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Lack of certification not a bar to targeted jobs credit use.

Under Sec. 51, employers are allowed an income tax credit for a portion of wages paid to certain new employees who qualify as members of disadvantaged groups. This credit, known as the work opportunity credit, applies to employees who are members of certain targeted groups. These groups include (1) qualified IV-A (Aid to Families with Dependent Children) recipients, (2) qualified veterans, (3) qualified ex-felons, (4) high-risk youths, (5) vocational rehabilitation referrals, (6) qualified summer youth employees, (7) qualified food stamp recipients and (8) qualified SSI recipients.

In general, the work opportunity credit applies to eligible individuals who began work after Sept. 30, 1996 and before July 1, 1999. The credit is 35% (40% for individuals who began work after Sept. 30, 1997) of the first $6,000 of wages ($3,000 for qualified summer youth employees) paid to each targeted group member during the first year of employment. Individuals who began work after Sept. 30, 1997 must complete a minimum of 120 hours of service. The employer receives a credit of only 25% of wages if the employee performs less than 400 hours of service; for 400 hours or more of service, the credit is 40% of the employee's wages.

The predecessor of the work opportunity credit was the targeted jobs credit. Created by Congress in 1978, the targeted jobs credit was designed to encourage businesses to hire members of economically disadvantaged groups. The targeted jobs credit provided a 40% tax credit of the first $6,000 of wages paid to members of certain targeted groups that suffered higher than average unemployment rates. To claim the credit, these "targeted" employees were required to be certified by a local agency as being a member of one of the targeted groups. To further encourage employers to hire members of the targeted groups, Congress directed the Department of Labor to designate local agencies to handle the certification process. Employers were required to request or receive, from these local agencies, certification that each of these individuals was a member of a targeted group on or before the first day of employment. By creating these agencies to handle the certification process, Congress believed that employers (alleviated of the burden of proof that an individual was a member of a targeted group) would be more likely to participate in the program.

These local agencies, however, failed to timely process the certification requests due to the government's shutdown of the program. In many cases, the backlog of requests exceeded two years. In December 1994, the targeted jobs credit program expired. The local agencies were required to complete the processing of certification requests by the end of September 1995.When the program ended, the local agencies had not completed all certifications. Without the certifications, the IRS disallowed many of the claims for the tax credit.

Perdue Farms, Inc.

When the certification program ended, Perdue Farms had 2,362 applications for certification that the local agencies had failed to process. In May 1996, Perdue filed amended Federal income tax returns to claim a refund of $2,122,758 of overpaid income taxes. The overpayment resulted from Perdue's claim of entitlement to the targeted jobs credit relating to the unprocessed applications. The Service disallowed Perdue's claim on the basis that Perdue had not received the actual certifications from the local agencies. Perdue filed suit in district court and was granted summary judgment, allowing its claim of the targeted jobs credit (Perdue Farms, Inc., DC MD, 6/14/99).

The court concluded that Perdue had employed members of the targeted groups and had properly requested written certification from the local agencies. While the local agencies failed to act on the certification requests, it was undisputed that, if they had acted on the requests, the certifications would have been issued. The court further concluded that the legislative intent of the certification program was to encourage employer participation in the program with the certification system designed for the employer's benefit. The court was especially concerned that the IRS attempted to disallow the credit, even though Perdue had complied with all of the procedures to claim it. The failure to receive the certifications was due to the government's termination of the program, not due to the taxpayer's lack of compliance. Therefore, based on the legislative intent of the certification process, the court granted Perdue's motion for summary judgment and upheld its refund claim.

Planning Opportunity

Taxpayers who have been denied a claim of the targeted jobs credit or did not claim the credit due to lack of certification now have an opportunity to file refund claims. While the Service has not indicated if it intends to appeal the decision, taxpayers may consider filing protective claims for refund before the statute of limitations (SOL) expires. Currently, the SOL runs for three years from the later of the due date of the tax return (including extensions) or the date the return was filed.


Philip E. Moore, CPA, MBA Brown, Dakes & Wannall, P.C. DFK International Fairfax, VA
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Article Details
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Author:Cronin, David M.
Publication:The Tax Adviser
Geographic Code:1USA
Date:Oct 1, 1999
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