US coal companies may be owed tax refunds by the federal government to the extent they export coal

US coal companies may be owed tax refunds by the federal government to the extent they export coal

March 01, 1999 | By Keith Martin in Washington, DC

The government collects excise taxes of $1.10 a ton on coal from surface mines and 55¢ a ton on coal from underground mines.  A federal district court said recently that the tax is unconstitutional to the extent it applies to coal that is exported.  The “export clause” of the US Constitution bars the federal government from interfering with exports from the states.  The federal government is expected to appeal.

Pittston Companies, which was the plaintiff in the case, was awarded $678,948 for taxes on export sales during just one quarter in 1997.

AN INTERESTING TAX ANGLE...A foreign corporation contributed securities on which it had a loss to its US subsidiary.

This let it claim the loss in its home country.  However, the US treated the transfer as a capital contribution.  Thus, the US subsidiary took a carryover basis in the securities.  It sold the securities later and claimed a loss on its US return.

The IRS discussed the transaction in an old “field service advice” that was released to the public in early March.  It considered whether to try to invoke US transfer pricing rules in section 482 to deny the US tax loss, but decided against it.  It suggested to the IRS agent who had raised the issue that he try to “settle this case on the best basis possible or concede the case if necessary,” unless he could prove the transaction was purely tax motivated. “[I]t may be that distortion will have to be tolerated in certain circumstances in order to achieve proper results in the vast majority of cases.”

THE IRS IS STILL TARGETING DEBT-EQUITY SWAPS involving foreign government debt.

An example of a swap is where a US company buys government debt issued by a Latin American government at a discount to face value in the market.  It then trades the debt for shares in a utility that the government has put up for sale in a privatization.  If the US company is credited with greater value in the trade than it paid in the market for the government bonds, then the IRS will require that tax be paid on the gain.

The IRS lost a case in September 1997 called GM Trading involving a swap of Mexican government debt for pesos to be used by a maquiladora.

The IRS released a “field service advice” last month in which it rejected a refund claim from a company with similar facts to the taxpayer in GM Trading.  The agency said it disagrees with the decision in GM Trading.  It also cited another argument it plans to use in litigation with the taxpayer seeking the refund that it had not used in GM Trading.  The taxpayer appears to have had its US parent buy the Mexican government debt.  The parent then contributed it to a Mexican subsidiary before the swap with the Mexican government.  The US collects toll charges whenever appreciated property is transferred offshore.  Thus, even if the swap did not trigger a tax, the IRS intends to argue that the outbound transfer of the debt instruments did.

FLORIDA SAID SALES TAXES DO NOT HAVE TO BE PAID on equipment for a gas-fired power plant.

A private contractor is building the plant for a municipal utility.  The state exempts from sales taxes equipment used to produce electricity or steam, but there are two conditions.  First, the boiler fuel must not be a residual oil.  Second, the electricity or steam must be “primarily used in manufacturing . . . tangible personal property for sale.” The state appears to have decided in this case that steam will be used to manufacture electricity — an item of “tangible personal property.” The Department of Revenue said, “It is the established position of the Department that the electrical energy is the tangible personal property that is produced for sale.” The advice is in a technical assistance advisement issued in December.

Keith Martin