In a Section 351 restructuring of a Georgia manufacturer, do the successor entities qualify as existing manufacturing facilities for the investment tax credit, and can the credit be assigned to an affiliate?

Plain-English summary

A leading Georgia manufacturer planned a large plant expansion and equipment upgrade, then a two-step corporate restructuring: effective one January 1 it would contribute all its assets to an affiliate ("Taxpayer 2") in an IRC Section 351 contribution, and the next January 1 the manufacturing and R&D assets would be contributed again to another affiliate ("Taxpayer 3"), also tax-free under Section 351. The historic Georgia manufacturing operations would "continue as before," only under the new entities. It asked three questions about the investment tax credit (O.C.G.A. §§ 48-7-40.2, 48-7-40.3, 48-7-40.4).

The Department ruled:

• Assigning credit rights (Issue 1): Tax credits are generated and claimed on a separate legal entity basis, so Taxpayer 1 cannot assign its qualifications, duties, and obligations to a successor. However, if Taxpayer 1 restructures under Section 351 and the historic Georgia operations continue, the affiliated entities that receive the assets do not have to separately meet the investment-tax-credit eligibility requirements. And all tax credits, including the investment tax credit, can be assigned to an affiliated entity under O.C.G.A. § 48-7-42 -- but the assignment must be made on an original income tax return, and a carryforward cannot be assigned.
• Existing-facility status (Issues 2 and 3): The investment tax credit statutes were meant to benefit Georgia manufacturers; a corporation must be physically present and operating a qualifying facility in Georgia for at least 36 months and cannot impute a sister or subsidiary's presence. Because Taxpayer 1 had owned the Georgia facility for well over three years, the Department ruled that after the first restructuring Taxpayer 2 qualifies as an "existing manufacturing facility," and after the second restructuring Taxpayer 3 qualifies as well.

What this means for you

Manufacturers planning a multi-step reorganization

You can restructure a long-standing Georgia plant through Section 351 contributions without resetting the 36-month "existing manufacturing facility" clock, as long as the historic operations continue in the successor. But do not assume the credits automatically follow: they are earned entity-by-entity, and moving unused credits to an affiliate requires a proper § 48-7-42 assignment.

Accountants and tax professionals

Watch the mechanics of § 48-7-42: the assignment to an affiliated entity must be made on the original return, and an existing carryforward cannot be assigned. Distinguish two separate ideas the ruling keeps apart -- (1) whether the successor is itself eligible (yes, because operations continued), and (2) whether the predecessor can hand its credit position to the successor (only through the statutory assignment mechanism, not by informal "assignment" of qualifications and duties). Compare LR IT-2010-01 (Section 721 contribution, successor qualified as an existing manufacturing facility) and LR IT-2014-02 (unused job tax credit carryforward transferable to a successor under § 48-7-40(g)).

Common questions

Q: Can the original manufacturer just hand its credit eligibility to the new entities?
A: Not directly. Credits are generated and claimed on a separate legal-entity basis, so the original taxpayer cannot assign its qualifications, duties, and obligations. The successors qualify in their own right because the historic operations continue, and unused credits can move only through a § 48-7-42 assignment to an affiliate.

Q: Do the successor entities have to build up their own 36 months in Georgia?
A: No. Because the historic Georgia manufacturing operations continued after the Section 351 contributions, the Department ruled the successors need not separately meet the three-year existing-facility requirement.

Q: Any limits on assigning the credit to an affiliate?
A: Yes. Under § 48-7-42 the assignment must be made on an original income tax return, and a carryforward cannot be assigned.

Q: Can another manufacturer rely on this ruling?
A: No. It binds the Department only as to the requesting taxpayer and its specific facts and has no precedential value for anyone else.

Citations and references

Statutes and regulations:

• O.C.G.A. §§ 48-7-40.2, 48-7-40.3, 48-7-40.4 -- manufacturer's investment tax credits
• O.C.G.A. § 48-7-40.2(b) -- three-year existing-manufacturing-facility requirement
• O.C.G.A. § 48-7-40.2(c)(2) -- sale/merger/acquisition/bankruptcy creates no new eligibility; unused credit transfers to a transferee
• O.C.G.A. § 48-7-42 -- assignment of tax credits to an affiliated entity (original return; no assignment of carryforward)
• Revenue Regulation 560-7-8-.37(3)(b), (3)(d) -- "taxpayer" defined; change of form and new eligibility

Federal:

• Internal Revenue Code § 351 -- nonrecognition on contribution of property to a controlled corporation

Source

• Landing page: Georgia Income Tax Letter Rulings
• Original PDF: LR IT-2013-01

Original ruling text

Date Issued:
Georgia Letter Ruling:
Topic:

October 11, 2013
LR IT-2013-01
Investment Tax Credit

This letter is in response to your letter requesting a ruling regarding Taxpayer 1’s expenditures for the investment
tax credit and their and restructuring.
Facts As Presented by the Taxpayer
Your letter to the Department states: “Taxpayer 1 is a leading manufacturer of with
employees in our manufacturing and distribution facility in . Our manufacturing facilities have been
located in Georgia since <3 + years ago>. , Taxpayer 1 must expand its manufacturing facility in
to encompass new product lines and enhance existing manufacturing equipment.
“Taxpayer 1 plans to construct and equip an approximately square foot expansion project at the
facility in order to produce a new and innovative (the ‘Expansion Project’), and to make other
capital investments with respect to expanding and refreshing existing product lines (the ‘Upgrade Projects’). The
Expansion Project is expected to be undertaken in two (2) phases. During the first phase of the Expansion Project, it
is anticipated that Taxpayer 1 will construct the building expansion (the ‘Building Expansion’) and add automated production lines to the facility. During the second phase, which is to be reviewed and
approved by management, it is anticipated that Taxpayer 1 will install automated production lines
along with the necessary infrastructure to support capacity increases.
“To meet increased demand for our currently produced and to improve quality, Taxpayer 1 has to make
technological improvements to certain production lines. These upgrade Projects will consist of acquiring additional
new equipment and making capital improvements with respect to existing production lines and
distribution facilities, as well as adding new product lines, over two years.
“Taxpayer 1 estimates that a total of jobs will be created in as a result of the Project.
Taxpayer 1 estimates that capital investment for the Expansion Project will total <$amount>, with approximately
<$amount> invested in phase 1 of the Expansion Project and approximately <$amount> invested in phase 2.
“For expenditures prior to , the purchaser will be Taxpayer 1. Some corporate restructuring is anticipated for
subsequent years. According to the plan of restructuring, effective January 1, , Taxpayer 1 will transfer all of
its assets to an affiliated entity, Taxpayer 2, in a Section 351 contribution. Also according to the plan, effective
January 1, , Taxpayer 1’s manufacturing and R&D assets will be contributed by Taxpayer 2 to another
affiliated entity, Taxpayer 3, also in a contribution considered tax free for federal and state tax purposes under
Internal Revenue Code § 351. Essentially, these transfers will be straightforward contributions of assets, with the
goal to create a more efficient corporate structure. The historic Georgia manufacturing operations of Taxpayer 1
will continue as before, only as part of Taxpayer 2 and Taxpayer 3. All projects are for
manufacturing, distribution and related research in and only the name of the investor may change due to
this corporate restructuring.”
Issue

1. Whether Taxpayer 1 can assign its credit rights, qualifications, duties and obligations to an affiliated or successor
   entity, including but not limited to Taxpayer 2 and/or Taxpayer 3?
2. Whether Taxpayer 1’s prior activities in the state of Georgia can be taken into account in determining Taxpayer
   2’s and Taxpayer 3’s eligibility for tax credits and incentives?
3. Whether due to anticipated corporate restructuring, Taxpayer 2 and Taxpayer 3 will each be considered to have
   operated for the immediately preceding three years an existing manufacturing or telecommunications facility and to
   have met such requirement for purposes of O.C.G.A. §§ 48-7-40.2, 48-7-40.3, and 48-7-40.4?

October 11, 2013
LR IT-2013-01
Investment Tax Credit
Page 2 of 3

Analysis
Georgia Code Section 48-7-40.2(b) provides in pertinent part:
“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 Section 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, but any unused credit may be transferred and continued by any transferee of
the taxpayer;”
The term “taxpayer” is described in Georgia 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.”
The criterion for establishing new eligibility is described in Georgia 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 for Issue #1
Tax credits are generated and claimed on a separate legal entity basis, therefore Taxpayer 1 cannot assign its
qualifications, duties and obligations to an affiliated or successor entity, including but not limited to Taxpayer 2
and/or Taxpayer 3. However, if Taxpayer 1 undergoes a restructuring under Internal Revenue Code § 351 and the
historic Georgia manufacturing operations of Taxpayer 1 continue as before, then its affiliated entities that receive
its assets will not have to separately meet the eligibility requirements of the investment tax credit. Please note that
all tax credits, including the investment tax credit, can be assigned to an affiliated entity under O.C.G.A. § 48-7-42.
Assignments must be made on an original income tax return and carry forward cannot be assigned.
Ruling for Issue #2
Please reference the Ruling for Issue # 3 below.
Ruling for Issue #3
The investment tax credit statutes, O.C.G.A. §§ 48-7-40.2, 48-7-40.3, and 48-7-40.4, were intended to benefit
Georgia manufacturers. 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 Georgia Regulation 560-7-8.37(3)(b)). With respect
to the facility in Georgia, Taxpayer 1 has owned this facility since <3 + years ago>.

October 11, 2013
LR IT-2013-01
Investment Tax Credit
Page 3 of 3

Based on facts as stated herein, it is the opinion of this Department that after Taxpayer 1’s corporate restructuring
described in this letter ruling in , Taxpayer 2 will qualify as an “existing manufacturing facility”; and after
Taxpayer 2’s corporate restructuring described in this letter ruling in , Taxpayer 3 will qualify as an
“existing manufacturing facility.”

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.