Ruling Request No. 2005-01

Request for Ruling Regarding the Application of the Jobs Development Act as Amended

On behalf of your client, New company B, you request a Declaratory Ruling regarding certain provisions within the Rhode Island Jobs Development Act ("the Jobs Act") and more specifically, the Jobs Act as amended through Public Laws of 2004, Chapters 333 & 396 ("the Amendment"). This request is made pursuant to the provisions of §42-35-8, RIGL, 1956 (as amended) as well as Regulation DR94-01 of the Rhode Island Division of Taxation

Relevant Parties

Old Company A was the parent of various subsidiaries of which Old company A owned 80% or more ot the outstanding common stock (herein Old Company A and all its 80% or more owned subsidiaries will collectively be referred to as "Company A")

Company B is the parent of various subsidiaries some of which Company B owns 80% or more of the outstanding common stock. They will collectively be referred to as "Old Company B".

"New Company B" will refer to the post-acquisition group including Old Company B and Company A.

Company A's Rhode Island operations enabled it to take advantage of the tax rate reduction contained within the Jobs Act. Specifically, Company A had established "base employment" of ___FTE's (full time equivalent active employees) as of July 1, 1996. Its "adjusted current employment" as of December 31,1999 was ___FTE's. Therefore, Company A's intial new employment level is____units. Company A has maintained at least____ units of new employment through December 31, 2003. As result, Company A has enjoyed a Rhode Island tax rate of a certain percentage for several taxable years including 2003. The Rhode Island Division of Taxation (herein RIDOT) has verified the Company A tax rate through aduit.

Old Company B acquired all the business of Company A through a tax-free acquisition immediately followed by merger of Company A into Old Company B. Altough Old Company B did not enjoy any tax rate reduction under the Jobs Act, Old Company B did have _____FTE's within Rhode Island as of December 31, 2003. Pursuant to the integration of Old Company B and Company A, New Company B experienced a staffing reduction such that is units of new employment for the taxable year 2004 fell below_____units. Consequently, New Company B is required to compute and pay applicable taxes as though the Jobs Act did not apply for taxable year 2004 pursuant to RIGL §42-64.5-7(a)(4).

The Jobs Act was amended in 2004 through Public Laws of 2004,Chapters 333 and 396. This amendment set up certain conditions under which the resulting company of a business reorganization could maintain any rate reduction obtained prior to the reorganization or have a rate reduction restored that was lost as a result of the reorganization.

Declaratory Ruling Requested

Please confirm that in order to claim the company A tax rate reduction,New Company B must achieve___FTE's by December 2006. In addition,New Company B's units of new employment must maintain a daily average of at least_____FTE's for a twelve-month period (chosen by New Company B) that includes December 2006. Finally, in order to maintain the Company A tax rate reduction, New Company B must maintain at least______units of new employment for each taxable year ending after 2006.

Discussion

In accordance with RIGL sections 42-64.5-2(5),42-64.5-2(6)and 42-64.5-7

Company A and Old Company B qualify as eligible companies because each is a corporation.

Each Company A and Old Company B subsidary of which 80% of more the outstanding stock is owned by their respective parents is an eligible subsidiary

New Company B is a "resulting company" because (1) Old Company B acquired all of the business of Company A to form New Company B, (2) Company A had previsouly established a base employment date, and (3) new Company B elects to have RIGL§ 42-64.5-7 apply.

Old Company B, because it was in existence prior to the aquisition date,and Company A are each considered a combining company.

Company A is a "reference company" because it had a previously established base employment date, while the Old Company B did not.

The Jobs Act was amended in 2004 to address business reorganizations and it appears that the purpose was to ensure that in a merger, the surviving entity is neither benefited nor penalized as it pertain to the Job Act.The amendment also recognized that there would be a transition period in such a merger where Rhode Island employment levels would decrease to a level which would cause the resulting company to become ineligible for the established reduced rate under the Job Act. The amendment requires the resulting company to pay taxes at the normal rate but gives it almost three years to raise employment and if successful, be granted the original rate reduction going forward and a refund in accordance with section 42-64,5-7(a)(4)(i) and (ii). The computations relevant to a combination are governed by RIGL§42-64.5-7(a)(2).

The resulting company may claim a rate reduction, and the base employment of the resulting company shall be the base employment of the reference company [i.e. Company A's_______FTE's] plus, for each other combining company, the greatest of:(i)if the combinig company had a previously established base employment date, its base employment [i.e.N/A;(ii) base employment determined as of the base employment date of the reference company[i.e.Old company B group had 0 Rhode Island FTE's on such date]; and (iii) its adjusted current employment for its most recently completed taxable year [i.e.,Old Company B's______FTE's]. The initial new employment level of the resulting company shall be the inital new employment level of the reference company [i.e.Company A's_____units]plus, for each other combining company,the greaterof: (i) the combining company's previously established initial new employment level [i.e.],if any;and (ii) its adjusted current employment for its most recently completed taxable year [i.e.,Old Company B's____FTE's]. (author's inserts in [])(emphasis added)

To summarize, New Company B's base employment would be computed by addding Company A's base employment of______FTE's to Old Company B's adjusted current employment as of 12/31/2003 of______FTE's for a total of____FTE's.Furthermore, New Company B's intial new employment level would be computed by adding Company A's initial employment level of____units to Old Company B's adjusted current employment as of 12/31/2003 of____FTE's. Thus,under a literal reading,New Company B's initial new employemnt level will be___units,a result which is arrived at by adding units together with FTSE's. this result would punish a merging company by requiring them to add 50 employees for every employee they had prior to the merger, In theory, after a merger, a company would have to add zero employees if it had none in Rhode Island to begin with but would have to add 1,500 employees if they happened to have 30 employees prior to the merger. This conclusion is illogical. Due to the fact that you cannot add "apples + oranges"(units +FTE's) the result would be expressed as a total of____units plus____FTE's. This is also unworkable because the statute speaks in terms of units.

Furthermore, in order to meet the restoration condition as detailed in RIGL§ 42-64.5-7(a)(6), New Company B will have to meet two tests:

First "by the last month of the second taxable year beginning after the combination [i.e.December 2006], the resulting company's units of new employment equals or exceeds its initial new employment level [i.e.,New Company B's____units or____units +___FTE's;

Second, "for a twelve month period...that includes the last month of the second taxable year beginning after the combination [i.e.December 2006], the resulting company's adjusted current employment (measured over such twelve-month period) equals or exceeds its initial new employment level [i.e.New Company B____units or____units+___FTE's.

The first test mirrors the problem addressed above. The second test is another example of confusion caused by the use of the term "initial new employment level." Under the second test the combining companies "adjusted current employment,"by definition expressed as FTE's, must equal or exceed its initial new employment level__a term expressed in units. If the legislature meant this term to always be expressed units, there is no logical reason for this test. In the case of New Company B, they would need to have only___or___employees to meet this test.

The only logical conclusion is that the units of employment are still used to determine the amount of rate reduction but in order to be compared or added to terms that are expressed in FTE's, they must coverted back to the FTE count that resulted in the units of employment.

Ruling

Based upon the facts presented and representations made in the request for ruling and accompanying documents, the following ruling is made.

New Company B's base employment would be Company A's base employment of___FTE's plus Old Company B's____FTE's as of December 31, 2003 for a total of___FTE's.

Furthermore, New Company B computes its initial new employment level by adding Company A new employment FTE count (___), that resulted in its initial new employment level, to Old Company B's FTE count (___) as of December 31,2003 and, to convert back to units, dividing by 50 and rounding down. Therefore,New Company B's initial new employment level is ____(___/50 and rounded down).

In addition, the restoration condition will be met if the following two conditions are met:

1. By December 31, 2006,New company B's units of new employment equals or exceeds its initial new employment level(____). New Company B's units of new employment are determined by subracting its base employment (_____)from its adjusted current employment, dividing by 50 and rounding down. Therefore, New Company B would need a minmum adjusted current employment of_____FTE's to satisfy this condition.

2. For a twelve-month period that includes December 31, 2006, New Company B's adjusted current employment meets or exceeds its new employment level.

In order to complete this comparison, New Company B's initial new employment level be converted to the FTE count it represents and added to the base employment level. This results in an initial in an new employment level expressed as FTE's of_____.

Therefore, New Company B would have to have minimum adjusted current employment of____FTE's for a twelve month period including December 31, 2006.

After December 2006, New Company B would have to maintain_____units of new employment (expressed as FTE's_____)for each taxable year or the rate reduction will expire permanently.

R. GARY CLARK

TAX ADMINISTRATOR

JUNE 22, 2005