Tax Type
Corporation Income Tax
Description
Coalfield Employment Enhancement Tax Credit
Topic
Credits
Federal Conformity
Payment and Refund
Date Issued
06-06-2014
June 6, 2014
Re: § 58.1-1821 Application: Corporate Income Tax
Dear *****:
This will reply to your letter in which you seek correction of the corporate income tax assessments issued to ***** (the "Taxpayer"), for the taxable years ended December 31, 2009 and 2010.
FACTS
The Taxpayer and its affiliates filed combined Virginia income tax returns for the taxable years at issue. One of the affiliates (Corporation A) earned the Coalfield Employment Enhancement Tax Credit (the "Credit") in each of the 2006 and 2007 taxable years (collectively, the "Credits"). Following Virginia's statutory schedule for deferring the Credits, the Credits were applied in full to reduce the group's combined Virginia corporate income tax liabilities for the 2009 and 2010 taxable years, respectively. Using the accrual method of accounting, Corporation A included the Credits in its federal taxable income (FTI) and subtracted them from FTI in computing its Virginia taxable income.
The Department audited the TP for the taxable years at issue. The auditor disallowed the subtraction on the basis that the Taxpayer would not be entitled to both a subtraction and a credit for the Credits.
The Taxpayer appeals, contending that Corporation A should have been allowed to subtract the Credits as refunds or credits for overpayment of state income taxes pursuant to Va. Code § 58.1-402 C 4 because it included them in its FTI.
DETERMINATION
Coalfield Employment Enhancement Tax Credit
Pursuant to Va. Code § 58.1-439.2, a taxpayer with an "economic interest" in Virginia coal is eligible to take the Credit. The Credit is based upon the number of tons of coal sold during the taxable year that were mined in Virginia, multiplied by an employment factor. The amount of the Credit varies according to seam thickness for coal mined by underground methods. The Credit is also available for surface-mined coal.
The Credit is earned during taxable years beginning on or after January 1, 1996, but is deferred according to a statutorily established schedule. For Credits earned for taxable years beginning on and after January 1, 2002, if the amount claimed exceeds a person's liability for all state-imposed taxes that were incurred during the taxable year, then the excess is refundable up to 85% of the Credit claimed. The remaining 15% is deposited in a fund administered by the Coalfields Economic Development Authority ("CEDA").
In instances where a combined or consolidated Virginia corporate income tax return is filed, which include corporations not eligible to earn 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 that are primarily engaged in the mining, processing or distribution of coal. See Public Document (P.D.) 00-186 (10/11/2000).
Refundable State Tax Credits
Virginia Code § 58.1-301 provides, with certain exceptions, that terminology and references used in Title 58.1 of the Code of Virginia have the same meaning as provided in the Internal Revenue Code (IRC), unless a different meaning is clearly required. As such, Virginia's conformity to federal law is limited to the actual use of a specific term in a Virginia statute. Further, conformity does not extend to terms, concepts, or principles specifically provided for in Title 58.1 of the Code of Virginia. For corporate income tax purposes, Virginia generally "conforms" to federal law in that it starts the computation of Virginia taxable income with FTI.
Virginia Code § 58.1-402 provides that a corporation's Virginia taxable income for any given taxable year is the FTI and any other income taxable to the corporation under federal law for such year, adjusted and modified by certain specified additions, subtractions, and exemptions. For purposes of this statute, the term "federal taxable income" means all income from whatever source derived and however named on which a federal tax is imposed. See Title 23 of the Virginia Administrative Code (VAC) 10-120-100 A. Accordingly, items not deductible for federal income tax purposes are not deductible for Virginia income tax purposes unless Va. Code § 58.1-402 specifically states otherwise. Pursuant to Title 23 VAC 10-120-323 A, the Virginia taxable income for a combined return is separately allocated and apportioned for each eligible corporation using each corporation's commercial domicile and apportionment factors.
The Internal Revenue Service (IRS) has consistently opined that the portion of a refundable state tax credit that is applied to reduce tax before the tax becomes due is generally treated as a reduction in the state tax expense deductible under IRC § 164. See IRS CCA 200842002, 2008 WL 4610086 (10/17/2008). The credit is only included in income to the extent it exceeds the tax liability and is made available to the taxpayer as a cash payment. In addition, if the taxpayer chooses to apply the refund as a credit against state tax for the succeeding taxable year, the taxpayer is deemed to be in constructive receipt of such amount. The taxpayer, however, would also be treated as having made a corresponding payment of state tax for that next taxable year.
In P.D. 95-240 (9/22/1995), the Department set forth a comprehensive policy with respect to Virginia income tax credits. The ordering rules under P.D. 95-240 require a taxpayer to claim all other credits before any refundable credits. The excess of any refundable credits over the remaining tax liability is then refunded to the taxpayer. For these purposes, a credit for overpayment of tax carried over from the previous taxable year is considered a payment of estimated tax, not an income tax credit. See P.D. 03-43 (4/24/2003). After all tax credits are applied to the tax liability, payments made by or on behalf of the Taxpayer (including withholding, estimated payments, extension payments and payments made with a return) are applied.
In this case, the group had no other Virginia income tax credits that could have been applied before the Credits. As a result, the Credits were applied in full to reduce the group's combined corporate income tax liabilities for the taxable years at issue. As such, no portion of the Credits was paid in cash or applied against state tax for another taxable year. Thus, for tax purposes, the Credits should not have been included in Corporation A's gross income. Rather, to the extent they reduced Corporation A's corporate income tax liabilities, there should have been corresponding reductions to Corporation A's state tax expense deductions.
Subtraction for Income Tax Refunds
Virginia Code § 58.1-402 C 4 allows taxpayers to subtract from FTI the amount of any refund or credit for overpayment of income taxes imposed by the Commonwealth or any other taxing jurisdiction. In this case, Corporation A treated the Credits as such refunds or credits for overpayment and subtracted them from its FTI in computing its Virginia taxable income. The Credits, however, were applied in full to reduce the group's combined corporate income tax liabilities. They were not actually refunded or credited as overpayments of tax. As such, the Credits were not eligible for this subtraction.
Addition for Income Taxes
Under Va. Code § 58.1-402 B 4, corporations are required to make an addition for net income taxes and other taxes based on, measured by, or computed with reference to net income to the extent such taxes were deducted for federal income tax purposes. As indicated above, the Credits were considered to be reductions in Corporation A's state income tax deduction. As such, the additions Corporation A reported on its combined returns pursuant to Va. Code § 58.1-402 B 4 should be reduced by the amount of the Credits.
CONCLUSION
Because they would not be considered to be refundable under IRC § 164, the Credits would not be considered to be an item of gross income. Instead, they should have reduced Corporation A's deductible state income tax expenses. In this case, moving the Credits to correctly report them on the return had no effect on Corporation A's FTI.
Therefore, although the Department properly denied the subtractions Corporation A took for the Credits pursuant to Va. Code § 58.1-402 C 4, the additions required by Va. Code § 58.1-402 B 4 would have been reduced by the same amounts. As such, Corporation A's Virginia corporate income tax liabilities for the 2009 and 2010 taxable years were not impacted by the way the Credits were reported on the return. Accordingly, the assessments will be abated.
The Code of Virginia sections, regulation, and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site. If you have any questions regarding this determination, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-5580815963.M
Rulings of the Tax Commissioner