When a manufacturer contributes its Georgia plant to a newly formed partnership in a Section 721 transaction, does the new entity qualify as an 'existing manufacturing facility' for Georgia's investment tax credit?

Plain-English summary

A manufacturer ("Taxpayer 1") had operated a Georgia plant for many years. It created a new limited liability company/partnership ("Taxpayer 2") and, in an IRC Section 721 contribution, transferred all of the Georgia plant's fixed assets into Taxpayer 2. Taxpayer 2 files a Georgia partnership return; its corporate partners report the flow-through income and pay Georgia tax. The Georgia facility "continues to operate as before," with the same operations and personnel.

The taxpayer asked whether Taxpayer 2 still qualifies as an "existing manufacturing facility" for the investment tax credit under O.C.G.A. § 48-7-40.2, which requires that the taxpayer have operated an existing manufacturing (or telecommunications) facility in Georgia for the immediately preceding three years (36 months).

The Department ruled yes. The statute says a sale, merger, acquisition, or bankruptcy does not create "new eligibility" in a succeeding taxpayer, and the regulation says a partnership must itself have operated in the state for 36 months and cannot borrow a parent's or partner's Georgia presence. But the Department read the three-year rule as aimed at stopping a newcomer from moving into Georgia and immediately claiming manufacturing credits. Here the same plant kept running, the contributing owner had been present and operating in Georgia far longer than 36 months, and the restructuring was a change of form -- exactly the long-standing Georgia economic activity the credit was meant to reward. So Taxpayer 2 qualified as an existing manufacturing facility.

What this means for you

Manufacturers restructuring a long-standing Georgia operation

If you roll a Georgia plant into a new entity (for example, a Section 721 contribution to a partnership) but keep the same facility and operations running, the Department may treat the successor as an "existing manufacturing facility" -- so a corporate reorganization need not reset the 36-month clock. The key facts the Department relied on were continuity of the facility and operations and a genuinely long prior Georgia presence.

Accountants and tax professionals

Read this alongside the general rule that a "sale, merger, acquisition or bankruptcy... shall not create new eligibility in any succeeding taxpayer" (§ 48-7-40.2(c)(2)) and Regulation 560-7-8-.37(3)(b)'s bar on imputing a parent's or partner's presence. The Department distinguished a mere change of form -- name change, recapitalization, or a reorganization where the historic facility keeps operating -- from a newcomer trying to acquire instant eligibility. Compare LR IT-2013-01, which reached the same "existing manufacturing facility" result for successor entities in Section 351 contributions but stressed that credits are earned on a separate legal entity basis and can only be assigned to an affiliate under O.C.G.A. § 48-7-42.

Common questions

Q: Doesn't the "sale, merger, acquisition" rule block a successor from claiming the credit?
A: That rule stops a successor from getting new eligibility just by acquiring a business. It did not defeat this taxpayer, because the same facility kept operating and the owner already had the required long-standing Georgia presence -- the successor stepped into an existing, qualifying operation rather than creating fresh eligibility.

Q: Can a partnership count its corporate partner's years in Georgia toward the 36 months?
A: As a general rule, no -- Regulation 560-7-8-.37(3)(b) says a partnership must itself have operated in Georgia for the 36 months and cannot impute a parent's or partner's activity. The Department nonetheless found the existing-facility test met here because the historic Georgia facility and operations continued unchanged.

Q: Does this let any reorganized manufacturer claim the investment tax credit?
A: No. The ruling is specific to a facility that had long operated in Georgia and kept operating after a Section 721 change of form. A business new to Georgia would still have to meet the 36-month threshold on its own.

Citations and references

Statutes and regulations:

• O.C.G.A. § 48-7-40.2(b) -- investment tax credit for a taxpayer operating an existing manufacturing/telecommunications facility for the preceding three years
• O.C.G.A. § 48-7-40.2(c)(2) -- sale, merger, acquisition, or bankruptcy does not create new eligibility in a succeeding taxpayer
• Revenue Regulation 560-7-8-.37(3)(b) -- "taxpayer" defined; 36-month presence cannot be imputed from a parent or partner
• Revenue Regulation 560-7-8-.37(3)(d) -- change of name/recapitalization/liquidation of unrelated subsidiaries does not require new eligibility

Federal:

• Internal Revenue Code § 721 -- nonrecognition on contribution of property to a partnership

Source

• Landing page: Georgia Income Tax Letter Rulings
• Original PDF: LR IT-2010-01

Original ruling text

Date Issued:
November 30, 2010
Georgia Letter Ruling: LR IT-2010-01
Topic:
Investment Tax Credit

This letter is in response to your letter dated March 12, 2010, that requested a ruling that Taxpayer 2 qualifies as an
“existing manufacturing facility” for purposes of the tax credit in O.C.G.A. § 48-7-40.2.
Facts
Your letter dated March 12, 2010, to the Department states: “Taxpayer 1 has been in the state for many years and
has filed all the tax returns necessary. Taxpayer 2 was created under a Section 721 on date. The assets were not
transferred though until midnight on date, so the company did not start doing business until date.
“Effective date, Taxpayer 1 transferred all fixed assets of the Georgia plant to the new legal entity Taxpayer 2.
Taxpayer 2 filed a partnership return for year and will file a partnership return in Georgia for all future years. Both
corporate partners will report the flow-through income from the partnership and pay tax in Georgia. Taxpayer 1 is a
% owner of the new partnership, and Taxpayer 3 is a % owner. This was a straightforward Section 721 contribution
of assets, with the goal to create a more efficient corporate structure.
“The Georgia facility continues to operate as before. Taxpayer 2 and its corporate partners expect to file all
applicable GA returns.
“Based on the above, facts we believe that Taxpayer 2 would still be eligible for the Georgia investment tax credits.
The operations have not changed, and all the personnel remain the same. Also, under Section 721, all tax attributes
carry over. No credit is being claimed for property transferred in the reorganization.”
Issue
Whether or not Taxpayer 2 qualifies as an “existing manufacturing facility” for purposes of O.C.G.A. § 48-7-40.2?
Analysis
Georgia Code Section 48-7-40.2(b) provides in pertinent part that:
“In the case of a taxpayer which has operated for the immediately preceding three years an existing
manufacturing or telecommunications facility. . . in this state. . . there shall be allowed (a credit)
against the tax imposed. . .”
Georgia Code § 48-7-40.2(c)(2) provides in part that:
“The sale, merger, acquisition or bankruptcy of any taxpayer shall not create new eligibility in any
succeeding taxpayer. . . ”
The term “taxpayer” is described in Revenue Regulation 560-7-8-.37(3)(b):
“For the purpose of establishing eligibility, the ‘taxpayer’ referenced is the entity that is required
by law to file a return or pay tax. A partnership or business joint venture must have operated
within the state for the immediately preceding thirty- six months to qualify for the credit. For
example, the previous activity in Georgia of a parent, in the case of a corporation, a partner, in the
case of a partnership or a business joint venture will not create eligibility for a new entity for the
purposes of the thirty-six month threshold.”

November 30, 2010
LR IT-2010-01
Investment Tax Credit
Page 2 of 2

The criterion for establishing new eligibility is described in Revenue Regulation 560-7-8-.37(3)(d):
“The sale, merger, acquisition, or transfer in liquidation or bankruptcy of a taxpayer does not
create new eligibility for any succeeding taxpayer, but any unused credits may be transferred and
continued by any transferee of the taxpayer as long as the transferee meets other applicable
requirements in law and regulation. …When a taxpayer merely changes its name, recapitalizes, or
liquidates subsidiaries not related to the manufacturing facility, however, no new eligibility need
be established.”
Ruling
This statute was intended to benefit Georgia manufacturers. The apparent purpose of the three year requirement is to
prohibit a non-Georgia corporation from moving into the State, beginning its operation, and claiming manufacturing
investment credits without first meeting the three year threshold. To qualify, a corporation must be physically
present and operating a qualifying facility within the State for a minimum of thirty-six months prior to making a
qualified investment and may not impute the presence or activities of sister or subsidiary corporations (See Rule
560-7-8.37(3)(b)). In the case of the facility in Georgia, Taxpayer 1 has been the % owner of any corporation that
has held the facility since the decade. And Taxpayer 3 has been filing tax returns in Georgia since year.
Based on facts stated herein, it is the opinion of this Department that Taxpayer 2 qualifies as an “existing
manufacturing facility.” We feel confident that Taxpayer 1’s commitment to and presence in Georgia since the
early decade is precisely the economic activity that the Legislature intended to reward through the enactment of the
tax credit.
The opinions expressed in this ruling are based upon the information contained in your request and are limited to the
specific transactions and taxpayer in question. A ruling has no precedential value except to the person to whom the
ruling was issued and then only for the specific transaction addressed in the ruling. Should the circumstances
regarding this transaction change, or differ materially from those represented, then this ruling may become invalid.
In addition, please be advised that subsequent statutory or administrative rule changes or judicial interpretations of
the statutes and rules upon which this advice is based may subject similar future transactions to a different tax
treatment than those expressed in this response.