Over the past few years, taxpayers in New York have argued with the New York Tax Department over the scope of benefits promised under the Empire Zone program, an economic development initiative put in place by the New York State Legislature in 2000.1 Some of that litigation resulted from the perception — which sometimes turned out to be accurate — that some taxpayers were benefiting from the program by restructuring, or ‘‘shirtchanging,’’ and not by creating jobs and expanding operations in economically depressed areas. But more recently, the department seems to have denied promised benefits based on arguably strained or narrow interpretations of the statutory provisions providing for benefits. The latter trend is more troubling because it usually affects taxpayers who relied on the statutory promise of benefits in good faith only to be denied those benefits years later on audit.

Over the past year or so, one issue like that has been generating a lot of audit activity, and a lot of frustration, for taxpayers. It involves what should be a fairly straightforward calculation of the tax reduction credit, designed to reduce or eliminate New York business or personal income taxes paid on income earned by taxpayers operating in Empire Zones. In this article, we’ll outline the issue, discuss what’s happened in recent cases, and address the policy implications created by what we believe to be the tax department’s incorrect reading of the law.

Originally Published in State Tax Notes - December 16, 2013.