Tax Type
Corporation Income Tax
Description
Coalfield Employment Enhancement Tax Credit
Topic
Credits
Date Issued
01-19-1999
- January 19, 1999
Re: Request for a Ruling: Coalfield Employment Enhancement Tax Credit
Dear ******************
This will reply to your letter of September 23, 1998 in which you request a ruling on the application of the Coalfield Employment Enhancement Tax Credit. I apologize for the delayed response.
FACTS
Company A is a wholly owned subsidiary of Company B. Company A earned Coalfield Employment Enhancement Tax Credit (the "credit") contained in Code of Virginia § 58.1-439.2 (copy enclosed) during 1996 and 1997. Company B filed a consolidated Virginia corporate income tax return for 1996 and 1997 which consolidated its income with Company A and other companies.
Company A completed Virginia Form 306 in taxable years 1996 and 1997 indicating the amount of credit earned each taxable year. Company B also completed Form 306 for those taxable years indicating that it receives the credit through the consolidation of Company A. Company B is contemplating the sale of all of the stock of Company A to a unrelated buyer.
You ask the following with respect to the credits earned by Company A:
1. If Company A is sold:
A. Which company can claim the credits that were earned in, and reported for taxable years 1996 and 1997?
B. Which company can claim the credits that are earned in taxable year 1998 up to the date of the sale?
2. When the credits are claimed on future tax returns, if there is not sufficient income tax liability to use all of the credits:
A. What other state taxes, and for which company, can the credits be used to offset?
B. Which company would get the 90% refund of any remaining credit after the credit has been offset against all tax liabilities?
RULING
Question 1A.
Code of Virginia § 58.1-439.2 provides that "...any person who has an economic interest in coal mined in the Commonwealth ..." shall be allowed to take the credit provided certain requirements are met. Because Company A earned the credit in taxable years 1996 and 1997, it has an economic interest in the coal mined.
Code of Virginia §58.1-439.2 (C) states that "... [an] economic interest is the same as the economic ownership interest required by § 611 of the Internal Revenue Code as of December 31, 1977." Federal Tax Regulation § 1.611-1 (b), copy enclosed, provides that:
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. Therefore, mere shareholders of Company A do not have an economic interest in the coal which Company A mined in Virginia.
Page 6 of Virginia Tax Bulletin 97-1 (2/18/97), copy enclosed, provides that in instances where a combined or consolidated Virginia corporate income tax is filed which includes corporations which were not eligible to claim the credit, the credit is utilized to offset the combined or consolidated Virginia corporate income tax liability. In the instant case, Company A may be sold to an unrelated buyer. Credits earned by Company A in 1996 and 1997 will follow Company A when they are claimed in future years. Although the unrelated buyer does not have an economic interest in the coal, it may use the credits to offset Virginia corporate income tax liability, provided that a combined or consolidated Virginia corporate income tax return is filed. See also Public Document (P.D.) 97-409 (10/8/97), copy enclosed.
Question 1B.
If Company A is sold in 1998, all credits earned by Company A in that year will follow Company A. If the unrelated buyer files a consolidated or combined corporate income tax return with Company A, the credit may be used to offset any combined or consolidated Virginia corporate income tax liability of the affiliated group according to the credit deferral schedule in Code of Virginia § 58.1-439.2 (G).
Question 2A.
Virginia Tax Bulletin 97-1, page 1 (c), provides the that the credit is applicable to all taxes imposed by the Commonwealth. If the unrelated buyer and Company A file a combined or consolidated corporate income tax return, the credit would be first used to offset the affiliated group's combined or consolidated income tax liability. Any remaining credit could only be used to offset other state taxes incurred by corporations in the consolidated group which actually earned the credit. Thus, the surplus credit may only be used to offset other state tax liability which is incurred by Company A.
Question 2B.
Virginia Tax Bulletin 97-1, page 6, only provides for the credit offsetting income tax for companies without an economic interest in mined coal if these companies file a consolidated or combined return with companies which actually earned the credit. Therefore, any credit which remains after all income tax liability is offset, can be used to offset any other taxes imposed by the Commonwealth paid by Company A. A refund equal to 100% of all other state taxes paid by Company A will be issued. If an excess still remains, an additional refund amount will be issued for 90% of the face value of the remaining credit.
I hope that the foregoing answers your question. If you have any questions about this ruling, you may contact ************* at *************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/17814B
Rulings of the Tax Commissioner