Tax Type
Corporation Income Tax
Description
Coalfield employment enhancement tax credit; Treatment of excess credits
Topic
Credits
Date Issued
07-16-1999
July 16, 1999
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 credit').
FACTS
Company A, a Kentucky corporation, held a 50% interest in a Virginia general partnership (the ``Partnership'). The remaining 50% interest in the Partnership was held by Company B, a Virginia corporation. The principal business of the Partnership is the mining of coal pursuant to a sublease of coal reserves. The Partnership's fiscal year ends on July 31.
On or about September 23, 1997, 1% of Company B's Partnership interest was redeemed for cash, resulting in the Company A having a 51% interest in the Partnership, and Company B having a 49% interest in the Partnership. On September 24, 1997. Company C, a Kentucky corporation, purchased Company B's Partnership interest.
The Partnership will change its fiscal year to a calendar year beginning on August 1, 1998. You request a ruling on a number of different issues. Each issue will be addressed separately below.
RULING
1. In the case where a partnership interest is sold with earned but unapplied credits, will the selling or purchasing partner be entitled to claim the credit in the year of redemption?
The coal credit allows an income tax credit to producers of Virginia coal and coal methane gas. To the extent the credit exceeds tax liability, the excess is redeemable at 90% of the face value of the excess credit. The credit is effective for taxable years beginning on or after January 1, 1996. However, credits that are earned currently are deferred and cannot be applied against tax liabilities until future taxable years.
Virginia generally conforms to the federal tax treatment of partnerships. A partnership, as such, is not subject to income tax. Partners are liable in their individual or corporate capacity for income tax based on their distributive share of the partnership income. As such, each item of partnership income, gain, loss, or deduction shall pass-through to the respective partners in the same manner for Virginia income tax purposes as for federal income tax purposes. The manner in which Virginia tax credits pass through to partners is usually specified by the Virginia statute granting the credit.
In the case of the coal credit, the statute is silent as to the manner in which credits pass through to partners when the credits are earned by a partnership. However, the department has ruled in Tax Bulletin 97-1 that pass-through entities must allocate the credit among distributees according to ownership interest in the entity, and credits must be reported by each partner in the year the credits are earned. (See ``Reporting and Claiming the Credit,' on page 6 of Tax Bulletin 97-1, copy attached.) [Not reproduced.] Based on Virginia's income tax treatment of partnerships and Tax Bulletin 97-1, the coal credit shall pass-through to partners according to their ownership interest in the partnership in the year the credit is earned. Therefore, credits accrue to the benefit of those partners who own an interest in the partnership in the year the partnership earns the credit.
Tax Bulletin 97-1 does not address the manner in which to allocate credits to partners when partnership interests change or terminate during the taxable year. In the case of items of partnership income, gain, loss, or deduction, the Virginia treatment would conform to the federal income tax treatment of these items when a partnership interest is sold, exchanged or terminated during the taxable year. In order to remain consistent with the federal tax treatment of partnerships, the department finds it also appropriate to follow the federal income tax treatment of credits when a partnership interest is sold, exchanged or terminated during the taxable year.
Internal Revenue Code Sec. 706(d)(1) provides that if a partner's interest changes during the taxable year, each partner's share of the income, gain, loss, deduction, or credit shall be determined by regulation. Treasury Regulation Sec. 1.706-1(c)(2)(ii) provides that a partner shall include in his taxable income for his taxable year within or with which his partnership membership ends, his distributive share of the income, gain, loss, deduction, or credit for his taxable year ending with the date of such termination. In lieu of an interim closing of the books, this regulation permits the partner's share of such items be estimated by taking his pro rata part of the amount of such items he would have included in his taxable income had he remained a partner until the end of the taxable year.
Because the coal credit accrues to the partners who held partnership interests during the taxable year in which credit is earned, the coal credit shall be allocate among partners in the same manner as items of income, gain, loss and deduction are allocated for federal income tax purposes when a partner's interest in the partnership is terminated during the taxable year. In the alternative, the partners may agree to allocate partnership coal credits based upon the actual amount of credit earned during the portion of the taxable year in which the partners held their partnership interests.
2. Due to the change in the ownership of the Partnership, the partnership's taxable year changes from a fiscal to a calendar year. As a result of the change in taxable year, the partnership's has a shorter period in which it can earn the credit. You ask if the coal credit compensates for this lost time?
A taxpayer which changes its taxable year from a fiscal tax year to a calendar tax year would lose time in which it could earn the coal credit. Such taxpayers would not be in parity with those taxpayers which remain either fiscal or calendar year taxpayers. In the instant case, the partnership would lose seven months of coal sales for the third year because of the conversion.
Therefore, the department will treat the partnership's change to a calendar year as if it was retroactive in nature solely for the purposes of earning the coal credit. As such, the Partnership will be treated as earning the credit beginning with the 1996 calendar year and will report its coal sales on its returns as indicated on the schedule below. The schedule also indicates the appropriate employment factors to be used and the taxable years in which the credit will be redeemed.
The credit will be earned and redeemed in all years thereafter in accordance with Code of Virginia Sec. 58.1-439.2. Virginia requires that Form 306 be filed with the corresponding Virginia corporate income tax returns. Form 306 is then resubmitted when the credit is actually claimed. In order to properly report prior years' coal sales, amended returns must be filed which reflect the coal sales reported retroactively. Therefore, the partners that earned the credit would need to file amended returns to properly record the restated coal credit amounts.
As stated in the Question 1, credits will flow through to the partners which owned a partnership interest during the taxable year in which the credit was earned.
[3]4. When are the filing due dates for the isopach maps required to be filed with the Department of Mines, Minerals and Energy?
The Virginia Tax Bulletin 97-1, Page 5, states that isopach maps shall be submitted by April 1 of the year immediately following the year in which the tax credit is earned or within three months after the end of the operator's fiscal year. However, in the instant case, the Partnership's taxable year was changed from a fiscal year to a calendar year on August 1, 1998. Because the Partnership's taxable year is changed to a calendar year in 1998, isopach maps would normally be due by April 1, 1999 for the short taxable year. Also, isopach maps for the retroactive period would also normally be due on this date. Because the normal due date has now passed and the uniqueness of the this situation, the department will permit you 60 days from the date of this letter to submit these maps.
[4.]5. For pass-through entities which have allocated credits in excess of partners' Virginia combined corporate income tax liability for the redemption period, will the remaining credits be redeemed by the partnership or by the partners?
The coal credits which are earned through the activities of pass-through entities are passed through to the owners of the pass-through entity in the amount of each owner's respective share. Virginia Tax Bulletin 97-1 provides that the credit is first applied against income tax and then against all other taxes imposed by the Commonwealth which were incurred by the taxpayer during the taxable year. If any credit remains it will be refunded at 90% of face value. The owners of the pass-through entity, in this case the partners, will be entitled to the refund for any excess credit.
I hope that this ruling has answered all your inquiries. If you have any questions about this ruling you may contact ***** at *****.
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 credit').
FACTS
Company A, a Kentucky corporation, held a 50% interest in a Virginia general partnership (the ``Partnership'). The remaining 50% interest in the Partnership was held by Company B, a Virginia corporation. The principal business of the Partnership is the mining of coal pursuant to a sublease of coal reserves. The Partnership's fiscal year ends on July 31.
On or about September 23, 1997, 1% of Company B's Partnership interest was redeemed for cash, resulting in the Company A having a 51% interest in the Partnership, and Company B having a 49% interest in the Partnership. On September 24, 1997. Company C, a Kentucky corporation, purchased Company B's Partnership interest.
The Partnership will change its fiscal year to a calendar year beginning on August 1, 1998. You request a ruling on a number of different issues. Each issue will be addressed separately below.
RULING
1. In the case where a partnership interest is sold with earned but unapplied credits, will the selling or purchasing partner be entitled to claim the credit in the year of redemption?
The coal credit allows an income tax credit to producers of Virginia coal and coal methane gas. To the extent the credit exceeds tax liability, the excess is redeemable at 90% of the face value of the excess credit. The credit is effective for taxable years beginning on or after January 1, 1996. However, credits that are earned currently are deferred and cannot be applied against tax liabilities until future taxable years.
Virginia generally conforms to the federal tax treatment of partnerships. A partnership, as such, is not subject to income tax. Partners are liable in their individual or corporate capacity for income tax based on their distributive share of the partnership income. As such, each item of partnership income, gain, loss, or deduction shall pass-through to the respective partners in the same manner for Virginia income tax purposes as for federal income tax purposes. The manner in which Virginia tax credits pass through to partners is usually specified by the Virginia statute granting the credit.
In the case of the coal credit, the statute is silent as to the manner in which credits pass through to partners when the credits are earned by a partnership. However, the department has ruled in Tax Bulletin 97-1 that pass-through entities must allocate the credit among distributees according to ownership interest in the entity, and credits must be reported by each partner in the year the credits are earned. (See ``Reporting and Claiming the Credit,' on page 6 of Tax Bulletin 97-1, copy attached.) [Not reproduced.] Based on Virginia's income tax treatment of partnerships and Tax Bulletin 97-1, the coal credit shall pass-through to partners according to their ownership interest in the partnership in the year the credit is earned. Therefore, credits accrue to the benefit of those partners who own an interest in the partnership in the year the partnership earns the credit.
Tax Bulletin 97-1 does not address the manner in which to allocate credits to partners when partnership interests change or terminate during the taxable year. In the case of items of partnership income, gain, loss, or deduction, the Virginia treatment would conform to the federal income tax treatment of these items when a partnership interest is sold, exchanged or terminated during the taxable year. In order to remain consistent with the federal tax treatment of partnerships, the department finds it also appropriate to follow the federal income tax treatment of credits when a partnership interest is sold, exchanged or terminated during the taxable year.
Internal Revenue Code Sec. 706(d)(1) provides that if a partner's interest changes during the taxable year, each partner's share of the income, gain, loss, deduction, or credit shall be determined by regulation. Treasury Regulation Sec. 1.706-1(c)(2)(ii) provides that a partner shall include in his taxable income for his taxable year within or with which his partnership membership ends, his distributive share of the income, gain, loss, deduction, or credit for his taxable year ending with the date of such termination. In lieu of an interim closing of the books, this regulation permits the partner's share of such items be estimated by taking his pro rata part of the amount of such items he would have included in his taxable income had he remained a partner until the end of the taxable year.
Because the coal credit accrues to the partners who held partnership interests during the taxable year in which credit is earned, the coal credit shall be allocate among partners in the same manner as items of income, gain, loss and deduction are allocated for federal income tax purposes when a partner's interest in the partnership is terminated during the taxable year. In the alternative, the partners may agree to allocate partnership coal credits based upon the actual amount of credit earned during the portion of the taxable year in which the partners held their partnership interests.
2. Due to the change in the ownership of the Partnership, the partnership's taxable year changes from a fiscal to a calendar year. As a result of the change in taxable year, the partnership's has a shorter period in which it can earn the credit. You ask if the coal credit compensates for this lost time?
A taxpayer which changes its taxable year from a fiscal tax year to a calendar tax year would lose time in which it could earn the coal credit. Such taxpayers would not be in parity with those taxpayers which remain either fiscal or calendar year taxpayers. In the instant case, the partnership would lose seven months of coal sales for the third year because of the conversion.
Therefore, the department will treat the partnership's change to a calendar year as if it was retroactive in nature solely for the purposes of earning the coal credit. As such, the Partnership will be treated as earning the credit beginning with the 1996 calendar year and will report its coal sales on its returns as indicated on the schedule below. The schedule also indicates the appropriate employment factors to be used and the taxable years in which the credit will be redeemed.
The credit will be earned and redeemed in all years thereafter in accordance with Code of Virginia Sec. 58.1-439.2. Virginia requires that Form 306 be filed with the corresponding Virginia corporate income tax returns. Form 306 is then resubmitted when the credit is actually claimed. In order to properly report prior years' coal sales, amended returns must be filed which reflect the coal sales reported retroactively. Therefore, the partners that earned the credit would need to file amended returns to properly record the restated coal credit amounts.
As stated in the Question 1, credits will flow through to the partners which owned a partnership interest during the taxable year in which the credit was earned.
[3]4. When are the filing due dates for the isopach maps required to be filed with the Department of Mines, Minerals and Energy?
The Virginia Tax Bulletin 97-1, Page 5, states that isopach maps shall be submitted by April 1 of the year immediately following the year in which the tax credit is earned or within three months after the end of the operator's fiscal year. However, in the instant case, the Partnership's taxable year was changed from a fiscal year to a calendar year on August 1, 1998. Because the Partnership's taxable year is changed to a calendar year in 1998, isopach maps would normally be due by April 1, 1999 for the short taxable year. Also, isopach maps for the retroactive period would also normally be due on this date. Because the normal due date has now passed and the uniqueness of the this situation, the department will permit you 60 days from the date of this letter to submit these maps.
[4.]5. For pass-through entities which have allocated credits in excess of partners' Virginia combined corporate income tax liability for the redemption period, will the remaining credits be redeemed by the partnership or by the partners?
The coal credits which are earned through the activities of pass-through entities are passed through to the owners of the pass-through entity in the amount of each owner's respective share. Virginia Tax Bulletin 97-1 provides that the credit is first applied against income tax and then against all other taxes imposed by the Commonwealth which were incurred by the taxpayer during the taxable year. If any credit remains it will be refunded at 90% of face value. The owners of the pass-through entity, in this case the partners, will be entitled to the refund for any excess credit.
I hope that this ruling has answered all your inquiries. If you have any questions about this ruling you may contact ***** at *****.
Rulings of the Tax Commissioner