How did South Carolina calculate and prorate the capital-based corporate license fee under Revenue Ruling 05-11?

Plain-English summary

South Carolina Revenue Ruling #05-11 answered detailed questions about the corporate license fee imposed for the privilege of doing business as a corporation in the state. For most covered corporations, the ruling described the annual fee as $15 plus $1 for each $1,000, or fraction of $1,000, of capital stock and paid-in or capital surplus, with a $25 minimum.

The fee base came from the corporation's capital stock and paid-in or capital surplus on the first day of the taxable year in which the annual report was filed. Retained earnings were excluded, and treasury stock was not added back because it had already reduced shareholders' equity. Multistate corporations used the same apportionment ratio used for income tax, but the $25 minimum could not be apportioned.

For a short tax period caused by a change in accounting period, the annual fee was divided by 12 and multiplied by the number of months in the short period. Any part of a month counted as a full month, and the result could not be less than $25. The ruling also addressed consolidated returns, qualified Subchapter S subsidiaries, initial returns, final returns, acquisitions, mergers, and capital changes on the first day of a tax year.

What this means for you

Corporate taxpayers

The ruling's calculation began with the relevant balance-sheet capital accounts, not total shareholders' equity. It instructed corporations to subtract retained earnings and not to add treasury stock back into the base.

Multistate and consolidated groups

A multistate corporation apportioned the fee using its income-tax apportionment ratio. Each corporation in a South Carolina consolidated group was measured separately, without offsetting one group member's investment in another, and each was subject to the minimum fee.

Corporations with short tax years

Proration applied when a change in accounting period created a return shorter than 12 months. It did not apply to the initial $25 license fee, and the ruling said no license fee was due with a final income tax return because the fee had been paid in advance.

Common questions

Q: Were all business entities subject to this fee?
A: No. The ruling listed statutory and entity-based exclusions, including an LLC not taxed as a corporation, qualifying nonprofit corporations, banks, insurers, and entities without South Carolina nexus.

Q: How did a QSub calculate the fee?
A: The ruling treated a qualified Subchapter S subsidiary as disregarded. The parent and its QSubs were treated as one entity, using combined capital and the apportionment ratio of the entire entity.

Q: Could the minimum fee be apportioned or prorated below $25?
A: No. The ruling said the $25 minimum could not be apportioned, and a prorated short-period fee also could not be less than $25.

Q: Are the ruling's 2005 forms and dollar amounts current?
A: This page does not establish that. The ruling modified Revenue Procedure 98-1 and reflects the statutes, forms, and procedures described when it was issued in 2005.

Citations and references

• S.C. Code Ann. § 12-20-50 — capital-based fee, financial-statement terms, and minimum fee
• S.C. Code Ann. § 12-20-60 — multistate apportionment
• S.C. Code Ann. § 12-20-80 — short-period proration
• S.C. Code Ann. § 12-20-100 — alternative measure for specified regulated companies
• S.C. Code Ann. § 12-20-110 — exemptions discussed in the ruling
• S.C. Code Ann. § 12-2-25(B) — QSub treatment
• S.C. Code Ann. § 12-6-4410 — conformity of the South Carolina and federal tax years

Source

• Landing page: SC Advisory Opinion Search
• Original PDF: RR05-11.pdf

Original ruling text

State of South Carolina

Department of Revenue
Office of General Counsel
301 Gervais Street, P. O. Box 12265, Columbia, South Carolina 29211
Website Address: http://www.sctax.org

SC REVENUE RULING #05-11

SUBJECT:

License Fee Based on Capital Stock and Paid-In or Capital Surplus
– Computation and Proration Questions

EFFECTIVE DATE: Applies to all periods open under the statute.
MODIFIES:

SC Revenue Procedure #98-1

REFERENCES:

S. C. Code Ann. Section 12-20-50 (2000)
S. C. Code Ann. Section 12-20-60 (2000)
S. C. Code Ann. Section 12-20-80 (2000)
S. C. Code Ann. Section 12-20-100 (2000)
S. C. Code Ann. Section 12-20-110 (2000)
S. C. Code Ann. Section 12-2-25(B) (Supp. 2003)
S. C. Code Ann. Section 12-6-4410 (2000)

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (Supp. 2000)
S. C. Code Ann. Section 1-23-10(4) (Supp. 2000)
SC Revenue Procedure #03-1

SCOPE:

The purpose of a Revenue Ruling is to provide guidance to the
public and to Department personnel. It is a written statement
issued to apply principles of tax law to a specific set of facts or a
general category of taxpayers. A Revenue Ruling is an advisory
opinion; it does not have the force or effect of law and is not
binding on the public. It is, however, the Department’s position
and is binding on agency personnel until superseded or modified
by a change in statute, regulation, court decision, or advisory
opinion.

Introduction
South Carolina’s license fee, or franchise tax, is imposed on the privilege of doing
business as a corporation in South Carolina to compensate South Carolina for protection
and opportunities commensurate to doing business in South Carolina. Unless otherwise
exempted, every corporation required to file an annual report is required to pay an annual
license fee. The license fee is paid in advance of the taxpayer’s income tax year.

1

The purpose of this document is to answer some frequently asked questions about the
license fee base and to provide examples illustrating the computation of the license fee
for short periods based on capital stock and paid-in or capital surplus.
CAVEAT: Most corporations pay the license fee based on capital. Only specifically
enumerated companies, such as waterworks companies, power companies, electric
cooperatives, gas companies, telephone companies, and express companies, pay the
license fee based on gross receipts and property. Accordingly, the scope of this advisory
opinion is limited to the license fee imposed by Code Section 12-20-50.

Questions

1. Q. What is the measure of the license fee base?
   A. The type of license fee a taxpayer pays depends upon the taxpayer’s type of
   business. The measure of the license fee is based upon either:
2. Capital stock and paid-in or capital surplus of the corporation as set forth in
   Code Section 12-20-50 or
3. South Carolina gross receipts from regulated business and property used in the
   conduct of business as set forth in Code Section 12-20-100.
4. Q. Who is subject to the license fee?
   A. Generally, every domestic corporation, every foreign corporation qualified to do
   business in South Carolina, and any other corporation required by Section 12-64910 to file an income tax return must file an annual report with, and pay a
   license fee to, the Department.
   The following organizations, companies, and associations are not subject to the
   annual report or the license fee requirements in Chapter 20 of Title 12 because of
   a specific statute, because they are not organized as a corporation and are not
   taxed under Subchapter C or S provisions of the Internal Revenue Code (see Code
   Sections 12-20-20, 12-20-110, and 12-6-4910), or because they do not have nexus
   with South Carolina:
5. A Limited Liability Company (“LLC) that is not taxed as a corporation. An
   LLC taxed as a corporation must file an annual report and pay a license fee.
6. A corporation whose only contact with South Carolina is registration with the
   Secretary of State (i.e., a foreign corporation is not doing business in South
   Carolina). In rare situations where a corporation that is legally qualified to do
   business in South Carolina is not doing business in South Carolina (i.e., it
   does not have nexus with South Carolina for license fee purposes), it should

2

notify the Department’s Corporate Section to avoid a computer generated
failure to file notification.

3. A nonprofit corporation organized pursuant to Chapter 31 (South Carolina
   Nonprofit Corporation Act of 1994) of Title 33 exempt from income taxes
   pursuant to Section 501 of the Internal Revenue Code of 1986.
4. A volunteer fire department and rescue squad.
5. A cooperative organized pursuant to Title 33 of the South Carolina Code.
6. A bank as defined in Code Section 12-11-10.
7. A savings and loan association as defined in Code Section 12-13-10.
8. An insurance company or association including any fraternal, beneficial, or
   mutual protection insurance company.
9. A foreign corporation whose entire income is not included in gross income for
   federal income tax purposes due to any treaty obligation of the United States.
10. Nonprofit corporations organized pursuant to Chapter 36 (Corporations Not
    for Profit Financed by Federal or State Loans) of Title 33 for the purpose of
    providing water supply and sewerage disposal or a combination of those
    services.
11. A homeowners association as defined in Internal Revenue Code Section
    528(c)(1).
12. Entities that are not organized as a corporation and are taxed under provisions
    of the Internal Revenue Code other than Subchapters C or S. Examples of
    exempt entities, if they are not organized as a corporation, include:
    a. Real estate investment trusts (“REITs”) as defined in Internal Revenue
    Code Section 856 and taxed under Internal Revenue Code Section 857 if
    organized as a trust under local law.
    b. Regulated investment companies (“RICS”) as defined in Internal Revenue
    Code Section 851.
    c. Real Estate Mortgage Investment Conduits (“REMICs”) as defined in
    Internal Revenue Code Section 860D.
    d. Political organizations as defined in Internal Revenue Code Section 527.

3

13. Public corporations. Municipalities and counties are considered to be public
corporations. A Redevelopment Commission formed under the Community
Development Law of Chapter 10 of Title 31 to redevelop certain blighted
areas is also considered a public corporation.

3. Q. How much is the license fee?
   A. The annual license fee is $15 plus $1 for each $1,000, or fraction of a $1,000, of
   capital stock (common and preferred stock) and paid-in or capital surplus of the
   corporation as shown by the records of the corporation on the first day of the
   taxable year in which the report is filed. The minimum license fee is $25.
4. Q. When is the license fee due?
   A. Except for the initial license fee, the license fee is due on or before the original
   due date for filing the annual report and is paid in advance of the taxpayer’s
   income tax year. For example, a calendar year taxpayer filing a 2004 corporate
   income tax return for the year ending December 31, 2004 on March 15, 2005, will
   include a license fee for the calendar year 2005 based on the capital stock and
   paid-in or capital surplus as of January 1, 2005 (this is almost always the same as
   the capital stock and paid-in or capital surplus amount reported on the December
   31, 2004 balance sheet.) An extension of time does not extend the time for paying
   the license fee due.
   Initial license fee. The initial license fee is $25 and is generally paid to the
   Secretary of State at the time the articles of incorporation or application for
   certificate of authority by a foreign corporation is filed with the Secretary of State.
   A corporation that does not register with the Secretary of State pays the initial
   license fee with the Department on or before 60 days after initially doing
   business, or using a portion of its capital in South Carolina. See Code Sections 1220-20, 12-20-30, and 12-30-40 for more information on the annual report and the
   initial license fee.
   Subsequent license fees. Subsequent license fees are imposed for the privilege of
   doing business in South Carolina and are paid a year in advance of the taxpayer’s
   income tax year. For example, the income tax return for the calendar year ending
   December 31, 2004 includes an annual license fee for the calendar year 2005.
   Subsequent license fees are due on or before the 15th day of the third month
   following the end of the taxpayer’s tax year, unless otherwise provided.
   Subsequent license fees are computed on the appropriate tax form, such as Part II
   of Form SC1120, “South Carolina C Corporation Income Tax Return,” or Form
   SC1120S, “S Corporation Income Tax Return.” See Code Section 12-20-20(B).

4

5. Q. What is the base of the fee?
A. The license fee is based on the capital stock and paid in or capital surplus on the
taxpayer’s applicable financial statement balances on the first day of the taxable
year the annual report is filed (this is almost always the ending balances on the
last day of the immediately preceding income tax year.) For example, a calendar
year taxpayer filing a 2004 corporate income tax return for the year ending
December 31, 2004 will include a license fee for the calendar year 2005, based
upon capital and paid in surplus as of January 1, 2005, which is almost always the
balance on December 31, 2004.
The terms “paid in or capital surplus,” “earned surplus,” and “applicable financial
statement” are defined in Code Section 12-20-50. These definitions are as
follows:

1. “Paid in or capital surplus” means the entire surplus of a corporation other
   than earned surplus including, but not limited to, amounts charged against
   earned surplus and credited to other surplus accounts, donated capital,
   amounts representing the increase in valuation of assets made upon a
   revaluation of the company’s assets, and amounts credited to any surplus
   account other than earned surplus as a result of a merger or acquisition
   regardless of whether the amount credited to the surplus account was
   transferred from an earned surplus account. See Code Section 12-20-50(A).
2. “Earned surplus” means that portion of the surplus of a corporation equal to
   the balance of its net profits, income, gains, and losses from the date of
   incorporation or from the latest date when a deficit was eliminated by
   application of its capital surplus, after deducting subsequent distributions to
   shareholders and transfers to stated capital and capital surplus to the extent
   that such distributions and transfers are made out of earned surplus. See Code
   Section 12-20-50(A).
3. The term “applicable financial statement” is defined in Code Section 12-2050(B). It is generally a statement required to be filed with the Securities and
   Exchange Commission or a certified audited balance sheet to be used for the
   purposes of a statement or report. See Code Section 12-20-50(B)(2) for other
   types of appropriate financial statements upon which to base the license fee if
   one of the above does not exist.
   The computation of the license fee is mechanical and straightforward once the
   accounting concepts for the balance sheet are understood. The balance sheet
   provides beginning and end of year balances for total assets, liabilities, and
   shareholder’s equity. Since retained earnings is not included in the computation of
   the license fee, the license fee base is determined by subtracting retained earnings
   from shareholder equity.

5

For accounting and tax purposes, shareholder’s equity is the sum of common
stock, preferred stock, additional paid in capital, retained earnings, and
adjustments less treasury stock. Note: The effect of treasury stock on the
computation of the license fee is sometimes misunderstood. Since for accounting
and tax purposes, shareholder’s equity has been reduced by the amount of
treasury stock, the computation of the license fee base does not include an “add
back” of treasury stock.

6. Q. Can a multistate business apportion its license fee?
   A. When a corporation does business partly within and partly without South Carolina
   or uses its capital partly within and partly without South Carolina, the license fee
   is apportioned using the same apportionment ratio used for income tax purposes.
   The $25 minimum license fee, however, may not be apportioned. See Code
   Section 12-20-60.
7. Q. How is the license fee computed for taxpayers filing a South Carolina
   “consolidated” (combined) return?
   A. Corporations meeting the requirements of Code Section 12-6-5020 are allowed to
   file a “consolidated” South Carolina income tax return that requires income and
   losses to be computed separately for each entity based on the proportion of
   business that each taxpayer conducts in South Carolina.
   When a consolidated return is filed, the license fee computation is as follows:
8. If the license fee is based on capital stock and paid in capital, then it is
   measured by the total capital and paid in or capital surplus of each corporation
   considered separately without offset for investment of one corporation in the
   capital or surplus of another corporation in the group. The minimum license
   fee of $25 applies to each corporation in the consolidated group. See Code
   Section 12-20-70.
9. Since the license fee is generally computed on the corporate income tax
   return, corporations filing a consolidated return should attach a schedule to the
   South Carolina income tax return filed in the name of the parent that shows
   the license fee computation for each entity participating in the consolidated
   return. A separate income tax return should not be filed to pay the license fee
   of each entity. One payment may be remitted to the Department for the total
   income tax and license fee liabilities of all entities participating in the
   consolidated return. Also, note that an annual report is required to be attached
   to the income tax return for each corporation included in the consolidated
   return.

6

8. Q. How is the license fee computed for a Qualified Subchapter S Subsidiary?
A. For tax purposes, South Carolina treats the assets, liabilities, income, and
deductions of a Qualified Subchapter S Subsidiary (QSub) as it is treated for
federal income tax purposes. Therefore, for South Carolina income tax, license
fee, and annual report purposes, a QSub is treated as a disregarded entity (i.e., for
South Carolina tax purposes, including the determination of nexus, the parent and
all QSubs will be treated as one entity; the parent and each QSub are not
considered separately for income tax, license fee, or nexus purposes.) Code
Section 12-2-25(B)(2).
Accordingly, the parent S corporation files a single SC Form 1120S, “S
Corporation Income Tax Return,” in the name of the parent; a separate SC1120S
is not filed for each entity. The parent computes the combined items of income,
deduction, credit, and capital stock base using the apportionment ratio(s) of the
entire entity (i.e., the separate attributes of each entity are disregarded.) Simply
stated, the items of income, deduction, credit, and capital stock of the QSubs are
treated as if the QSubs are divisions of the S Corporation, not subsidiaries.
For example, assume a calendar year parent operating in South Carolina makes
valid QSub elections; QSub 1 has 100% activity in South Carolina; QSub 2 has
0% activity in South Carolina; and the “combined” entity has a 40% South
Carolina apportionment ratio that is used for both income tax and license fee
purposes, and shows on its balance sheet capital and paid in surplus of $200,000.
(Note: The parent and each QSub do not compute and apply separate
apportionment ratios.) The South Carolina license fee for 2004 of $95 is
computed based on the capital stock and paid in or capital surplus of the entity as
of January 1, 2004 (this is the same amount shown on its December 31, 2003
balance sheet) as follows: $200,000 total capital stock and paid in or capital
surplus of the entity x 40% South Carolina apportionment ratio x .001 + $15.

9. Q. How is the license fee computed on initial returns?
   A. The initial license fee is $25. There is no proration of the license fee for short
   periods due to initial returns. Code Section 12-20-80(B).
10. Q. Is a license fee due on a final income tax return?
    A. A license fee is not due with a final income tax return since the license fee is paid
    a year in advance of the income tax year.
11. Q. Can the license fee be prorated for short taxable years?
    A. The license fee can be prorated for short tax periods due to a change in accounting
    period.

7

12. Q. How is the license fee prorated for a change in accounting period?
A. Code Section 12-20-80 provides for the proration of the license fee. This
computation is as follows:

1. If a corporation has a change in its accounting period that results in the filing
   of an income tax return for less than 12 months, then the license fee due with
   the short period return is prorated by dividing the annual license fee by 12
   months and multiplying the result by the number of months in the short
   period.
2. Each part of a month is considered a full month.
3. Any prorated license fee may not be less than $25.

Examples – Code Section 12-20-50 License Fee Calculation for Short
Periods
Examples best explain the calculation of the license fee imposed under Code Section 1220-50 for short periods. Unless otherwise indicated, the following examples assume:

1. The taxpayer is doing business solely in South Carolina (i.e., the South Carolina
   license fee apportionment ratio is 100%.)
2. The ending balances of the capital stock and paid-in or capital surplus accounts on the
   applicable financial statements are the same on the last day of the immediately
   preceding income tax year as the first day of the taxable year in which the annual
   report is filed.
3. In the rare situation where the capital structure on which the license fee is based is
   different from the capital reported on the applicable financial statement that is on
   Form 1120, “U. S. Corporation Income Tax Return,” Schedule L, “Balance Sheet Per
   Books,” the taxpayer should attach a schedule to the South Carolina tax return to
   support the license fee computation.
   Example 1: Change in Tax Year. The corporation is a calendar year corporation paying
   the license fee based on capital stock and paid in capital of $50,000. There is no change
   in the capital stock and paid in capital accounts during this time. In 2003, the taxpayer
   timely requests from the Internal Revenue Service a change in tax year to May 31st. It is
   important to remember that the license fee is paid a year in advance of the income tax
   year.
4. Full Year Computation - The corporation files a December 31, 2002, income tax
   return March 15, 2003, and pays a license fee of $65 for the calendar year 2003
   ($50,000 x .001 + $15).

8

2. Short Year Computation - The corporation has a change in accounting period and
changes its tax year end to May 31st. As a result, a short period income tax return for
January 1, 2003, through May 31, 2003, is filed August 15, 2003, along with a
prorated license fee of $27 based on the capital stock and paid in capital of the
corporation on June 1, 2003, of $50,000. The $27 license fee due with the short
period return is calculated as follows: ($50,000 x .001 + $15) x 5/12.
Note: The South Carolina income tax form does not provide for proration of the
license fee; a schedule must be attached to the income tax return computing the
prorated license fee. The license fee paid with the 2002 income tax return filed on
March 15, 2003, is not credited or refunded to the taxpayer.

3. Full Year Computation - The fiscal year corporation files an income tax return for the
   tax year ending May 31, 2004, on August 15, 2004, and pays a license fee of $65 for
   the fiscal year June 1, 2004 through May 31, 2005, based on $50,000 of capital as of
   June 1, 2004 ($50,000 x .001 + $15.)
   Example 2: Short Period Ends During the Month. The stock of Corporation X is
   acquired by Corporation Y on September 14, 2003. The corporations are all calendar year
   taxpayers. Corporation Y does not have nexus with South Carolina. For federal purposes,
   Corporation X is required to file two short period returns for the following periods: (1)
   January 1, 2003 through September 14, 2003 and (2) September 15, 2003 through
   December 31, 2003.
   Reminder: Code Section 12-20-80(A) provides that each part of a month is considered a
   full month for purposes of prorating the license fee (i.e., the license fee is not computed
   based on the number of days in a short period.)
4. Short Year 1 Computation – Time of Acquisition. On September 14, 2003,
   Corporation X is acquired and required to join the new consolidated group of
   Corporation Y. As a result, Corporation X files a short period income tax return for
   January 1, 2003 through September 14, 2003, on December 15, 2003, along with a
   prorated license fee of $536 based on the capital stock and paid in capital of the
   corporation on September 15, 2003, of $700,000, and the number of full and partial
   months in the short period. The $536 license fee due with the short period return is
   calculated as follows: ($700,000 x .001 + $15) x 9/12.
5. Short Year 2 Computation – New Consolidated Group Y. Corporation X’s tax year
   did not change as a result of change in ownership. Corporation X’s short period
   income tax return for September 15, 2003 through December 31, 2003, is filed March
   15, 2004, along with a prorated license fee of $330 based on the capital stock and
   paid in capital of the corporation on January 1, 2004 of $975,000, and the number of
   full and partial months in the short period. The $330 license fee due with the short
   period return is calculated as follows: ($975,000 x .001 + $15) x 4/12.

9

Example 3: Every Prorated License Fee Must be $25 or More. Based on a change
from a calendar year end to a fiscal year end of February, Corporation X files a 2 month
short period South Carolina income tax return for January 1, 2004 through February 29,
2004, on May 15, 2004. The corporation pays the license fee based on capital stock and
paid in capital of $95,000. There is no change in the capital stock and paid in capital
accounts during this time.
Short Year Computation - Corporation A files a 2 month short period South Carolina
income tax return for January 1, 2004 through February 29, 2004, on May 15, 2004,
along with a minimum prorated license fee of $25 based on the capital stock and paid in
capital of the corporation on March 1, 2004, of $95,000, and the number of full months in
the short period. Although the license fee due with the short period return is actually
calculated as $18 as follows ($95,000 x .001 + $15) x 2/12, the $25 minimum license fee
established in Code Section 12-20-50(A) must be paid.
Example 4: Statutory Merger. Corporation A and Corporation B are calendar year
taxpayers. Corporation A merges into Corporation B pursuant to a statutory merger
under an Internal Revenue Code §368(a)(1)(A) reorganization on October 31, 2003. For
federal income tax purposes, Corporation A must file a short period return for 10 months
and Corporation B, the surviving corporation, must file a full calendar year income tax
return. The South Carolina income tax return is due at the same time as the federal
income tax return.

1. Pre Merger Full Year - Corporation A and Corporation B each file an income tax
   return for the calendar year ended December 31, 2002, on March 15, 2003, and each
   pays a full year license fee for the 2003 calendar year.
2. Final Year Corporation A - Corporation A files a final income tax return for the year
   ended October 31, 2003, on January 15, 2004. The license fee is paid a year in
   advance of the income tax year; no license fee is due since this is Corporation A’s
   final income tax return. Further, no portion of the full year license fee paid for the
   2003 calendar year (see item 1 above) is refunded or credited to the taxpayer.
3. Full Year Corporation B - Corporation B, the surviving corporation, files an income
   tax return for the calendar year ending December 31, 2003, on March 15, 2004, and
   pays a full year license fee for the 2004 calendar year based on the capital stock and
   paid in capital of the entire merged corporation as of January 1, 2004.
   Example 5: Acquired Company is Required to Leave One Federal Consolidated
   Group and Join a New Consolidated Return Group; Acquiring Corporation Has
   Same Tax Year. Corporation A is a calendar year taxpayer which files a separate South
   Carolina tax return but is a member of a federal consolidated return group for the tax year
   January 1, 2002 through December 31, 2002. The license fee for the 2003 tax year is paid
   based on capital stock and paid in capital of $150,000. On February 28, 2003, the stock of
   Corporation A was purchased by an unrelated corporation. For federal income tax
   purposes, two short period returns are filed as a result of Corporation A’s departure from

10

the federal consolidated group – (1) a 2 month return for the period January 1, 2003
through February 28, 2003, where the taxpayer was included in the federal consolidated
group, and (2) a 10 month return for the period March 1, 2003 through December 31,
2003, where the taxpayer filed a separate corporate return. Code Section 12-6-4410
requires that a taxpayer’s tax year must be the same for South Carolina purposes as it is
for federal purposes; South Carolina also requires income tax returns and pro-rated
license fees be filed for the two short periods.

1. Full Year Computation – Pre Departure from Federal Consolidated Group.
   Corporation A files an income tax return for the calendar year ended December 31,
   2002, on March 15, 2003, and pays a license fee of $165 for calendar year 2003
   computed as follows: ($150,000 x .001 + $15).
2. Short Year 1 Computation – Period Included in Federal Consolidated Group. On
   February 28, 2003, the stock of Corporation A is purchased by an unrelated
   corporation. Because of Corporation A’s departure from the federal consolidated
   group, a short period consolidated federal return is required. As a result, Corporation
   A files a 2 month short period South Carolina income tax return for January 1, 2003
   through February 28, 2003, on March 15, 2004, along with a prorated license fee of
   $28 based on the capital stock and paid in capital of the corporation on March 1,
   2003, of $150,000, and the number of full months (2) in the short period. The $28
   license fee due with the short period return is calculated as follows: ($150,000 x .001
   + $15) x 2/12.
3. Short Year 2 Computation – New Ownership. Although Corporation A’s ownership
   changed, its tax year remained December 31st. Corporation A’s short period South
   Carolina income tax return for March 1, 2003 through December 31, 2003, is filed
   March 15, 2004, along with a prorated license fee of $138 based on the capital stock
   and paid in capital of the corporation on January 1, 2004 of $150,000, and the number
   of full months (10) in the short period. The $138 license fee due with the short period
   return is calculated as follows: ($150,000 x .001 +$15) x 10/12.
   Example 6: Acquired Company is Required to Leave One Federal Consolidated
   Group and Join a New Consolidated Return Group; Tax Year is Changed to
   Acquiring Corporations. Corporation A is a fiscal year taxpayer which files a separate
   South Carolina income tax return but is a member of a federal consolidated return group
   for the tax year April 1, 2002 through March 31, 2003. Its license fee for the period April
   1, 2003 through March 31, 2004 is based on capital stock and paid in capital of $300,000.
   On September 30, 2003, Corporation A was acquired by Corporation X; is required to
   join Corporation X’s consolidated federal return group; and is required to change it’s year
   end to December 31. Because of the federal consolidated rules, Corporation A files two
   short period returns – (1) a 6 month return for the period April 1, 2003 through
   September 30, 2003, and (2) a 3 month return for the period October 1, 2003 through
   December 31, 2003. Although South Carolina has not adopted the federal consolidated
   return rules, South Carolina Code Section 12-6-4410 requires that a taxpayer’s tax year
   must be the same for South Carolina purposes as it is for federal purposes; South

11

Carolina also requires income tax returns and pro-rated license fees be filed for the two
short periods. For purposes of this example, it is assumed that the capital stock and paid
in capital amounts increase as indicated.

1. Full Year Computation – Pre Acquisition. Corporation A files a March 31, 2003,
   income tax return on June 15, 2003, and pays a license fee of $315 for the fiscal year
   April 1, 2003 through March 31, 2004 ($300,000 x .001 + $15).
2. Short Year 1 Computation – Time of Acquisition. On September 30, 2003,
   Corporation A is acquired and required to join the federal consolidated group of
   Corporation X. As a result, Corporation A files a 6 month short period income tax
   return for April 1, 2003 through September 30, 2003, on December 15, 2003, along
   with a prorated license fee of $170 based on the capital stock and paid in capital of
   the corporation on October 1, 2003, of $325,000, and the number of full months in
   the short period. The $170 license fee due with the short period return is calculated as
   follows: ($325,000 x .001 + $15) x 6/12.
3. Short Year 2 Computation – Change to New Consolidated Group X’s Year End.
   Corporation A’s tax year changed to December 31st as a result of change in
   ownership. Corporation A’s short period income tax return for October 1, 2003
   through December 31, 2003, is filed March 15, 2004, along with a prorated license
   fee of $91 based on the capital stock and paid in capital of the corporation on January
   1, 2004, of $350,000, and the number of full months in the short period. The $91
   license fee due with the short period return is calculated as follows: ($350,000 x .001
   +$15) x 3/12.
4. Full Year Computation – Post Acquisition. Corporation A files an income tax return
   for the calendar year ended December 31, 2004 on March 15, 2005, and pays a
   license fee of $415 for the 2005 calendar year, based on its capital of $400,000 as of
   January 1, 2005. The $415 is calculated as follows: ($400,000 x .001 + $15).
   Example 7: Capital Contribution/Issuance of Common or Preferred Stock on the
   First Day of Tax Year. The stock of Corporation X is acquired by Corporation Y on
   September 30, 2004. Corporation X is required to join the new consolidated group of
   Corporation Y. Both corporations are fiscal year end October 30th taxpayers. Corporation
   Y does not have nexus with South Carolina. For federal purposes, Corporation X is
   required to file two short period returns for the following periods: (1) November 1, 2003
   through September 30, 2004 and (2) October 1, 2004 through October 31, 2004. On
   October 1, 2004, Corporation X issues 100,000 shares of preferred stock to Corporation
   Y thereby increasing the total capital stock and paid in capital of Corporation X from
   $700,000 to $800,000. Note: The capital structure on which the license fee is based (i.e.,
   the capital stock and paid in or capital surplus amount as of the first day of the taxable
   year (October 1, 2004) is greater than the capital reported in the applicable financial
   statement as of the end of the taxable year (September 30, 2004) that is on Form 1120,
   “U. S. Corporation Income Tax Return,” Schedule L, “Balance Sheet Per Books.”

12

Accordingly, a schedule reflecting the October 1, 2004 balance and the reasons for the
difference should be attached to South Carolina Form 1120.

1. Short Year 1 Computation – Time of Acquisition. On September 30, 2004,
   Corporation X is acquired and required to join the new consolidated group of
   Corporation Y. As a result, Corporation X files a short period income tax return for
   November 1, 2003 through September 30, 2004, on December 15, 2004, along with a
   prorated license fee of $747 based on the capital stock and paid in capital of the
   corporation on October 1, 2004, of $800,000 (not $700,000), and the number of full
   months in the short period. The $747 license fee due with the short period return is
   calculated as follows: ($800,000 x .001 + $15) x 11/12.
2. Short Year 2 Computation – New Consolidated Group Y. Corporation X’s tax year
   did not change as a result of change in ownership. Corporation X’s short period
   income tax return for October 1, 2004 through October 31, 2004, is filed January 15,
   2005, along with a prorated license fee of $68 based on the capital stock and paid in
   capital of the corporation on November 1, 2004 of $800,000, and the number of full
   months in the short period. The $68 license fee due with the short period return is
   calculated as follows: ($800,000 x .001 + $15) x 1/12.

SOUTH CAROLINA DEPARTMENT OF REVENUE

s/Burnet R. Maybank III
Burnet R. Maybank III, Director

July 12
, 2005
Columbia, South Carolina

13