The Office of General Counsel issued the following opinion on November 30, 2004 representing the position of the New York State Insurance Department.

Re: CAPCO Program Four - Qualified Debt Instrument

Question Presented:

Do the Notes described in the private placement memorandum ("PPM") of ABC Co., L.P. ("ABC") comply with the definition of "qualified debt instrument" in the Certified Capital Company ("CAPCO") statute?


The Notes described in the PPM comply with the definition of "qualified debt instrument" contained in the CAPCO statute.


ABC is an applicant for participation in CAPCO Program Four and has made the above inquiry in connection with the application. The impetus for the inquiry is the fact that, according to the PPM, the investors in ABC (i.e., the insurance companies that are the purchasers of Notes) will also receive limited partnership interests (the "Interests") at no additional cost. The Notes and Interests are separate instruments and can be transferred independently of one another.

The Notes entitle the bearers thereof to certain scheduled principal repayments plus the receipt of the tax credits provided pursuant to the CAPCO statute.1 The Notes will be priced to yield a predetermined fixed interest rate wholly unrelated to and independent of the profitability of ABC.

The Interests are structured as limited partnership interests and entitle the holders thereof to 10% of the profits of ABC.


CAPCO Program Four was authorized by the enactment of Part D, Ch. 59 L. 2004. The section of the law relevant to the instant inquiry (the definition of "qualified debt instrument") section provides as follows:

"Qualified debt instrument" - a debt instrument issued by a certified capital company, at par value or a premium, with an original maturity date of at least five years from date of issuance, a repayment schedule which is not faster than a level principal amortization, and interest, distribution or payment features which are not related to the profitability of the certified capital company or the performance of the certified capital company's investment portfolio.

N.Y. Tax Law § 11(a)(8)(McKinney 2000, as amended by Ch. 59 L.2004) (emphasis added).

Under the above-quoted statute, the return on debt instruments issued by a CAPCO may not be tied to the performance or profitability of the CAPCO. This requirement prevents the return to the investors of their investment in a CAPCO prior to the utilization of the CAPCO funds for the purposes intended by the CAPCO statute. The Notes proposed to be offered by ABC do not entitle the holders thereof to any such performance based return. The Notes thus appear to comply with the CAPCO statute. This conclusion, while not incorrect, requires further analysis by reason of the fact that the purchasers of the Notes will also receive the Interests, which do provide for a participation in ABC’s profitability. This arrangement, since it allows for the recipient of the Notes to receive at no additional cost an instrument that provides the ability to share in ABC’s profit, could be viewed as a circumvention of the restriction disallowing the incorporation of an equity return component in the Notes. Given the structure of the CAPCO law, however, this proves to not be the case.

The distribution of profits by a CAPCO to its investors is restricted under N.Y. Tax Law § 11(d)(1)(McKinney 2000, as amended by Ch. 59 L.2004), which provides as follows:

A certified capital company may make qualified distributions2 at any time. In order for a certified capital company to make a distribution other than a qualified distribution from a certified capital company program, to its equity holders, either (A) the aggregate cumulative amount of all qualified investments for such program must equal or exceed one hundred percent of its certified capital allocable to such certified capital company program, or (B) it must have received written authorization to make such distribution from the superintendent. In no event, however, shall any such distribution, other than a qualified distribution, be made by a certified capital company from a certified capital company program unless an amount equal cumulatively to at least ninety percent of its certified capital of such program is invested in companies that conduct their principal business operations in New York state.

N.Y. Tax Law § 11(d)(1)(McKinney 2000, as amended by Ch. 59 L.2004).

Under § 11(d)(1), the payment by ABC of any equity based return on investment is considered a non-qualified distribution that can only be made with the approval of the Superintendent of Insurance or upon the attainment of the "100% milestone" of investments of its certified capital. Thus, the issuance of the Interests, although possibly providing the Note holders with an eventual equity-linked return, does not in any way circumvent the CAPCO statute's restriction on the distribution of profits prior to the investment by ABC of 100% of its certified capital. Therefore, the Notes comply with the definition of "qualified debt instrument" contained in the CAPCO statute.

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

1    In the event that there is a recapture of tax credits under the CAPCO statute, the Notes will pay an interest component sufficient to restore to the Noteholders the value of the lost tax credits.

2   A "qualified distribution" is defined as any payment to an equity holder of a CAPCO related to certain costs/expenses of forming or managing the CAPCO (including professional fees and debt repayment) and tax expenses resulting from an increase in the earnings or tax liability of the CAPCO. N.Y. Tax Law § 11(a)(9) (McKinney 2000, as amended by Ch. 59 L.2004). An equity-return based payment to an investor in a CAPCO is not a qualified distribution.