New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

George E. Pataki
Governor

Gregory V. Serio
Superintendent

The Office of General Counsel issued the following opinion on November 13, 2003 representing the position of the New York State Insurance Department.

RE: Decertification/ Revocation or Recapture of Tax Credits for Failure to Meet Requirements of N.Y. Tax Law § 11(h)(3).

Questions:

1. If a Certified Capital Company ("CAPCO") has not attained the one-third targeted investment level in Empire Zones or underserved areas as of the fourth anniversary of its certification, is it subject to decertification or are its tax credits subject to recapture if it is otherwise in compliance with the requirements of the CAPCO program?

2. If a CAPCO meets the investment requirements of N. Y. Tax Law § 11(c)(1)(C) and it is not decertified and does not have its charter revoked before the fifth anniversary of its certification date, are the tax credits immune from recapture or forfeiture without regard to whether it has met the requirements of N.Y. Tax Law § 11(h)(3)?

3. If a CAPCO never invests the amounts required under N.Y. Tax Law § 11(h)(3) in Empire Zones and underserved areas, can it be decertified or have its charter revoked?

Conclusions:

1. If a CAPCO can certify to the superintendent that it had made a good faith effort to comply with the prescribed requirement, but the CAPCO has nevertheless not attained the one-third targeted investment level in Empire Zones or underserved areas as of the fourth anniversary of its certification, it is not subject at such point to decertification. Nor are its tax credits subject to recapture at that point in time if it is otherwise in compliance with the requirements of the CAPCO program. The potential for later decertification exists, however.

2. If a CAPCO is not decertified and does not have its charter revoked before the fifth anniversary of its certification date, and has properly made the required good faith certifications, the tax credits are immune from recapture or forfeiture.

3. If a CAPCO entirely fails to invest in empire zones or underserved areas, but it has properly made the necessary good faith certifications regarding its inability to do so, it will not be decertified or have its charter revoked, and the tax credits will not be recaptured for those reasons alone.

Facts:

The inquirer seeks further clarification of Office of General Counsel Opinion No. 01-06-08 (June 11, 2001) and the issues addressed therein. No particular facts were provided.

Analysis:

The inquirer has interpreted Office of General Counsel Opinion No. 01-06-08 (June 11, 2001) and the provisions of N.Y. Tax Law §§ 11 and 1511 (the "CAPCO statute") to conclude that "…there should should be no risk of forfeiture or recapture of tax credits if the investment requirements of N.Y. Tax Law § 11(h)(3) are never satisfied." This interpretation is based on the following language from that opinion letter:

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.

OGC Opinion No. 01-06-08 (June 11, 2001).

Although the above statement is not inaccurate, it nevertheless does not imply that failure to ever satisfy the requirements of § 11(h)(3) is without consequence. Such a conclusion would effectively read the requirement out of the law. Rather, the statement from Opinion 01-06-08 merely addressed the issue of whether the requisite investments in empire zones/underserved areas had to follow the "milestone schedule" required for qualified investments in general.

Under N.Y. Tax Law §11(c)(1)(C)(McKinney Supp. 2003), 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. 2003) 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]…" In addition, N.Y. Tax Law § 11(e) (McKinney Supp. 2003) sets forth the rules for the decertification of a CAPCO. Paragraph (4) thereof provides a mechanism affording a CAPCO additional time to comply with the investment requirements and contains the potential for the waiver, under certain conditions, of the requirements of N.Y. Tax Law § 11(h)(3). N.Y. Tax Law § 11(f) (McKinney Supp. 2003) sets forth the rules for the revocation of certification of a CAPCO.

For ease of reference, each of the above-cited statutes is reproduced below, in pertinent part, and in the order cited:

company program of a certified capital 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.

N. Y. Tax Law § 11(c)(1)(C) (McKinney Supp. 2003).

Certified capital may be raised by each certified capital company with respect to certified capital company program three at any time subsequent to its certification date, and credits shall be allocated to and vested in certified investors at the time of each such investment as provided in this paragraph, although such credits shall not be first allowed or incurred for state tax purposes, until, at the earliest, tax years beginning in two thousand two. 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 businesses 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 businesses located in underserved areas outside such empire zones.

N.Y. Tax Law § 11(h)(3) (McKinney Supp. 2003).

(4) Notwithstanding the provisions of [§ 11(e)(2)&(3)], if a certified capital company in certified capital company program three fails to satisfy the requirement in [§ 11(c)(1)(B)] because it has been unable to make a sufficient amount of qualified investments in qualified businesses located either in empire zones … or in underserved areas…, such certified capital company shall not be subject to decertification at that time. However, if such certified capital company fails to satisfy the requirement in § 11(c)(1)(C)] because it has been unable to make a sufficient amount of qualified investments in qualified businesses located either in such empire zones or in underserved areas outside such empire zones, but certifies to the superintendent that it had made a good faith effort to make such investments, such certified capital company shall be allowed two additional years to satisfy the requirement in such subparagraph (C). If, after the conclusion of such two year period, the certified capital company still has not been able to satisfy the requirement to make such investments, and such certified capital company certifies to the superintendent that it had made a good faith effort to make such investments, the requirement in [§ 11(h)(3)] to make qualified investments in qualified businesses located in empire zones or in underserved areas shall be waived. Such certified capital company shall then be allowed one additional year to satisfy the requirement in such subparagraph (C), and if, at the conclusion of that additional one year period, such requirement is still not satisfied, such certified capital company shall be subject to decertification and the provisions of [§ 11(e)(2)&(3)] shall apply.

N.Y. Tax Law § 11(e)(4) (McKinney Supp. 2003).

…[T]he superintendent may revoke the certification of a certified capital company if such certified capital company (i) falsely certified, pursuant to [§ 11(d)(3)] that a good faith effort was made to make additional qualifying investments under the requirements of [§ 11(h)(3)], or (ii) falsely certified, pursuant to [§11(e)(4)] that it had made a good faith effort to make a sufficient amount of qualifying investments in qualifying businesses located in empire zones … or in underserved areas outside such empire zones.

N.Y. Tax Law § 11(f) (McKinney Supp. 2003).

N.Y. Tax Law § 1511(k)(5) & (6) (McKinney Supp. 2003) contains the rules for the recapture of tax credits granted under the CAPCO program in the event of the decertification or revocation of certification of the CAPCO and provide, in pertinent part, as follows:

(5) Decertification of a certified capital company from a certified capital company program shall cause the disallowance and the recapture of the credit allowed under [§ 1511(k)(1)]…, as follows:

(A) Decertification of a certified capital company from a certified capital company program within two years of its starting date prior to meeting the requirements of [§ 11(c)(1)(A)] … shall cause disallowance of one hundred percent of the credit allowed under [§ 1511(k)(1)]… with respect to such certified capital company program and the recapture of any portion of such credit that was previously taken.

(B) Decertification of a certified capital company from a certified capital company program which, having met all requirements of [§ 11(c)(1)(A)] … subsequently fails to meet the requirements for continued certification under the provisions of [§ 11(c)(1)(B)] … shall cause the disallowance of eighty-five percent of the credit allowed under [§ 1511(k)(1)] … with respect to such certified capital company program and recapture of any portion of such credit in excess of fifteen percent that was previously taken.

(C) Decertification of a certified capital company from a certified capital company program which, having met all requirements of [§ 11(c)(1) (A) and (B)] subsequently fails to meet the requirements for continued certification under the provisions of [§ 11(c)(1)(C)] shall cause the disallowance of seventy percent of the credit allowed under [§ 1511(k)(1)] with respect to such certified capital company program and the recapture of any portion of such credit in excess of thirty percent that was previously taken.

(D) Decertification of a certified capital company from a certified capital company program pursuant to [§ 11(e)(2)], other than on the grounds of the failure of such certified capital company to meet the requirements of [§ 11(c)(1)(A), (B) or (C)] … shall not cause the disallowance of any of the credits allowed under [§ 1511(k)(1)] with respect to such certified capital company program, nor the recapture of any portion of such credits that was previously taken.

(6) Revocation of certification from a certified capital company program pursuant to [§ 11(f)] before the later of (i) the third anniversary of the certification date of the certified capital company or (ii) the date on which the certified capital company satisfies the requirements of subparagraph (C) of paragraph one of subdivision (c) of section eleven of this chapter, shall cause disallowance of one hundred percent of the credit allowed under paragraph one of this subdivision with respect to such certified capital company program and the recapture of any portion of such credit that was previously taken.

N.Y. Tax Law § 1511(k)(5) & (6) (McKinney Supp. 2003).

With regard to the first question, in the event that a CAPCO that was otherwise in compliance with the legal requirements of the CAPCO program, by the fourth anniversary of its formation had not yet attained the one-third targeted investment level in empire zones/underserved areas, and assuming further that a proper certification as to good faith effort has been made, then the CAPCO would not at that point be subject to decertification. This is because N.Y. Tax Law § 11(e)(4) clearly provides additional time to satisfy the requirements of § 11(c)(1)(C) in such cases. If the CAPCO fails to meet the requirements of the statute during these extensions, then it can be decertified as provided in the statute. It bears noting however that the "requirement of § 11(c)(1)(C)" addressed in § 11(e)(4) must necessarily include the requirement for investments in empire zones/underserved areas that is set forth in § 11(h)(3). First, the language of § 11(c)(1)(C) expressly incorporates by reference the requirement for investments in empire zones/underserved areas. Second, § 11(e)(4) also includes the satisfaction of the investment in empire zones/underserved areas as an integral part of § 11(c)(1)(C). Therefore, "the requirement of § 11(c)(1)(C)" cannot be satisfied if the investments in empire zones/underserved areas are not made.

With respect to the second question, assuming that the necessary certifications of good faith effort are properly made as required by the statute, and, that at the fifth anniversary point the requirement of N.Y. Tax Law § 11(c)(1)(C) has been satisfied [apart from the making of investments in empire zones/underserved areas, which element is waived at the five year point under § 11(e)(4)], then the CAPCO would not be subject to decertification or revocation. Accordingly, under the provisions of § 1511(k)(5)&(6), the tax credits would be immune from recapture.

Finally, with regard to the third question, if the requirement for investments in empire zones/underserved areas was never met, but the CAPCO had properly made the good faith certifications required by § 11(e)(4), the waiver of the empire zone/underserved area investment requirement allowed under § 11(e)(4) and the application of the provisions of §1511(k)(5)&(6) would render the tax credits immune from recapture.

Please note that the above conclusions are all predicated on the assumption that all certifications as to the inability of the CAPCO to make the required investments in empire zones/underserved areas are indeed made in good faith. If the Department were to discover that any such purported certifications were not legitimate, we would revoke the certification of the CAPCO pursuant to § 11(f). Under § 1511(k)(6), such a revocation, regardless of when effected,1 would cause the recapture of any tax credits previously taken.

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


1 This is the case because the false certification by the CAPCO would preclude it from satisfying the requirements of § 11(c)(1)(C). Thus, the time limit set by § 1511(k)(6) would not have expired.