June 29, 2017
Re: Ruling Request: Coalfield Employment Enhancement Tax Credit
Dear *****:
This will reply to your letter in which you request a ruling with respect to the Coalfield Employment Enhancement Tax Credit (the “Credit”).
FACTS
***** (the “Taxpayer”), a producer of coal that has numerous corporate and pass through entity subsidiaries, filed for Chapter 11 bankruptcy. As a result of the bankruptcy, the Taxpayer will go through a reorganization. At the time of the reorganization, several of the Taxpayer's subsidiaries will have Credit that they had not yet utilized.
The bankruptcy's reorganization plan will result in ***** (Parent A) becoming the parent company to the Taxpayer and its subsidiaries. Parent A will file a federal consolidated income tax return for the entire 2016 taxable year. In addition, the Taxpayer will form ***** (Parent B), which will acquire certain assets of the Taxpayer and will result in a new, separate federal consolidated group after the reorganization. Parent B will file a consolidated short year federal income tax return for the short year from the date of the reorganization until December 31, 2016.
RULING
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 earned during the taxable year is deferred according to a statutory schedule. 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 includes 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).
You request a ruling on how the Credit is to be utilized for ***** (Sub A), ***** (Sub B), ***** (Sub C), ***** (Sub D) and ***** (Sub E), collectively known as “the Entities”.
Scenario One
Sub A and Sub B are subsidiary corporations of the Taxpayer. They will be transferred to Parent B as part of the reorganization plan and will continue as corporations. Sub A and Sub B will file as part of Parent A's consolidated group from the short taxable year beginning January 2016 until the reorganization is effectuated. They will then file as part of Parent B's consolidated group on a short year return from the date of the reorganization until the end of the 2016 taxable year. Both Sub A and Sub B have Credit earned, but not claimed prior to the reorganization. You ask whether this Credit can be claimed by Parent B on its consolidated short-year 2016 Virginia return.
Virginia Tax Bulletin (VTB) 97-1 (2/18/1997) 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. As such, a consolidated or combined group of corporations may claim the Credit against its consolidated or combined income even if members of the group do not have an economic interest in the mined coal. Accordingly, the Credit that has been earned by a corporation can be utilized by an acquiring consolidated or combined group.
In this case, Sub A and Sub B have earned Credit during the 2013 taxable year that has not been utilized. Virginia Code § 58.1-439.2 G requires that the Credit be claimed in the third taxable year following the taxable year in which the credit was earned and allowed. Because Sub A and Sub B's status as corporations did not change during the reorganization, the 2013 Credit not claimed in 2016 short taxable year for Parent A may be claimed on Parent B's consolidated 2016 short-year return.
Scenario Two
Sub C, a wholly owned subsidiary of the Taxpayer, is a limited liability company treated as a corporation for federal tax purposes. It had Credit earned, but not claimed prior to the reorganization. Pursuant to the reorganization, Sub C will elect to be treated as a pass-through entity and its assets transferred to an entity in the Parent A consolidated group. However, it will remain in existence and will be considered owned by a corporation that files its Virginia income tax returns as part of the Parent B consolidated group. You ask whether this Credit will be carried over to be claimed by Parent B on its consolidated short-year 2016 Virginia return.
A corporation may still claim the Credit that it earned if it ceases operations and sells its assets provided that it remains in existence and is required to file a Virginia corporate income tax return. See Public Document (P.D.) 99-91 (4/21/1999). In addition, pass-through entities that earn the Credit allocate the credit among distributees according to ownership interest. See VTB 97-1.
As such, Sub C will retain the Credit upon its election to change from a corporation to a pass through entity. Unused amounts of the Credit will pass through to its corporate owner which files as part of the Parent B consolidated group. As stated above, the Credit may be used to offset the Virginia income tax liability of Parent B's consolidated group to the extent that it offsets Parent B's consolidated Virginia corporate income tax liability.
Scenario Three
Sub D is a limited liability company that had elected to be treated as a corporation for income tax purposes. Sub D has earned Credit that has not been utilized. Pursuant to the reorganization, Sub D will convert to a pass-through entity and its assets and liabilities deemed transferred to its parent in a taxable sale. Its assets and liabilities will ultimately be transferred to an entity within the Parent A consolidated group. Sub D will then be considered owned by an entity treated as a corporation within the Parent B consolidated group. Sub D will be deemed to undergo a taxable liquidation upon the reorganization.
This fact scenario is essentially the same as the facts in Scenario Two except that Sub D will undergo a taxable liquidation for federal income tax purposes. Although Sub D is liquidated, it still remains a pass-through entity that is owned by a taxable entity in Parent B's consolidated group. Because Sub D will remain in existence after the reorganization, it will retain the Credit. As such, any unused amount of the Credit earned by Sub D but not yet utilized may be claimed on Parent B's 2016 Virginia consolidated corporate income tax return.
Scenario Four
Sub E is a corporation that will convert to a pass-through entity at the time of the reorganization and will be owned by a chain of other pass-through entities that is ultimately owned by a corporation that will be part to the Parent B consolidated group. Sub E has earned Credit that has not been utilized.
This fact scenario is essentially the same as the facts in Scenarios Two and Three. Sub E will be a pass-through entity that is owned by a taxable entity in Parent B's consolidated group. It remains a legal entity that retains the Credit. As such, the Credit previously earned by Sub E and not used during the previous 2016 short taxable year may be claimed on Parent B's Virginia consolidated corporate income tax return.
Employment Factor
Virginia Code § 58.1-439.2 F provides that the amount of the Credit earned must be multiplied by the entity's employment factor. The employment factor is the percentage obtained by dividing the total number of coal mining jobs by the total number of coal mining jobs from the prior year. The Taxpayer requests a ruling on how the employment factor will be calculated in light of the Entities' short taxable year.
VTB 97-1 provides that the employment factor is based on the number of local mining jobs for the calendar year in which the credit is earned to the number of coal mining jobs for the prior calendar year. Because the employment fact is calculated on a separate company basis, each entity will calculate its own employment factor.
The Taxpayer believes the employment factor will be calculated based on the number or mining jobs for the Entities beginning after the reorganization and ending December 31, 2016. In Example 2 in VTB 97-1, a fiscal year taxpayer computes its employment factor based on the ratio of Virginia coal mining jobs for the calendar year end of the year the Credit was earned to the number of Virginia coal mining jobs for the previous calendar year end. As such, the fact that an entity files on a fiscal year basis does not change the requirement of the employment factor's requirement that the mining jobs be calculated according to the calendar year end. As such, the Entities would calculate the employment factor for the Coalfield Credit earned in the 2016 taxable year by the ratio of Virginia coal mining jobs of each entity as of December 31, 2016 to the number of Virginia coal mining jobs the Entities had as of December 31, 2015.
Claiming the Credit
Virginia Code § 58.1-439.2 G requires that the Credit be claimed in the third taxable year following the taxable year in which the Credit was earned and allowed. Virginia law requires that a taxpayer's Virginia income taxable year be the same as its taxable year for federal income tax purposes. See Va. Code §§ 58.1-340 and 440. The Taxpayer asserts that the Credit earned by the Entities in 2013 should, be claimed on Parent A's short year return ending on the date of the reorganization and the Credit earned in 2014 should be claimed for the short year ended December 31, 2016.
The Entities that will have a short taxable year for federal purposes beginning on January 1, 2016 and ending at the date of the reorganization and a short taxable year beginning on the date of reorganization and ending on December 31, 2016 will have the same taxable years for Virginia income tax purposes. As stated in the above scenarios, the Entities that remain after the reorganization retain the Credit they earned. As such, the Credit earned by the Entities in the 2013 taxable year would first be claimed on Parent A's short year return. To the extent the 2013 Credit is not fully used on the first 2016 short year return, they may be claimed on the second short year return. The Credit earned by the Entities in 2014 would be claimed on the third taxable year following the 2014 taxable year, which would be on Parent B's consolidated 2017 return. Credit earned by the Entities during 2016 would be claimed on Parent B's 2019 consolidated return.
This ruling is based on the facts presented as summarized above. Any change in facts or the introduction of new facts may lead to a different result.
The Code of Virginia sections and public document 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 ruling, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/770.B