Tax Type
Corporation Income Tax
Description
Domestic International Sales Company (DISC); Consolidated return
Topic
Returns/Payments/Records
Taxable Income
Date Issued
07-18-1984
July 18, 1984
Re: § 58-151.079 - Permission to File a Consolidated Return
§ 58-151.083 - Domestic International Sales Company
Dear *****************
FACTS
The parent has applied for permission to file a consolidated return including itself and its numerous subsidiaries. Only three of the subsidiaries are subject to taxation in Virginia and they have filed separate Virginia returns in the past. The parent does not do business in Virginia and is not subject to Virginia income tax.
One of the subsidiaries is a Domestic International Sales Company (DISC). Taxpayer cites § 58-151.083 and Corporation Income Tax Circular No. 2 as authority for granting its request.
DETERMINATION
Only affiliated corporations, as defined in Va. Code § 58-151.081, may be included in a Virginia consolidated or combined return. Under § 58-151.081 each corporation must be subject to Virginia income tax as well as satisfying certain ownership criteria. Thus, only the three subsidiaries subject to taxation in Virginia may be included in a consolidated or combined return.
The parent's reliance on § 58-151.083 is misplaced. That section authorizes the Department to require consolidated reports and other information and to equitably adjust the tax if "... any arrangements exist in such a manner as improperly to reflect the business done or the Virginia taxable income earned from business done in this State."
As stated in Circular No. 2, the Department has determined that the use of a DISC to defer federal income taxes on a portion of export income causes the Virginia taxable income from business done in Virginia to be improperly reflected. In most cases the Department has equitably adjusted the tax based upon a consolidation of the DISC with its parent. However, on occasion the Department has used other methods to equitably adjust the tax. This is such an occasion.
Since the parent does not do business in Virginia, consolidation of the DISC with the parent would serve no purpose. Accordingly, the Department will require that the tax of the three subsidiaries doing business in Virginia be equitably adjusted by attributing to each subsidiary the portion of DISC income which was earned by the subsidiary.
Although the three subsidiaries which are subject to Virginia income tax could have elected to file a consolidated Virginia return in the first year that two or more affiliated corporations became subject to Virginia income tax, the subsidiaries elected to file separate Virginia returns. Therefore the subsidiaries must obtain permission from the Department to change their method of filing.
In a consolidated return inter-affiliate transactions are eliminated and the apportionment factors of multistate corporations are consolidated. As a result the income subject to Virginia income tax on a consolidated return may be significantly different than the total shown on separate returns, especially if any of the affiliates do business in more than one state. For this reason the Department of Taxation very rarely grants permission for corporations to change to or from consolidated returns once the election has been made.
Accordingly, permission to file a consolidated return is denied.
§ 58-151.079 has been amended to permit affiliated corporations to file a combined return for taxable years beginning on or after January 1, 1981. A change from separate returns to a combined return does not affect the computation or apportionment of income except that losses of one corporation may offset the income of an affiliated corporation.
Permission is hereby granted to file a combined return for 1983 and subsequent years. The combined return shall include the affiliated corporations noted above which are subject to taxation in Virginia and shall be prepared in accordance with the following conditions:
1. Schedules shall be filed with the combined return which contain all information which would be contained in a separate Virginia return for each and every eligible member of the affiliated group. See §§ 58-151.079 and 58-151.081.
2. In computing the Virginia Taxable Income of each eligible member of the affiliated group there shall be added to federal taxable income the amount of any net operating loss deduction or other deduction which has been recognized for Virginia income tax purposes and offset other income in a Virginia consolidated or combined return for other taxable years. See, for example, Federal Income Tax Regulation 1.1502-79.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner