Tax Type
Corporation Income Tax
Description
Coalfield Employment Enhancement Tax Credit; Application to subsidiaries.
Topic
Credits
Date Issued
10-08-1997
October 8, 1997
Re: Request for Ruling
Coalfield Employment Enhancement Tax Credit
Dear*****************
This is in reply to your facsimile of September 5, 1997 in which request a ruling on the application of the Coalfield Employment Enhancement Tax Credit to a hypothetical set of facts.
FACTS
A holding company ("Holding") sold 100% of the stock of Company B to Company A in 1996. Company B owned 100% of companies C and D, who in turn each own 50% of Company X. Company X owns 100% of Companies E and F. Companies E and F have an economic interest in coal reserves in Virginia. E and F mined through contract miners, approximately 2 million tons of Virginia coal during 1996. E and F sell the coal at market price and receive the proceeds of the sale, even though B's name is on the contract. E and F have an agreement with B which gives the B the authority to sell coal for E and F. X has filed consolidated tax returns for E and F. Holding will file a short year recturn for 1996 for the period prior to the sale. Company A will file a short year return for 1996 for the period after the sale. You ask the following:
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- 1) Does E and F file Forms 306 for all Virginia produced tons sold during 1996? If so, can E and F assume that the full amount of the eligible tax credit will be refunded to them despite the change in control?
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- 2) Alternatively, do Holding and A (through E and F) file a separate 306 for the pro-rata Virginia produced tons sold during their respectively ownership periods? If so, how does Holding apply for the tax credit in 1999 and 2005?
DETERMINATION
Code of Virginia § 58.1-439.2, copy enclosed, provides that "...any person who has an economic interest in coal mined in the Commonwealth ..." shall be allowed to take the Coalfield Employment Enhancement Tax Credit provided certain requirements are met. As provided in the facts, E and F have an economic interest in Virginia coal. The determinative question is whether Holding or A has an economic interest in the Virginia coal.
Virginia Tax Bulletin 97-1, page 1, copy enclosed, which interprets § 58.1-139.2 (C), states that:
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- [a]n economic interest for purposes of this [Coalfield Employment Enhancement Tax] Credit will be the same as the economic ownership interest required by § 611 of the Internal Revenue Code as of December 31, 1977...
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- Federal Tax Regulation § 1.611-1 (b), Copy enclosed, provides that:
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- An economic interest is possessed in every case in which the taxpayer has acquired by investment any interest in mineral in place or standing timber and secures, by any form of legal relationship, income derived from the extraction of the mineral or severance of the timber, to which he must look for a return of his capital.
An economic relationship requires something more than mere ownership of stock in a company which has an economic interest in minerals. Any benefits derived from having an economic interest in minerals are allowed to the corporation actually possessing the interest, not its shareholders. B's authority to sell coal on behalf of E and F, and having its name on E and F's sales contract does not rise to the level of having an economic interest. Thus, E and F would be entitled to the Coalfield Employment Enhancement Tax Credit. Neither its shareholders, nor any tier of Parent Companies would have an economic interest for purposes of the credit. Therefore, the change in ownership from Holding to A does not affect the applicability of the credit.
In the instant case, X files a consolidated return with its wholly owned subsidiaries, E and F. X is not eligible to take the credit since it does not have an economic interest in the coal. However, in instances where a combined or consolidated Virginia corporate income tax is filed which includes corporations which were not eligible to claim the credit, special rules apply. In such cases, the credit as calculated above is utilized to offset the combined or consolidated Virginia corporate income tax liability. 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.
Refunds for previously paid taxes imposed by the Commonwealth which were incurred during the taxable year will be refunded at 100% of face value up to the amount of the credit. If any credit remains, it will be refunded at 90% of face value. Therefore, in cases where a combined or consolidated Virginia corporate income tax is filed which includes corporations which are not eligible to claim the credit,100% of the combined or consolidated income tax may be offset by the credit, then the remaining credit may offset any other state taxes incurred by corporations in the group which actually earned the credit. If any credit then remains, 90% of it will be refunded.
I trust that this will answer your questions. If you have any questions, you may contact***** at *******.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12924B
Rulings of the Tax Commissioner