Tax Type
Corporation Income Tax
Description
Change of Corporate Filing Status
Topic
Filing Status
Date Issued
04-05-2013
April 5, 2013
Re: Request for Ruling: Change of Corporate Filing Status
Dear *****:
This will respond to your letter submitted on behalf of ***** (the "Taxpayer"), in which you request a ruling as to whether it may be allowed to elect to file a consolidated Virginia corporate income tax return with its affiliates effective for the short taxable year ended June 30, 2010. I apologize for the delay in responding to your request.
FACTS
Through a series of transactions, ***** (A) merged with ***** (B) in January 2010. The shareholders of A and B each received 50% of the stock of the Taxpayer. B, based in ***** held a marginally higher value of the combined corporate assets prior to the merger, and held a slight edge in total revenue. An officer of A, based in Virginia, was designated as the chairman of the board and chief executive officer of the Taxpayer. The Taxpayer moved its headquarters to ***** (State B).
Prior to the merger, A filed a combined Virginia income tax return. Only one of B's subsidiaries (B Sub) was subject to Virginia income tax prior to the transaction. The Taxpayer requests a ruling that the merger meets the merger of equals standard for eligibility to make a corporate filing status election.
RULING
Virginia Code § 58.1-442 allows corporations to elect to file returns as separate, combined, or consolidated entities regardless of how the corporations file their federal income tax returns. Title 23 of the Virginia Administrative Code (VAC) 10-120-320 provides that in the first year, two or more members of an affiliated group of corporations are required to file Virginia returns, the group may elect to file separate returns, a combined return, or a consolidated return. All returns for subsequent years must be filed on the same basis unless permission to change is granted by the Department. The Department will generally not grant permission to change to a consolidated filing status absent extraordinary circumstances.
In Public Document (P.D.) 07-155 (10/4/2007), the Department ruled that pending the promulgation of regulations in this area, when a merger or acquisition occurs between two affiliated groups of corporations (1) neither of which owned any substantial interest in the other prior to the merger and (2) where the total assets or net value of the target group is almost equal to or greater than that of the acquiring group on the date of the transaction, the resulting new affiliated group may choose to file Virginia income tax returns using the filing method previously elected by the acquiring group or the target group.
Further, for purposes of the test in number 2 above, the affiliated groups involved in the merger or acquisition would be considered to be almost equal if the target group's assets or net value immediately prior to the merger or acquisition transaction is greater than 45% of the combined value of the acquiring group and target group. In the case at hand, the target group's net value exceeded the value of the purchasing group.
The Taxpayer believes that the Department policy with regard to the merger of equals should be available to the Taxpayer even though B Sub was not a member of an affiliated group for Virginia income tax purposes prior to the merger.
In order to file on a consolidated or combined return for Virginia purposes, a corporation must be affiliated within the meaning of Va. Code § 58.1-302. Under this section, the term "affiliated" means two or more corporations subject to Virginia incomes taxes whose relationship to each other is such that (i) one corporation owns at least 80% of the voting stock of the other or others, or (ii) at least 80% of the voting stock of two or more corporations is owned by the same interests. According to the Taxpayer, B had only one subsidiary that was subject to Virginia income tax. As such, B was not an affiliated group for purposes of the policy established in P.D. 07-155.
When affiliated groups merge, however, there may be two different elections at issue. For such circumstances, the Department's longstanding policy has been to require the target group to adopt the election of the acquiring group. See P.D. 93-187 (8/26/1993) and P.D. 94-212 (7/05/1994). In P.D. 07-155, the Department found it appropriate to modify its filing status policy with regard to mergers and acquisitions of affiliated groups of corporations.
As indicated by the Taxpayer, B Sub was not part of an affiliated group prior to merging with A. The Taxpayer, therefore, argues that B Sub had never had an election year and, therefore, was entitled to make an election when it joined the affiliated group during the merger.
To support its position, the Taxpayer cites P.D. 97-226 (5/16/1997). In P.D. 97-226, the Department ruled that when a corporation, which had no other affiliates in Virginia, purchases an existing affiliated group in a taxable transaction, the affiliates became members of a newly formed affiliated group. In this case, the evidence does not indicate that B acquired A in a taxable transaction and became the parent of a new affiliated group.
Because B Sub is the only entity in B's corporate family that was operating in Virginia prior to the merger, it would be not be considered to be included in an affiliated group for purposes of making a filing status election. Generally, Title 23 VAC 10-120-320 requires single corporations that join an existing affiliated group of corporations to conform to the election made by such affiliated group unless permission to change is granted by the Department. See P.D. 93-61 (3/17/1993). As such, B Sub would be considered to be joining an existing affiliated group.
Further, the Department will generally not grant permission to change to a consolidated filing status absent extraordinary circumstances. See P.D. 93-153 (7/23/1993). Based on the facts presented, I find no extraordinary circumstances exist to warrant granting permission to change to filing on a consolidated basis. Accordingly, permission to file a consolidated return will not be granted. Thus, the Taxpayer's Virginia affiliates should continue to file corporate income tax returns on a combined basis.
This ruling is based on the facts presented by the Taxpayer as summarized in this letter. Any change in the facts or the introduction of new facts may lead to a change in the Department's ruling.
The Code of Virginia section, regulation and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions regarding this letter, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-4730592644.o
Rulings of the Tax Commissioner