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GT Attorneys Secure Targeted Job Tax Credits

November 1999

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The Office of the Solicitor General recently announced that it would not pursue an appeal of the taxpayer’s victory in Perdue Farms, Inc. v. United States, 1999 U.S. Dist. Lexis 10774, 99- 2 U.S. Tax Cas. (CCH) ¶50,659 (D. Md., June 14, 1999). This left standing the District Court’s opinion which held that an employer can be allowed Targeted Jobs Tax Credits despite the fact that the state agencies failed to issue certifications.

In 1978, Congress enacted the Targeted Job Tax Credit ("TJTC") to encourage businesses to hire members of certain economically disadvantaged groups with chronically high rates of unemployment. 26 U.S.C. §51(d)(1)(A)-( J) (amended 1993). An employer employing an individual from a targeted group was provided a tax credit of forty percent of the first $6,000 of wages paid to that employee. In each state, local agencies assigned by the Department of Labor were authorized to certify that an employee was a member of a targeted group. Certification of each individual was to be requested or received by the employer claiming the credit by the first day of employment. The TJTC program expired in December, 1994 and in April, 1995, the Department of Labor instructed the local agencies to cease all processing activities by the end of September, 1995. At the conclusion of the program, there was a large backlog   of requests for certification that the designated local agencies had not processed.

During the years at issue, Perdue Farms, Inc. ("Perdue") filed certification requests for thousands of its employees in Maryland, North Carolina, Virginia and other states. In September, 1995, Perdue was left with 2,362 employees for whom the local agencies failed to act. In 1996 Perdue filed claims for refund of federal corporate income tax based on TJTC claims for these individuals in the amount of $2,122,758. Treasury Regulation §1.51-1(d) imposes a requirement not found in the statute that the employer must receive a certification before TJTC can be claimed. The Internal Revenue Service, relying on Treasury Regulation §1.51- 1(d), disallowed the claim for the sole reason that Perdue did not receive certifications from the local agencies.

In Perdue, the first case in which this issue was litigated, Greenberg Traurig’s team, consisting of members of the Tax and Governmental Affairs Departments, filed a motion for summary judgment arguing that there were no issues of fact and that Perdue was entitled to judgment as a matter of law. The Government cross-moved for summary judgment, agreeing that there were no factual disputes, but contending that the law required that certifications be issued by the applicable local agency   before a TJTC claim could be considered. The United States District Court for the District of Maryland granted summary judgment in favor of Perdue, ruling that the Internal Revenue Service’s disallowance of the TJTC to a business which did not receive certification as a result of the cessation of processing activities by a local agency was contrary to the intent of Congress in establishing the TJTC, and that to the extent the regulation required certification, it was void as contrary to this congressional intent. The Court granted judgment in favor of Perdue for $2,122,758 plus interest, which is at least another $1,000,000.

The Decision

The court analyzed the intent of Congress in enacting the TJTC. It found that the concern of Congress was to employ individuals from certain targeted groups and to establish a certification system with as little possible audit expense and uncertainty in order to encourage employers to participate in the TJTC program. The court held that "[t]he government’s argument in this case turns the statute on its head by using the certification provision in an attempt to block the credit." The court found the government’s position troubling in light of the undisputed fact that Perdue did everything it had to do with regard to the certifications and the only thing keeping Perdue from receiving the certificates was the government shutdown of the program. In granting summary judgment in favor of Perdue, the court opined that "the government is attempting to deny Perdue the credit for employing 2,362 of these individuals by perverting the certification system adopted to advance the Program’s goals of increasing employment rates among the targeted groups. The government’s actions are contrary to the clear intent of Congress."

After the Decision

After the court’s opinion, Greenberg Traurig’s team began an intense legislative effort to have Congress reaffirm its intent, as set forth in the Perdue decision. As a result of this effort, the Government changed its position in two key ways. First, it dismissed the appeal it had filed with the U.S. Court of Appeals for the Fourth Circuit. Second, the Service has now pledged to issue guidelines to examining agents for use in evaluating pending TJTC claims where there was no certification. Greenberg Traurig is working with the Department of the Treasury and a number of new clients to develop these guidelines, which should be available shortly.

 

© 1999 Greenberg Traurig


This GT ALERT is issued for informational purposes only and is not intended to be construed or used as general legal advice. Greenberg Traurig attorneys provide practical, result-oriented strategies and solutions tailored to meet our clients’ individual legal needs.