Tax Type
Corporation Income Tax
Description
Change from consolidated return to combined is denied
Topic
Returns/Payments/Records
Date Issued
01-11-1990
January 11, 1990
Re: §58.1-442 Request for Permission to Change from
Consolidated Return
Dear*************
This will reply to your letters dated June 9, 1989 and October 23, 1989 in which you request permission on behalf of your client,*************to change from filing a corporate consolidated income tax return to filing a corporate combined income tax return. I apologize for the delay in responding to your inquiry.
FACTS
The taxpayer, a Virginia corporation, is the parent of an affiliated group of multistate corporations. In the first taxable year that two or more members of the group were subject to Virginia tax, the group filed consolidated federal and Virginia returns. The Virginia returns for the next two taxable years were filed on a combined basis.
Based on notes found in the former accountant's records, the taxpayer's controller was asked if a consolidated return should be filed and the response was affirmative. The former accountant then prepared consolidated federal and Virginia returns which were duly executed and filed. The present accountant believes that the controller's response was directed toward the federal return only and was misinterpreted by the former accountant to include Virginia returns also.
The mistake was discovered while preparing the fiscal year June 27, 1987 returns and a letter requesting permission from the department to change from a consolidated basis to a combined basis was drafted by the taxpayer's former accounting firm.
However, due to changes in corporate management and a subsequent change in accounting firms, the request for change was overlooked and the letter was not executed. The taxpayer filed for years ending June 27, 1987 and July 2, 1988 on a combined return.
RULING
Virginia Regulation §630-3-442(E)(1) states that "[p]ermission to change to or from filing consolidated returns will generally not be granted. Such changes affect the allocation and apportionment factors and distort the business done in Virginia and the income arising from activity in Virginia." In this case, you state that switching to a combined Virginia return would affect the manner in which 40% to 50% of the income of one affiliate is apportioned.
The law permits an affiliated group to make an initial election as to how its Virginia returns will be filed. It does not permit subsequent "election shopping" based on whichever method results in the lowest Virginia tax liability for each taxable year. The fact that an initial election is later determined to be unwise, whether attributable to a change in management or tax advisors or to subsequent acquisitions or other events, is not sufficient grounds to allow a change to or from consolidated filing.
In this case, however, there is a substantial question as to whether the taxpayer intentionally elected to file a consolidated Virginia return. The evidence suggests that a combined Virginia return would have been filed if the taxpayer's controller had been asked specifically about the Virginia filing method. On the other hand, the taxpayer had the opportunity to review and revise the Virginia return after it was prepared and before it was executed and filed. The courts have been reluctant to permit a taxpayer to shift his own responsibility to a tax advisor. See U. S. v. Boyle, 469 U.S. 241 (1985). (Executor's reliance on an attorney to file a timely estate tax return was not reasonable cause for filing the return three months late.) The former accountant may have made an unwise choice when preparing the first Virginia consolidated return, but the taxpayer cannot avoid the responsibility for the decision to file a consolidated return. Therefore, permission to change from a consolidated to combined filing is denied. The returns for the second and third taxable years must be amended to conform to the consolidated filing method elected on the first return.
Please contact the department if you need additional information.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner