be invested in early stage businesses.

Early Stage Business - Starting Date

N.Y. Tax Law §11(a)(10) defines the term "Early stage business" as follows:

"Early stage business"--a qualified business which is involved, at the time of investment, in activities related to the development of initial product or service offerings, such as prototype development or establishment of initial production or service processes, or, which is less than two years old and during the fiscal year immediately preceding the qualified investment had, together with its affiliated, gross revenues of no more than two million dollars, on a consolidated basis as determined in accordance with generally accepted accounting principles.

In determining whether the business is less than 2 years old, the date of incorporation of the business will typically be used to determine the age of the business. This date, however, may not always be accurate. For example, the business itself may have been incorporated some time after it had started operations. If such was the case, it may not qualify as an early stage business in that it may have already existed as an ongoing concern for longer than two years despite the fact that it was incorporated within the statutory limit. Conversely, a preexisting "shell" may be used as a vehicle for a new business. If such is the case, the arbitrary application of the two-year rule will unfairly disqualify a bona fide early stage business. In light of these possibilities, the Department will consider making exceptions to the two years from date of incorporation rule.

Starting Date of a Specific CAPCO program

N.Y. Tax Law §11(a)(13) provides as follows:

"Starting date"--the date on which a certified capital company is allocated certified capital for a specific capital company program pursuant to subdivision (b) of this section.

Thus, for purposes of N.Y. Tax Law § 11(c)(A-C), the starting date is the date on which the allocations for a given program are made by the Department.

15% Restriction

N.Y. Tax Law § 11(c)(3) provides as follows:

No qualified investment may be made by a certified capital company to the extent such investment would cause the company’s total qualified investment outstanding with respect to the qualified business receiving such investment to exceed fifteen percent of the total certified capital of the certified capital company at the time of such investment.

Concerning the question as to whether or not a CAPCO could aggregate its investment allocations from two or more CAPCO programs in order to avoid having an investment disqualified as exceeding the 15% limit. The Department 's position is that a CAPCO cannot so aggregate investment allocations from different programs. Each CAPCO program is the creation of a separate statutory enactment, and the allocations are made only with respect to one program at a time. Similarly, all of the percentage limits are applied separately to each program. To do otherwise would be unnecessarily complicated. In addition, the CAPCO statute has been modified for each program. Since different statutory standards apply for each program, allowing the aggregation of allocations/investments across program lines would lead to confusion as to the proper application of the relevant statute.

For further information, you may contact Supervising Attorney Michael Campanelli at the New York City Office.