Technical Assistance Advisory No.88-011R Re: This Technical Assistance Advisory Supersedes TechnicalAssistance Advisory 88-011, Which Is Of No Further Effect. WaiverBy Partners Of Credit Which Might Pass Through A Partnership To ItsPartners Under The West Virginia Capital Company Act Tax DepartmentTechnical Assistance Advisory No. 88-006 states that the WestVirginia capital company credit carries back three (3) years, and fora partnership would apply against the taxes enumerated in Section11-13C-5(c) through (i) of the West Virginia Code for which thepartnership would be liable, and would pass through to the partnersand apply against their personal income tax liability for incomearising from the partnership. The credit carryback would be taken bythe filing of amended tax returns by the partnership. The TaxDepartment has received a request for an advisory as to whether thepass through of the credit to the partners of a partnership thatinvests in a West Virginia capital company is mandatory. Section5E-1-8 of the West Virginia Code provides that "the credit forinvestment by a partnership or by a corporation electing to betreated as a Subchapter S Corporation may be divided pursuant toelection of partners or shareholders." The Tax Department has beenasked whether this language may be interpreted to mean that thepartnership does not have to pass the tax benefits through to theindividual partners, but instead may retain whatever tax benefitsarise out of an investment for application against taxes imposed uponthe partnership itself. Section 5E-1-8(c) of the West Virginia Codereads as follows: (c) Any investor, including an individual,partnership or corporation who makes a capital investment in aqualified West Virginia capital company is entitled to a tax creditequal to fifty percent of the investment. The credit allowed by thisarticle shall be taken after all other credits allowed by chaptereleven of this code. It shall be taken against the same taxes and inthe same order as set forth in subsections (c) through (i), sectionfive, article thirteen-c, chapter eleven of this code.The credit for investments by apartnership or by a corporation electing to be treated as aSubchapter S corporation may be divided pursuant to election ofpartners or shareholders.(Emphasis added.) The last sentence of this subsection permits thepartners of a partnership or shareholders of an S corporation toallocate the credit available to a partnership or S corporation amongthemselves and the partnership or S corporation in any proportionthey may wish. This provision in essence makes the pass through ofcredit discretionary and not mandatory because the partners mayallocate the entireavailable credit to the partnership (and S corporation shareholderslikewise to the S corporation) so that the credit would be availableonly to the partnership or S corporation, and not to the partners orshareholders. The partners or shareholders may also, under thisprovision, allocate the entirecredit to the partners and shareholders, and no part of the credit tothe partnership or S corporation. Although subsection 5E-1-8(c)specifically mandates that the credit shall betaken against the taxes and in the order of the taxes set forth inSection 11-13C-5(c)-(i) of the West Virginia Code, all this languagesays is that if one has allowable credit, here is how it must beapplied. The last sentence of subsection 5E-1-8 governs to whomcredit is allowable. In other words, this mandatory sequence isapplicable to the taxpayer only after the initial credit allocationdescribed above occurs. Thus, if no credit were available to partnersor S corporation shareholders, by reason of the preliminaryallocation of all credit to the partnership or S corporation, thenthe section 11-13C-5(c)-(i) prioritization would apply only to thepartnership or S corporation. Conversely, if the partners andshareholders were the exclusive recipients of the credit under thepreliminary allocation, then only they, and not the partnership or Scorporation, would take the credit subject to the section11-13C-5(c)-(i) prioritization. If the preliminary credit allocationis in specified dollar amounts to both the partnership and itspartners, or the S corporation and its shareholders, then the creditwould be subject to the Section 11-13C-5(c)-(i) prioritization. Inthis latter instance, credit would first be taken by the partnershipor S corporation against the applicable Section 11-13C-5(c)-(i)taxes, and would then flow through to the partners or shareholdersand be applicable to the remaining section 11-13C-5(c)-(i) taxes forwhich the partners or shareholders would be liable. The partners, orS corporation shareholders, can still elect to avoid pass through tothem of the unused portion of credit allocated to the partnership, orS corporation. Unless this election is affirmatively made, the unusedportion allocated to the partnership, or S corporation, will passthrough to the partners, or S corporation shareholders. Refunds oftax to the partnership or S corporation arising from the carryback ofthe credit will constitute current period income for the partners orS corporation shareholders as a pass through from the partnership orS corporation, rather than income which would require filing ofamended personal income tax returns by each partner or S corporationshareholder for the carryback years. Section 5E-1-8(d) of the WestVirginia Code reads as follows: (d) The tax credit allowed underthis section is to be credited against the taxpayer's tax liabilityfor the taxable year in which the investment in a qualified WestVirginia capital company is made. If the amount of the tax creditexceeds the taxpayer's tax liability for the taxable year, the amountof the credit which exceeds the tax liability may be carried back ormay be carried forward in accordance with the provisions of sectionforty-six (b) of the Internal Revenue Code of 1954 [now I.R.C.§

172]. Because subsection 5E-1-8(d)states that the credit may becarried back, the Tax Department interprets this language to meanthat the taxpayer may elect to either carry the credit back and thenforward or to only carry it forward. If the partners of thepartnership or S corporation shareholders choose to forgo the creditcarryback for the partnership or S corporation, thereby avoiding thecomplexity of filing amended tax returns for the partnership, theymay do so. This election once made, cannot be revoked, and thepotential tax benefits which would be available from the creditcarryback will be lost. ___________________________________ MichaelE. Caryl State Tax Commissioner Date: December 9, 1988