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Technical Assistance Advisory No. 88-009 Re: Leases Of Natural Resource Reserves Capable Of Ten Years Sustained Production Are Qualified Investment For Business Investment And Jobs Expansion Tax Credit Recently the State Tax Department has received a request for a determination that a certain lease of natural resources with a primary term of five years, and five year extensions available until exhaustion, is a qualified investment under the Business Investment and Jobs Expansion Tax Credit Act, as amended, where the leased natural resources are capable of sustained production for a period in excess of ten years. Section 11-13C-6(c)(7) of the West Virginia Code sets forth the requirements of the West Virginia supercredit statute with regard to leases or purchases of natural resources in place. Although Section 11-13C-6(c)(3)(A) of the West Virginia Code requires that leases of realty have a primary lease term of at least ten years, the specific requirements of Section 11­13C­6(c)(7), as they apply to natural resources supersede the general requirements of Section 11-13C-6(c)(3)(A). Section 11-13C-6(c)(7) reads as follows: (7) Natural resources in place. - In the case of natural resources in place, the property must be capable of sustained production for a period of at least ten years. If this qualification is met, then the qualified investment is one hundred percent of the purchase price of the natural resource in place that is attributable to ten years of production, but not more than twenty years of production. If such price is not quantifiable at the time the mining operation is placed into production, cost shall be determined annually and shall be the amount of royalties actually paid to the owner of the natural resource in place during each year for a total period of ten years. The amount of such royalties multiplied by the taxpayer's new jobs percentage (determined at the time the mining operation is placed in service or use) divided by ten establishes the credit allowable each year for ten successive years beginning with the year in which the royalties were paid. If a lease or a set of leases for mineral property encompasses a sufficient quantity of natural resources in place to sustain continuous production for a period of ten years, then such lease or leases will qualify for the business investment and jobs expansion tax credit, even though some or all of the leases do not have a primary lease term of at least ten years. Those taxpayers who can benefit from this new interpretation may amend their business investment and jobs expansion tax credit projects to include the investment in natural resources in place, capable of sustained production for a period of at least ten years, regardless of the primary term of the lease or leases permitting at least ten years of sustained production. Where the price is not quantifiable at the time the mining operation is placed in service, cost shall be determined annually and shall be the amount of royalties paid to the owner during each year for a period of ten years. The amount of such royalties multiplied by the taxpayer's new job percentage divided by ten establishes the credit allowable each year for ten successive years beginning with the year in which the royalties were paid. Where the purchase price is quantifiable at the outset, qualified investment is limited to that portion of the price attributable to ten years of production but not more than twenty years of production. If the taxpayer fails to maintain sustained production for a period of at least ten years, after certifying that the lease or leases were so capable, the taxpayer shall be subject to the redetermination provisions in W.

Va. Code §

11-13C-8(a). These provisions call for forfeiture of the unused credit allowed for such property in the tax year in which the property ceased to be used and all subsequent tax years, as well as recalculation of additional taxes due for the prior years, plus interest and penalties. _________________________________ Michael E. Caryl State Tax Commissioner Date: October 27, 1988