Can High Performance Incentive Program (HPIP) income-tax credits be transferred to a related company?

Plain-English summary

A company asked whether it could receive the High Performance Incentive Program (HPIP) income-tax credits — set out in K.S.A. 74-50,132 and K.S.A. 79-32,160a(e) — that had originally been secured by a related entity. The Department concluded the credits can be transferred to a related taxpayer, if three conditions are satisfied.

The statute that allows transfers. The Department started with K.S.A. 79-32,156(a), which lets a business that established a qualified business facility (the "transferor") allow a related taxpayer (the "transferee") to claim the credit allowed by K.S.A. 79-32,153 — the investment and job-creation credit under the Job Expansion and Investment Credit Act of 1976 — when the facility is acquired by or leased to the related taxpayer.

Bridging to the HPIP credit. On its face, 79-32,156(a) speaks only to the 79-32,153 credit, not the HPIP investment credit under 79-32,160a(e). But the Department relied on K.S.A. 79-32,160a(f), which provides that the HPIP section is "part of and supplemental to the job expansion and investment credit act of 1976." Reading the two together, the Department found that "a reasonable reading and interpretation of the Act would indicate" the transfer mechanism applies to the newer HPIP credit as well — so the 79-32,160a(e) credit may be transferred to a related taxpayer.

The three conditions. The Department said the credits may be transferred if:

1. The parties are "related taxpayers" as defined in K.S.A. 79-32,154(h). That definition turns on control — broadly, direct or indirect ownership of at least 80% of a corporation's voting stock (and 80% of other stock), or 80% of a partnership's/association's capital or profits, or 80% of a trust's beneficial interest. The Department noted it could not determine from the information provided whether the two entities met this test.
2. The transferee becomes HPIP certified and continues to be qualified and recertified for each succeeding taxable year.
3. The transferor sells or leases the qualified business facility to the transferee.

Bottom line: HPIP income-tax credits are transferable to a genuinely related (80%-affiliated) taxpayer, but only when the transferee steps into the program (certified and recertified each year) and actually takes the facility by purchase or lease. The related-taxpayer test is strict, and the Department will not presume it is met — the parties must establish the 80% control relationship.

What this means for you

Companies holding HPIP credits

HPIP credits are not necessarily locked to the original earner. Under this reading, they can move to a related taxpayer — useful in a reorganization or intercompany facility transfer — but only if the affiliation and program-participation conditions are met. Plan the transfer around the three requirements, not just the desire to move the credit.

The 80% "related taxpayer" test is the gatekeeper

Everything depends on the parties being "related taxpayers" under K.S.A. 79-32,154(h) — generally 80% common control. The Department expressly declined to find this on the facts given, so be prepared to document the ownership/control relationship precisely.

The transferee must run the program

A transfer is not just a paper assignment of credits. The transferee must become and stay HPIP certified (recertified each year) and must acquire or lease the qualified business facility. If the transferee does not carry the program forward, the transfer conditions are not satisfied.

Common questions

Q: Can HPIP credits be transferred to another company?
A: Yes, to a related taxpayer. The Department read K.S.A. 79-32,156(a) together with K.S.A. 79-32,160a(f) to allow the HPIP credit (K.S.A. 74-50,132 and 79-32,160a(e)) to be transferred, subject to conditions.

Q: What makes two companies "related taxpayers"?
A: K.S.A. 79-32,154(h) — broadly, one controls the other (or a common parent controls both), with control generally meaning at least 80% ownership of voting stock, capital/profits interest, or trust beneficial interest.

Q: What else must happen for the transfer to work?
A: The transferee must become HPIP certified and stay qualified and recertified each year, and the transferor must sell or lease the qualified business facility to the transferee.

Q: Did the Department confirm these two companies qualified?
A: No. It said it could not determine from the information provided whether the parties were "related taxpayers," so the companies would need to establish that relationship.

Citations and references

• K.S.A. 74-50,132 and K.S.A. 79-32,160a(e) — the High Performance Incentive Program (HPIP) credits at issue.
• K.S.A. 79-32,156(a) — allows a transferor to let a related-taxpayer transferee claim the credit under K.S.A. 79-32,153 when the qualified business facility is acquired by or leased to the transferee.
• K.S.A. 79-32,153 — the investment and job-creation credit under the Job Expansion and Investment Credit Act of 1976, to which the transfer statute directly applies.
• K.S.A. 79-32,154(h) — defines "related taxpayer," turning on roughly 80% control of a corporation, partnership/association, or trust.
• K.S.A. 79-32,160a(f) — makes the HPIP section supplemental to the 1976 Act, the bridge the Department used to extend the transfer mechanism to the HPIP credit.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2001-107

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

August 28, 2001

XXXXX
XXXXX
XXXXX
XXXXX
XXXXX

Dear XXXXX:

Thank you for your request for a private letter ruling regarding whether XXXXX is entitled to the High Performance Incentive Program credits set forth in K.S.A. 74-50,132 and K.S.A. 79-32,160a(e) which were originally secured by XXXXX.

K.S.A. 79-32,156(a) provides,

“If a taxpayer, hereafter referred to in this section as “transferor,” shall have established a qualified business facility and, prior to the expiration of the ten-year period during which the credit allowed by K.S.A. 79-32,153, and amendments thereto, may be claimed by the transferor, all or a portion of such qualified business facility, is acquired by, or leased to, a related taxpayer, as defined in subsection (h) of K.S.A. 79-32,154, and amendments thereto, and hereafter referred to in this section as “transferee,” the transferor shall elect either to allow the transferee to claim such credit as provided in subsection (b), or to retain such credit as provided in subsection (c).”

Based on the reading of this statute, it specifically states that a credit allowed by K.S.A. 79-32,153 may be transferred to a related taxpayer. K.S.A. 79-32,153 allows an investment credit and job creation credit under the Job Expansion and Investment Credit Act of 1976. K.S.A. 79-32,156(a) does not address any other type of credit, such as the “enhanced” business and job development credit allowed under K.S.A. 79-32,160a or the high performance incentive program investment credit allowed under K.S.A. 79-32,160a(e).

However, K.S.A. 79-32,160a(f), provides:

“This section and K.S.A. 79-32,160b and amendments thereto shall be part of and supplemental to the job expansion and investment credit act of 1976 and acts amendatory thereof and supplemental thereto.”

Therefore a reasonable reading and interpretation of the Act would indicate that the provisions within the original act were meant to apply to the newer provisions in K.S.A. 79-32,160a, thereby allowing a transfer of the credit earned under K.S.A. 79-32,160a(e) to a related taxpayer.

K.S.A. 79-32,154(h) provides the definition of related taxpayer as,

“Related taxpayer” shall mean (1) a corporation, partnership, trust or association controlled by the taxpayer; (2) an individual, corporation, partnership, trust or association in control of the taxpayer; or (3) a corporation, partnership, trust or association controlled by an individual, corporation, partnership, trust or association in control of the taxpayer. For the purposes of this act, “control of a corporation” shall mean ownership, directly or indirectly, of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of all other classes of stock of the corporation; “control of a partnership or association” shall mean ownership of at least 80% of the capital or profits interest in such partnership or association; and “control of a trust” shall mean ownership, directly or indirectly, of at least 80% of the beneficial interest in the principal or income of such trust.”

XXXXX may transfer the credits secured through HPIP (K.S.A. 74-50,132 and K.S.A. 79-32,160a(e)) to XXXXX if the following conditions are met:
· XXXXX and XXXXX must be considered as “related taxpayers” as defined in K.S.A. 79-32,154(h) (Based on the information you have provided, I am unable to make this determination);
· XXXXX must become HPIP certified and continue to be qualified and recertified for each succeeding taxable year; and
· XXXXX must sell or lease the qualified business facility to XXXXX.

This is a private letter ruling pursuant to Kansas Administrative Regulation 92-19-59. It is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to an accurate determination by the department, this ruling is null and void. This private letter ruling will be revoked in the future by operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or a published revenue ruling, that materially affects this ruling.

If I may be of further assistance, please contact me at your earliest convenience.

Sincerely,

Kathleen M. Smith
Tax Specialist, Office of Policy and Research

Date Composed: 10/04/2001 Date Modified: 10/10/2001

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