Tax Type
Corporation Income Tax
Description
Coalfield Employment Enhancement Tax Credit
Topic
Credits
Date Issued
04-21-1999
April 21, 1999
Re: Request for a Ruling: Coalfield Employment Enhancement Tax Credit
Dear****************
This will reply to your letter in which you request a ruling on the application of the Coalfield Employment Enhancement Tax Credit (the "coal credits').
FACTS
Company A, a Virginia coal mining company, earned coal credits for the 1996, 1997 and 1998 taxable years. Company A's parent corporation is contemplating the sale of Company A, either through the sale of 100% of its capital stock or an Internal Revenue Code (IRC) §338 (h)(10) transaction (i.e., a purchase of all of the stock of a corporation by another on which the election is made to be treated as an asset purchase). Company A's acquisition is expected to occur sometime after the close of its 1998 taxable year. Under either option, Company A would immediately cease to continue mining its coal reserves. Eventually, its coal reserves would be mined by the acquiring entity, but the timing of that mining is unknown.
You ask whether the coal credits earned by Company A would be available to it in future years after its acquisition in either of the above-described transactions and, if so, can Company A claim those credits in future years even if it does not mine coal in those years.
Also, in the alternative, Company A's parent is considering shutting down Company A's operations. All of the assets will be disposed of and liabilities paid, however, Company A will not be dissolved. You ask if Company A can claim the coal credit by filing returns in future years.
RULING
The coal credits provide an income tax credit to producers of Virginia coal and coal methane gas. To the extent the coal credits exceed tax liability, the excess is redeemable at 90% of the face value of the excess credit. The coal credits are effective for taxable years beginning on or after January 1, 1996, however, coal credits that are earned currently are deferred and cannot be applied against tax until future taxable years.
IRC §338 (h)(10) Transaction
The department previously ruled on the IRC §338 (h)(10) election's impact on the coal credits in Public Document (P.D.) 97-489, copy enclosed. A sale under IRC §338 (h)(10) allows the purchaser of stock in a target corporation to obtain a stepped up basis in the target's assets as if there had been a direct purchase of the assets.
In the case of an IRC §338 (h)(10) election, the target corporation is not actually dissolved. In order to avoid potential double taxation, IRC §338 (h)(10) allows the purchaser and seller to make a joint election, provided that the target and seller are part of an affiliated group of corporations that file a consolidated federal return. The result of the election is that a series of steps are deemed to have occurred:
-
-- The target is deemed to have sold its assets, recognizing gain or loss that must be included in the selling group's consolidated federal return;
-- The target is deemed to have distributed all its assets in a complete liquidation to which IRC §332 applies; and,
-- Any gain or loss on the sale of target stock incurred by the selling group is ignored.
Company A would remain intact after its acquisition. Neither the sale of stock nor the federal election would change the legal nature of Company A. Thus, the transaction would not result in the loss of the coal credits for Company A.
Capital Stock Sale
The sale of the stock of a company which had earned the coal credit was addressed in P.D. 99-16, copy enclosed. All of the stock of Company A may be sold to an unrelated buyer. Coal credits previously earned by Company A will be available to be claimed by Company A in future years. Although the unrelated buyer did not have an economic interest in the coal mined by Company A, it may use the credits to offset Virginia corporate income tax liability, provided it files a combined or consolidated Virginia corporate income tax return which must include Company A. Any remaining credit, however, can only be used to offset other state taxes incurred by the corporations in the consolidated or combined group which actually earned the credit. If any credit remains, 90% will be refunded.
Therefore, the acquisition of Company A's stock by an unrelated buyer does not result in it losing coal credits previously earned. Company A will be eligible to claim coal credits previously earned in future years even if it does not mine coal in the years in which it is eligible to claim the credit.
Company A Ceases Operations
In the alternative, Company A's parent is considering ceasing Company A's operations. Company A would not be dissolved but it would no longer be an operating entity. All of Company A's assets would be sold and its liabilities paid. Under this scenario, you ask if Company A can file a return in future years and claim the credits it previously earned.
Virginia Regulation 23 VAC 10-120-130 (A)(1) describes those corporations required to file Virginia corporate income tax returns. It provides:
-
- Every corporation organized under the laws of Virginia and every foreign corporation registered with the State Corporation Commission for the privilege of doing business in Virginia shall file a return with the Department of Taxation...
- Every corporation organized under the laws of Virginia and every foreign corporation registered with the State Corporation Commission for the privilege of doing business in Virginia shall file a return with the Department of Taxation...
I trust that this ruling answers your question. If you have any further questions, you may contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/20971B
Rulings of the Tax Commissioner