Was the South Carolina minority-business income-tax credit applied separately to each eligible subsidiary in a consolidated return, or once to the consolidated group as a whole?

Plain-English summary

South Carolina Private Letter Ruling 89-17 held that the minority-business income-tax credit was calculated separately for each eligible subsidiary in a consolidated corporate return, rather than once for the consolidated group as a single entity.

Each qualifying subsidiary could claim the lesser of:

• $25,000 annually; or
• that subsidiary's allocated share of the consolidated South Carolina tax liability.

But separate treatment did not make every group member eligible. Only the corporation holding the state contract could claim the credit. Each corporation also had its own five-year credit period, and unused credit could not be carried forward.

The credit described in the ruling

Section 11-35-5230 allowed a firm with a state contract to claim an income-tax credit equal to 4% of payments to certified minority subcontractors for work under that contract.

The statute limited the credit to $25,000 annually and allowed a firm to claim it for five years beginning when the first credit was claimed.

XYZ, a parent corporation and general contractor, filed a consolidated South Carolina income-tax return with its subsidiaries. It asked whether the credit limits applied separately to the subsidiaries or only once to the consolidated earnings of the group.

Why each subsidiary was treated separately

The Commission read the statutory word "firm" to include a business enterprise or a separately identifiable business unit within a larger organization, such as a subsidiary. It also said the Legislature intended to promote the use of minority firms and intended the benefit to extend to each subsidiary.

The ruling relied on Emerson Electric Co. v. Wasson, where the South Carolina Supreme Court interpreted the Legislature's use of the plural "taxpayers" to mean that corporations filing consolidated returns were not a single entity.

The Commission therefore applied the credit and its limitations separately to each subsidiary.

How the tax-liability cap worked

A subsidiary could not use the separate $25,000 limit to claim more credit than its own share of the consolidated tax liability.

The ruling allocated consolidated tax under Internal Revenue Code section 1552(a)(1), using each subsidiary's South Carolina taxable income relative to the taxable income used for the allocation.

Its example assumed:

• Corporation A had $100,000 of South Carolina taxable income.
• Corporation B had $900,000.
• Corporation C had a $300,000 loss.
• Consolidated taxable income was $700,000, producing $35,000 of South Carolina tax.

The ruling allocated 10% of the tax, or $3,500, to A and 90%, or $31,500, to B. It allocated none to loss corporation C. Assuming each otherwise qualified, A's credit was limited to $3,500, B's to $25,000, and C could not claim a credit.

Other limits the ruling imposed

The state-contract holder had to claim

Only the member of the consolidated group with the state contract was eligible. A related corporation could not claim merely because it joined the same consolidated return.

Each corporation had its own five-year period

The five-year period began when that corporation first claimed the credit.

Unused credits did not carry over

If the annual credit exceeded the subsidiary's allocated tax liability or the statutory cap, the unused amount could not be carried forward.

Related-party transfers would be scrutinized

The Commission said related corporations and consolidated groups would be examined closely for transfers of contracts, business opportunities, or assets designed to avoid the credit limits.

What this means for you

Consolidated corporate groups

PLR 89-17 separated credit eligibility and limits by legal entity even though the corporations filed one consolidated return.

Government contractors

Identify which corporation actually holds the state contract and pays the certified minority subcontractor. Group membership alone did not establish eligibility.

Corporate tax departments

Allocate consolidated tax liability before applying an entity's credit ceiling. The ruling capped each subsidiary at both $25,000 and its own allocated liability.

Readers applying the ruling today

PLR 89-17 interpreted a 1989 credit statute. Current credit availability, certification rules, limits, carryovers, consolidated-return treatment, and allocation methods must be checked under current law.

Common questions

Q: What percentage of qualifying payments generated the credit?

A: Four percent of payments to certified minority subcontractors for work under a state contract.

Q: What was the annual dollar limit?

A: $25,000 per eligible entity, further limited by that entity's allocated tax liability.

Q: Could every subsidiary in the consolidated group claim?

A: No. Only the company with the state contract was eligible.

Q: How long could an eligible corporation claim the credit?

A: Five years beginning when it first claimed the credit.

Q: Did unused credit carry over?

A: No.

Q: Can another consolidated group rely on PLR 89-17?

A: No. The ruling says it applied only to XYZ's facts, had no precedential value, and was not intended for distribution.

Citations and references

• S.C. Code section 11-35-5230 (1976) — minority-business income-tax credit
• S.C. Code section 11-35-5010 (1976) — minority-firm definition referenced by the credit provision
• Internal Revenue Code section 1552(a)(1) — consolidated tax-liability allocation method
• S.C. Code section 12-3-170 (1976) — PLR authority
• Emerson Electric Co. v. Wasson, 287 S.C. 394, 339 S.E.2d 118 (1986) — corporations filing consolidated returns remained separate taxpayers
• 73 Am. Jur. 2d, Statutes, section 275 — strict-construction principle quoted in the ruling

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR89-17.pdf

Original ruling text

SC PRIVATE LETTER RULING #89-17

TO:

XYZ

SUBJECT:

Minority Business Credit
(Income Tax)

REFERENCE:

S.C. Code Ann. Section 11-35-5230 (1976) (Law. Co-Op. 1976)

AUTHORITY:

S.C. Code Ann. Section 12-3-170 (Law Co-Op. 1976)

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 distribution.

Question:
May the Minority Business Credit (S.C. Code Section 11-35-5230) be applied against the
earnings of each subsidiary before consolidation or is the credit's application limited to the
consolidated earnings of the parent corporation and subsidiaries as a whole?
Facts:
XYZ (parent corporation and general contractor) files an annual South Carolina income tax
return on a consolidated basis with its subsidiaries. For purposes of applying the Minority
Business Credit, XYZ has requested an interpretation of Section 11-35-5230.
Discussion:
S.C. Code Section 11-35-5230 provides in pertinent part:
(B) (1) Firms with state contracts that subcontract with minority firms shall be
eligible for an income tax credit equal to four percent of the payments to minority
subcontractors for work pursuant to a state contract. Such subcontractors must be
certified as to the criteria of a minority firm as defined in Section 11-35-5010 of
this code and any regulations which may be promulgated thereunder.
(2)The tax credit is limited to a maximum of twenty-five thousand dollars
annually. A firm shall be eligible to claim a tax credit for a period of five
years from the date the first income tax credit is claimed.

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The term "firm" as used in this statute is defined by Webster's Third New International
Dictionary as "a business unit or enterprise". A unit is defined by Webster's as "a member of an
aggregate that is the least part to have a clearly definable separate existence and normally a basic
element of an organization within an aggregate". The above definitions lead one to conclude that
the word "firm" utilized in Section 11-35-5010 was intended to mean a business enterprise or a
business unit of a larger organization such as a subsidiary. The Legislature intended to promote
the use of minority firms. We conclude that the Legislature intended to extend this benefit to
each subsidiary.
With respect to the construction of statutes:
"Although a strict construction is a narrow construction and the statute may not be
extended by implication or inference, the construction should not be unduly
technical, arbitrary, severe, artificial, or narrow. The words used need not be
given any meaning other than their full meaning, where such construction is in
harmony with the context. A strict construction permits the words to be read
naturally.
73 Am. Jur. 2d, Statutes, Section 275.
Section 11-35-5230, when given its full meaning, should be read as allowing a maximum credit
of $25,000 per entity. A narrow reading would require an implication or inference which would
be unduly technical and narrow.
This position is supported by the South Carolina Supreme Court's determination of the effect of a
consolidated return on the separate taxpayers. In Emerson Electric Co. v. Wasson (1986) 287
SC 394, 339 SE2d 118 the court stated:
The legislature's use of the plural "taxpayers" instead of taxpayer indicates that
corporations filing consolidated returns are not to be considered a single entity.
It should be noted that this Supreme Court decision overturned a decision of the Court of
Appeals. The Court of Appeals had concluded that the consolidated entities should to considered
as one or homogenized. Emerson v. Wasson (1984, SC App) 332 SE2d 671.
The credit for each subsidiary in the consolidated return is limited to the lesser of $25,000
annually or the subsidiary's tax liability. The tax liability on the consolidated return must be
allocated to each subsidiary based on the taxable income allocation method provided in Internal
Revenue Code Section 1552(a)(1). Under this method the consolidated tax liability is allocated
based on a ratio of each subsidiary's South Carolina taxable income to total South Carolina
taxable income of all corporations in the consolidated return.
Example: A, B, and C file a consolidated return. A has S.C. taxable income of
$100,000, B has S.C. taxable income of $900,000, while C has a loss of $300,000
resulting in a consolidated S.C. taxable income of $700,000. The S.C. tax would

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be $35,000. Under the allocation formula 10% (100,000 divided by 1,000,000) of
the tax or $3,500 is allocated to A and 90% (900,000 divided by 1,000,000) of the
tax or $31,500 is allocated to B. No part of the consolidated tax liability is
allocated to C since C had no taxable income. Thus, assuming that each
corporation would otherwise qualify for the credit, A's minority business credit is
limited to $3,500, B's credit is limited to $25,000 and C would not be eligible for
the credit.
The only member of the consolidated group eligible for the credit is the company with the state
contract. Each corporation is also limited to five years of credits and there is no carryover of
unused credits. The five year period begins with the date the first credit is claimed. As a result
of the limitations on the credit, related corporations and corporations filing a consolidated return
will be examined closely to ensure there are no transfers of contracts, business opportunities or
assets to avoid the credit limitations.
Conclusion:
Therefore, each subsidiary is entitled to the Section 11-35-5230 credit and the credit limitations
are applied separately to each subsidiary.

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
September 13
1989

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