The Office of General Counsel issued the following informal opinion on January 9, 2002, representing the position of the New York State Insurance Department.
Re: Empire Zones and Zone Equivalent Areas
Will a qualified investment in a qualified business located in an Empire Zone Equivalent Area count toward the requirement for the program three CAPCO to invest in Empire Zones?
Would a change in the boundaries of an Empire Zone so as to include the headquarters and principal business operations of a qualified business in which a qualified investment was previously made recharacterize the initial investment in that business as one which was made in an Empire Zone?
If a qualified business located either within or outside New York State moves its headquarters and principal business operations into an Empire Zone, will a qualified investment made by a program three CAPCO subsequent to the relocation count toward the Empire Zone requirement?
1. No, an investment in a business located in an Empire Zone Equivalent Area would not count toward the Empire Zone investment requirement.
2. No, a qualified investment that was made in a business located outside an Empire Zone will not be recharacterized as an Empire Zone investment in the event that the boundaries of a nearby Empire Zone are expanded so as to subsequently include the location in which the business is located.
3. Yes, if a qualified investment is made in a business after that business has relocated its headquarters and principal business operations to an Empire Zone, such an investment will count toward the Empire Zone requirement.
No specific facts were given.
Empire Zone Equivalent Area:
Under N.Y. Tax Law § 11(c)(1)(C) (McKinney Supp. 2001), a CAPCO, in order to maintain its certification, is required to invest at least fifty percent of its certified capital in qualified businesses within four years of the starting date of the CAPCO program for which the certified capital was allocated. At least fifty percent of such investment must be placed in "early stage businesses," but in the event investments are made in a business located in an Empire Zone, the requirement for qualified investments in early stage businesses shall not apply. With respect to CAPCO program three, N.Y. Tax Law § 11(h)(3) (McKinney Supp. 2001) further mandates that one-third of the certified capital raised by a CAPCO "shall be used to make qualified investments in qualified businesses located in [Empire Zones] . . . ."
N.Y. Gen. Mun. Law § 958 (McKinney Supp. 2001) defines the term Empire Zone at great length. An Empire Zone Equivalent Area, referred to in the statute as a "Zone Equivalent Area", is defined in N.Y. Gen. Mun. Law § 959(bb) (McKinney Supp. 2001). Under that definition, a Zone Equivalent Area shares a few, but not nearly all, of an Empire Zones characteristics. See N.Y. Gen. Mun. Law § § 958 and 959 (McKinney Supp. 2001). The "Zone Equivalent Area" concept existed in the law well before the institution of the CAPCO statute. Had the Legislature intended to accord Empire Zones and Zone Equivalent Areas the same treatment, it presumably would have expressly referred to both of them in the CAPCO statute. As no mention of Zone Equivalent Area was made, the only logical inference is that an investment made in a Zone Equivalent Area does not amount to an investment in an Empire Zone.
Empire Zone Expansion
The characterization of an investment (i.e., whether or not it "counts" as an investment in an Empire Zone) should be determined at the time of the qualified investment. This result follows from the express language of both N.Y. Tax Law § 11(c)(1)(C) and § 11(h)(3), the former of which provides, in relevant part, that "except that in the case of qualified investments made in qualified businesses located in economic development zones . . ." and the latter of which states, "shall be used to make qualified investments . . ." (emphasis supplied). The use of the terms "made" and "make" in the statutes indicates that the qualified business, at the time that the investment occurred, was already located in an Empire Zone. A subsequent change in the boundaries of an Empire Zone so that a business in which a qualified investment was previously made was later included in the Empire Zone, would not recharacterize the initial investment in that business as one which was made in an Empire Zone. This interpretation is consistent with the CAPCO statutes goal of maximizing the number of investments in Empire Zones.
Investment Subsequent to Relocation
An investment made in a qualified business subsequent to the relocation of the headquarters and principal business operations of the business to an Empire Zone will be treated as a qualified investment made in an Empire Zone. As discussed in the analysis to question 2, at the time the investment is made, the qualified business will be located in an Empire Zone. Therefore, it will be treated as a qualified investment made in a qualified business located in an Empire Zone.
For further information, you may contact Supervising Attorney Michael Campanelli at the New York City Office.