When a Georgia business is reorganized into a new entity under Section 351, can its unused job tax credit carryforward be transferred to the successor entity?

Plain-English summary

A business ("Taxpayer 1") earned Georgia's job tax credit for a county facility. In a restructuring that qualified as a tax-free reorganization under IRC Section 351, that Georgia facility -- along with all property, assets, liabilities, employees, payroll, and sales -- was separated from Taxpayer 1 and moved into a new entity ("Taxpayer 2"). The Georgia operations and personnel stayed the same, and going forward the county operations would be reported under Taxpayer 2. The business asked whether Taxpayer 1's unused job tax credit could be transferred to Taxpayer 2.

The Department ruled yes -- with a condition. Under O.C.G.A. § 48-7-40(g), a sale, merger, acquisition, or bankruptcy does not create new job-tax-credit eligibility in a succeeding business, but any unused job tax credit may be transferred and continued by a transferee of the business enterprise. The Department's job-tax-credit regulation (560-7-8-.36(9)(d)) and the Department of Community Affairs regulation (110-9-1-.03(9)) say the same, and add that a transferee may even earn new credits for the original enterprise's full-time jobs as long as those jobs are maintained. So if all statutory and regulatory requirements for earning the credit were satisfied, the unused job tax credit carryforward generated by Taxpayer 1 may be transferred to Taxpayer 2.

What this means for you

Businesses reorganizing a credit-earning Georgia operation

An unused job tax credit is not necessarily lost when you move a Georgia operation into a new legal entity. If the jobs and operations continue with the successor and the credit was properly earned, the unused carryforward can follow the business to the transferee.

Accountants and tax professionals

The distinction is between new eligibility (which a sale/merger/acquisition/bankruptcy cannot manufacture) and unused credits (which transfer to the transferee). Note the Department of Community Affairs' role: its regulation confirms the transferee can continue the unused credit and earn new credits for maintained full-time jobs, and the Commissioner of Community Affairs determines whether qualifying net job increases or decreases have occurred. The Department's approval was expressly conditioned on all the credit-earning requirements having been met. Compare LR IT-2013-01, which applied similar successor/assignment reasoning to the investment tax credit.

Common questions

Q: Does a Section 351 reorganization wipe out the job tax credit?
A: No. It does not create new eligibility in the successor, but the unused job tax credit can be transferred to and continued by the transferee that receives the business.

Q: Can the successor earn new job tax credits, not just use the old ones?
A: Under Department of Community Affairs Regulation 110-9-1-.03(9), a transferee may earn new credits for the original enterprise's new full-time jobs as long as those jobs are maintained and the transferee meets the other legal requirements.

Q: Is the transfer automatic?
A: No. The Department conditioned its ruling on all statutory and regulatory requirements for earning the credit having been satisfied. The Commissioner of Community Affairs determines whether qualifying job changes occurred.

Q: Can another business rely on this ruling?
A: No. A Georgia letter ruling binds the Department only for the taxpayer and facts it was issued to and has no precedential value for others.

Citations and references

Statutes and regulations:

• O.C.G.A. § 48-7-40(g) -- job tax credit; no new eligibility from sale/merger/acquisition/bankruptcy, but unused credit transfers to a transferee
• Revenue Regulation 560-7-8-.36(9)(d) -- transfer of unused credits on reorganization of a business enterprise
• Department of Community Affairs Regulation 110-9-1-.03(9) -- successor may continue unused credit and earn new credits for maintained jobs

Federal:

• Internal Revenue Code § 351 -- tax-free reorganization / contribution to a controlled corporation

Source

• Landing page: Georgia Income Tax Letter Rulings
• Original PDF: LR IT-2014-02

Original ruling text

Georgia Letter Ruling: LR IT-2014-02
Topic:
Job Tax Credit
Date Issued:
January 23, 2014
This letter is in response to your letter requesting a ruling that Taxpayer 1’s unused job tax credit can be transferred
to Taxpayer 2.
Facts as Presented by the Taxpayer

“In late , Taxpayer 1 went through restructure and the , Georgia facility was separated from
Taxpayer 1 and all property, assets, liabilities, employees, payroll and sales were moved into Taxpayer 2.
“The Georgia operations have not changed and all personnel have remained the same. Note that this restructure
qualified as a tax free reorganization under IRC Sec. 351 (a) which provides that no gain or loss is recognized by
transferors of property to a corporation solely in exchange for the stock of the transferee, if after the exchange, the
transferor is in control of the transferee. Effective , all , Georgia business operations and
transactions will be reported under Taxpayer 2.
Further, it appears that Taxpayer 1 qualified for the job tax credit in tax year and the job tax
credit was calculated as such since tax year and forward.
Issue
Whether or not Taxpayer 1’s unused job tax credit can be transferred to Taxpayer 2?
Analysis
Georgia Code § 48-7-40 (g) provides that:
“(g) The sale, merger, acquisition, or bankruptcy of any business enterprise shall not create new
eligibility in any succeeding business entity, but any unused job tax credit may be transferred and
continued by any transferee of the business enterprise. The commissioner of community affairs
shall determine whether or not qualifying net increases or decreases have occurred and may
require reports, promulgate regulations, and hold hearings as needed for substantiation and
qualification.”
Revenue Regulation 560-7-8-.36 (9)(d) provides that:
“(d) Sale, Merger, Acquisition, Reorganization, or Bankruptcy of a Business
Enterprise. The sale, merger, acquisition, or transfer or liquidation or bankruptcy of a business
enterprise will not create new eligibility in any succeeding taxpayer, but any unused credits may
be transferred and continued by any transferee of the taxpayer. When a business enterprise merely
changes its name, recapitalizes, or liquidates unrelated subsidiaries; however, no new eligibility
need be established.”
Department of Community Affairs Regulation 110-9-1-.03 (9) provides that:
“(9) The Sale, Merger, Acquisition, Reorganization, or Bankruptcy of any Business
Enterprise Shall Not Create New Eligibility in any Succeeding Business Entity. The sale,
merger, acquisition, reorganization, or bankruptcy of any business enterprise shall not create new
eligibility in any succeeding business entity. Any unused job tax credit may be transferred by a
business enterprise to any transferee of that business enterprise. New tax credits may be earned by
any transferee of a business enterprise for new, full-time jobs created by the original business
enterprise as long as those new, full-time jobs are maintained by the transferee of the business
enterprise and as long as the transferee meets other applicable requirements in law and regulation.”