Which personal property in ABC's headquarters expansion qualified for the historical SC headquarters credit under PLR 91-3?

Plain-English summary

South Carolina Private Letter Ruling 91-3 allowed ABC's historical corporate-headquarters credit for personal property used in headquarters functions and qualifying research-and-development work.

The ruling approved property used by employees handling financial, investment, legal, audit, administrative, planning, business-development, and regional, national, or international sales-and-marketing management and support. It also approved property used for experimental software product development.

It denied the credit for property used by employees performing custom programming for specific clients, system installations, customer-assistance work, or other functions outside the stated headquarters and R&D definitions.

Headquarters-related functions

The historical headquarters definition covered the location where corporate staff were employed and where most financial, personnel, legal, planning, or other business functions were handled on a regional or national basis. It also required the location to be the company's sole headquarters for that region or nation.

Under ABC's facts, personal property used by employees performing those functions in the headquarters expansion qualified, assuming the stipulated compensation and new-job requirements were met.

Research-and-development functions

Because the headquarters-credit statute did not define research and development, the ruling read it consistently with the jobs-credit and property-tax provisions.

Qualifying R&D meant laboratory, scientific, or experimental testing and development for:

• new products;
• new uses for existing products; or
• improved existing products.

It excluded efficiency or management studies, consumer or economic surveys, advertising, promotion, and literary, historical, or similar research.

ABC's software-development roles

ABC developed and experimentally tested insurance-industry software. The ruling found qualifying R&D property could be used by employees actually performing the described development work, including:

• product or project managers planning and coordinating new products;
• systems architects solving complex design problems and directing specifications;
• product or insurance analysts translating business requirements into new-product specifications;
• systems or programmer analysts producing technical plans and detailed specifications; and
• programmers coding, testing, and documenting new programs and procedures.

Job title alone did not control. Employees with the same titles but assigned to custom client programming, installations, customer assistance, or other non-R&D work did not generate qualifying personal-property costs.

Mainframe and telephone-system upgrades

ABC located mainframe computers and telephone-switching equipment in specialized buildings within its existing headquarters complex. It planned added capacity to serve the expansion.

The ruling allowed the credit for necessary mainframe and telephone-system enhancements because they were predominantly used for headquarters and R&D functions and were housed within the headquarters complex. The equipment did not have to sit inside the new expansion building itself.

When the credit had to be claimed

ABC had to claim the credit for the tax year in which the facility was placed in service.

Qualifying original-expansion-plan expenses incurred through the corporate return's due date, including extensions, were eligible. For this purpose, an accrual-method taxpayer incurred an expense when it accrued for income-tax accounting, without regard to Internal Revenue Code Section 461(h).

Later costs outside the original headquarters expansion plan did not qualify under the ruling's timing rule.

What this means for you

Headquarters incentive teams

Trace property to the actual employee function. The ruling allowed a functional allocation rather than treating every item in the headquarters complex as automatically eligible.

Software companies

Distinguish experimental development of new or improved products from client-specific programming, installation, support, marketing, and other operational work.

Fixed-asset and tax accounting teams

Preserve placed-in-service dates, original project plans, asset locations, and the functions served by shared systems. The ruling allowed qualifying shared computer and phone infrastructure because of its predominant headquarters and R&D use.

Common questions

Q: Did all personal property in the expansion qualify?

A: No. Eligibility depended on whether the property served headquarters or qualifying R&D functions.

Q: Did every programmer's equipment qualify?

A: No. Equipment for experimental new-product work could qualify; equipment for custom client programming, installation, or customer assistance did not.

Q: Could equipment in an existing headquarters building qualify?

A: Yes. The mainframe and telephone enhancements qualified because they served the expansion's qualifying functions and remained in the headquarters complex.

Q: When was the credit claimed?

A: In the tax year the facility was placed in service.

Q: How late could an original-plan expense be included?

A: Through the return due date, including extensions, if otherwise qualifying and accrued under the ruling's stated method.

Citations and references

• S.C. Code Ann. § 12-7-1245 — historical corporate-headquarters credit
• S.C. Code Ann. § 12-7-1220 — historical research-and-development definition
• S.C. Code Ann. § 12-37-220(B)(32) — historical headquarters and research-facility definitions
• I.R.C. § 461(h) — economic-performance rule disregarded by the ruling's historical accrual test

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR91-3.pdf

Original ruling text

SC PRIVATE LETTER RULING #91-3

TO:

ABC

TAX ANALYST:

Malane S. Pike

SUBJECT:

Headquarters Credit for Personal Property
(Income Tax)

REFERENCE:

S.C. Code Ann. Section 12-7-1245 (Law. Coop. Supp. 1990)
S.C. Code Ann. Section 12-7-1220 (Law. Coop. Supp. 1990)
S.C. Code Ann. Section 12-37-220 (Law. Coop. Supp. 1990)

AUTHORITY:

S.C. Code Ann. Section 12-3-170 (Law. Coop. 1976)
SC Revenue Procedure #87-3

SCOPE:

A Private Letter Ruling is a temporary document issued to a taxpayer,
upon request, and it applies only to the specific facts or circumstances
related in the request.
Private Letter Rulings have no precedential value and are not intended for
general distribution.

QUESTION:
Is ABC entitled to the Corporate Income Tax Credit under S. C. Code Ann. Section 12-7-1245
for their investment in personal property in connection with the corporation's expansion of its
Corporate Headquarters Complex?
FACTS:
ABC, a South Carolina corporation, employs approximately 4000 individuals in 47 states and 7
countries. About 1700 of the corporation's employees are located at its existing corporate
headquarters in South Carolina.
The corporation's mission is to develop and provide software for the insurance industry, and its
principal product lines include software packages for property and casualty, life, health, and
group insurance companies.
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The corporation has acquired land on which it is constructing an addition (the "Expansion") to its
Headquarters. The personal property purchased or to be purchased as part of the Expansion
include furniture, fixtures, equipment, computer equipment (to be located in the Expansion
building) and a mainframe computer and peripheral equipment (to be located in the data center
portion of the existing headquarters complex). The expenditures relating to the Expansion were
made primarily in 1990, but Expansion expenditures have also been made during 1989 and will
be made during 1991. The current cost estimates for real and personal property purchased or to
be purchased as part of the Expansion are as follows:
$9.3 to $9.5 Million
$4.0 to $5.0 Million
$4.0 to $5.0 Million
$6.4 to $7.5 Million

Real Property (not including the land which the Corporation already
owned)
Furniture, Fixtures and Equipment
Computer Equipment (to be located inside the Expansion building)
Mainframe Computer and supporting peripheral equipment (to be
located in the data center portion of the Headquarters Complex)

$23.7 to $27.0 Million TOTAL
In connection with the Expansion, at least 150 new full-time jobs have been or will be created
which (1) have an average cash compensation level more than one and one-half times the per
capita income of the State at the time the jobs are filled, and (2) result in a total employee cash
compensation per South Carolina employee of more than twice the per capita income of the State
at the time the newly created jobs are filled.
With respect to the expansion, the employees will perform duties concerning financial,
investment, legal, audit, administrative, planning, business development and international,
national and regional sales and marketing matters. Employees at the Expansion will also include
management personnel who will manage employees at branch offices and elsewhere and direct
sales representatives.
Employees at the Expansion will also include the following employees directly involved with
new products:
1.

Product/Project Manager
Product and project managers are senior level individuals responsible for identifying new
product requirements in the marketplace and developing the product or project plan for a
new product. They are also involved in identifying and staffing a project team and
coordinating the research and product development activities necessary to take the project
plan from conception to reality.

2.

Systems Architect
Systems Architects are highly qualified technical resource individuals who solve complex
system design and development problems. Their responsibilities also include the
evaluation and analysis of current and future system trends. Systems architects also design
and direct the overall new systems development specifications that, in turn, determine the
systems design and programming specifications that are developed by product analysts or
systems analysts.
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3.

Product/Insurance Analysts
Product and Insurance Analysts are individuals who provide assistance in complex
situations requiring interaction between the business user and the technical programmers.
These individuals develop the business requirements and the programming specifications
that are the basis for new product development directions.

4.

Systems/Programmer Analysts
Systems and Programmer Analysts are professionals who provide technical guidance and
assistance in the product development process. They are responsible for formulating
systems plans that provide technical data regarding the environment in which a particular
development project is expected to perform. They also provide detailed specifications
from which programs are written.

5.

Programmers
Programmers are individuals who interpret the detailed instructions provided by systems
architects, product analysts and systems analysts. Their primary tasks are to code, test and
document the new programs and/or procedures that they are developing.

There may be a few corporation employees located in the Expansion with the same or similar job
titles who instead provide functions or services such as custom programming for specific client
needs, systems installations, or working in customer assistance centers. No credit is requested
for the personal property used primarily by these employees.
ABC performs extensive experimental testing and development in connection with its offering of
improved and new products. Each major functional component of a system is tested in order to
prove that a system can perform functions needed by the industry.
Generally, all of the Expansion-related personal property will be located in the Expansion
building. However, because of the special requirements and needs relating to modern mainframe
computers and peripherals, the corporation has located, and intends in the future to locate, its
mainframe computers in one special building which is a part of the existing Headquarters
Complex and which was constructed solely for the purpose of housing these computers.
Therefore, the corporation can provide these computers with the climate control, primary and
backup power, security and other needs particular to such modern mainframe computers. The
corporation will be purchasing the equivalent of at least one new mainframe computer (through
the purchase of an additional mainframe computer or upgrades to existing mainframe computers)
in order to provide the additional capacity required as a result of the Expansion.
Similarly, the corporation has located, and intends in the future to locate, all of its telephone
switching computers and related equipment in a single location within the existing Headquarters
Complex. In order to service the increased demands resulting from the Epansion, the corporation
is increasing the processing and memory capacity of its Central Switching System. This cost is
included in the estimated cost of Expansion furniture, fixtures and equipment.

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DISCUSSION:
Section 12-7-1245 of the South Carolina Code provides a credit for qualifying corporate
headquarters equal to 20% "of the (1) costs incurred in the design, preparation, and development
of either establishing or expanding a corporate headquarters, and (2) direct construction or the
direct lease costs during the first five years of operations for the corporate headquarters".
Personal property "used for corporate headquarters related functions and services" or "research
and development related functions and services" is also entitled to the headquarters credit
provided that the per capita income requirements of this statute are met. Pursuant to the per
capita income requirements, at least one hundred fifty new full-time jobs must be created which:
(1) have an average cash compensation level more than one and one-half times the
per capita income of the State at the time the jobs are filled, and (2) result in a total
employee cash compensation per South Carolina employee of more than twice the
per capita income of the State at the time the newly created jobs are filled.
This document will define "corporate headquarters related functions and services" and "research
and development related functions and services". It will then determine if ABC's personal
property fits within these definitions. ABC has stipulated that the per capita income
requirements are met, therefore, that issue will not be addressed. Finally, the time period for
obtaining the headquarters credit will be discussed.
Definition of "Corporate Headquarters Related Functions and Services"
Section 12-7-1245 defines the term "corporate headquarters related functions and services" by
reference to Section 12-37-220(B)(32). This section provides a definition of "corporate
headquarters" which outlines the activities which are considered to be headquarters related. This
provision reads as follows:
"corporate headquarters" means the location where corporate staff members or
employees are domiciled and employed, and where the majority of the company's
financial, personnel, legal, planning, or other business functions are handled either
on a regional or national basis and must be the sole such corporate headquarters
within the region or nation.
Thus, employees physically located in the headquarters and performing these functions would
qualify for the credit provided that the per capita income requirements are met.
Definition of "Research and Development Related Functions and Services"
Section 12-7-1245 does not provide a definition for "research and development related functions
and services". For purposes of determining whether personal property qualifies for the credit, it
is necessary to define this term. As seen with the definition of "headquarters related functions
and services", Section 12-7-1245 refers directly to the property tax statute, Section 12-37-220.

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Therefore, it is reasonable to construe these two statutes together. In addition, Section 12-7-1220,
the jobs credit, provides a definition of "research and development". Both the headquarters credit
and the jobs credit are designed to attract new business into South Carolina. Corporations
availing themselves of the headquarters credit are often eligible for the jobs tax credit as well.
Therefore, it is reasonable to construe "research and development" as used in Section 12-7-1245
to be consistent with "research and development" as used in the jobs tax credit.
Section 12-37-220, a property tax exemption provision, contains a definition of a related term
"facilities of enterprises engaged in research and development activities". This definition reads
as follows:
For purposes of this section, facilities of enterprises engaged in a research and
development activities are facilities devoted directly and exclusively to research and
development in the experimental or laboratory sense for new products, new uses for
existing products, or for improving existing products. To be eligible for the
exemption allowed by this section, the facility must be a separate facility devoted
exclusively to research and development as defined in this section. The exemption
does not include facilities used in connection with efficiency surveys, management
studies, consumer surveys, economic surveys, advertising, promotion, or research in
connection with literary, historical, or similar projects.
Section 12-7-1220, an income tax credit provision for the creation of new jobs, contains a similar
definition of the related term, "research and development facility". This definition reads as
follows:
"Research and development facility" means an establishment engaged in laboratory,
scientific, or experimental testing and development related to new products, new
uses for existing products, or improving existing products, but a "research and
development facility" does not include an establishment engaged in efficiency
surveys, management studies, consumer surveys, economic surveys, advertising,
promotion, or research in connection with literary, historical, or similar projects.
The definitions contained in 12-7-1220 and 12-37-220 are substantially
similar. Given the legislative intent of these statutes and the direct reference from 12-7-1245 to
12-37-220, it is reasonable to construe "research and development" for use in 12-7-1245 to be
consistent with these statutes.
Is ABC's Personal Property Being Used for Corporate Headquarters Related Functions and/or
Research and Development Related Functions as Required by Section 12-7-1245?
Pursuant to the facts provided by ABC, a significant portion of the personnel to be located in the
Expansion will perform services such as financial, investment, legal, audit, administrative,
planning, business development, and international, national and regional sales and marketing
management and support. The management staff located in the Expansion will be responsible
for managing employees in the branch offices and elsewhere.
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Based upon the definition given in Section 12-37-220(B)(32), the cost of purchasing personal
property for use by ABC employees performing these functions qualifies for the credit.
With regard to research and development related activities, ABC develops new products and
improves existing products in order to remain competitive in the insurance software business.
Although the corporation does not have a research and development division as such, research
and development functions and personnel are spread throughout the corporation on a product line
basis.
Each product line has certain positions dedicated to the development of new software. Some of
the job titles utilized to perform these functions are Product or Project Manager, Systems
Architect, Product or Insurance Analyst, Systems or Programmer Analyst, and Programmer.
Descriptions of these jobs are included in the facts submitted by ABC. Although these same job
titles may be used in reference to personnel not performing research and development duties, the
credit is only being requested for the personal property of those who are. ABC conducts
extensive experimental testing to ensure that a system can perform functions needed by the
industry.
Pursuant to the definitions in Sections 12-37-220 and 12-7-1220 and information provided by
ABC, the corporation is performing research and development. Its personal property, used by
employees performing these functions, therefore qualifies for the credit provided the per capita
income requirements of Section 12-7-1245 are met. The personal property of those employees
dedicated to marketing custom programming for specific client needs, systems installations,
working in customer assistance centers or performing other functions does not qualify for the
credit.
Necessary enhancements to the mainframe computer and the telephone system to serve the
headquarters expansion is also personal property which qualifies for the credit in Section 12-71245. They are predominately used for corporate headquarters functions and research and
development. The credit is allowed because the equipment is housed in the corporate
headquarters complex.
Time Period for Obtaining the Credit
The corporation is entitled to the headquarters credit in the tax year in which the facility is placed
in service. Qualifying headquarters expenses which have been incurred through the date on
which the corporate return for that year is due, including extensions, are eligible for the credit.
For the purposes of this credit, an expense is incurred if it is accrued under the accrual method of
accounting for income tax purposes, without regard to subsection 461(h) of the Internal Revenue
Code. Only the expenses which are part of the original headquarters expansion plan are eligible
for the credit.

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CONCLUSION:
ABC is entitled to the Corporate Income Tax Credit under S. C. Code Ann. Section 12-7-1245
for their investment in personal property devoted to headquarters related functions and services
and research and development related functions and services, as defined in this document, for
their corporate headquarters complex expansion. The personal property for employees not
performing these functions is not eligible for the credit.
The corporation must claim the credit for the tax year in which the facility is placed in service.
All expenses which otherwise qualify for the credit and which are incurred through the date on
which the corporate return is due, including extensions, are eligible for the credit. For the
purposes of this credit, an expense is incurred if it is accrued under the accrual method of
accounting for income tax purposes, without regard to subsection 461(h) of the Internal Revenue
Code.
SOUTH CAROLINA TAX COMMISSION

s/S. Hunter Howard Jr.
S. Hunter Howard, Jr., Chairman

s/A. Crawford Clarkson Jr.
A. Crawford Clarkson, Jr., Commissioner

s/T. R. McConnell
T. R. McConnell, Commissioner

Columbia, South Carolina
, 1991
May 29

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