Tax Type
Corporation Income Tax
Description
Affiliates included on consolidated return
Topic
Returns/Payments/Records
Date Issued
10-09-1990
October 9, 1990
Re: §58.1-1821 Application; Corporation Income Tax
Dear******************
This is in response to your letter of January 11, 1990, in which you applied for correction of assessments of corporation income tax against two affiliated taxpayers for taxable years ended
Facts
A consolidated Virginia corporation income tax return was filed that included numerous corporations. on field audit, the auditor determined that the parent corporation and one of its subsidiaries did not have tax nexus with Virginia and Taxpayer #2 was a financial corporation. The corporations were removed from the consolidated return and additional income tax was assessed against Taxpayer #1, the corporate name in which the consolidated return for the group was filed, and against Taxpayer #2 as a financial corporation filing a separate Virginia return. You protest the removal of the three corporations from the Virginia consolidated return and the assessment of additional income tax. The issues you raise will be addressed separately.
Discussion
Nexus
You contend that nexus existed between Virginia and the parent because the president and the treasurer/secretary of the parent spent "a substantial amount of time" in the United States, with most of the time being spent at a subsidiary's offices in Virginia. Specifically. you claim that the officers made 12 trips to the United States during 1986 and 1987.
Under paragraph 2.b. of the definition of "Income and deductions from Virginia sources" in VR 630-3-302. the applicable apportionment factors determine which activities are the most relevant for nexus purposes. The applicable apportionment formula for the parent and its subsidiary is the three factor apportionment formula of property, payroll and sales. An analysis of the apportionment data for all companies of the affiliated group included in the Virginia consolidated return indicates that there is no evidence that the parent owned or rented any real or tangible personal property that was located in Virginia at the beginning or end of any taxable year, or at any time during the years in question. Va. Code §53.1-411. No employees of the parent were based in Virginia. Although two employees made occasional business trips to Virginia, it appears that the services performed in Virginia were incidental to the services rendered to the parent outside Virginia. See VR 630-3-413.
The parent has no gross receipts (other than dividends) attributable to income producing activity or costs or performance in Virginia. Although the parent could have charged its Virginia subsidiary for management services provided (which might be attributable to income producing activity in Virginia) it did not do so. Because such charges may affect the souring of income within and without the United States for federal income tax purposes, we will not allow income to be reassigned or recharacterized for Virginia purposes in the absence of an amended federal return or a finding that Va. Code §58.1-446 applies.
Accordingly, the auditor properly excluded the parent from. the Virginia consolidated return.
Financial Corporation
You contend that Taxpayer #2, the financial corporation. should be included in the Virginia consolidated return to accurately reflect its Virginia source income.
A Virginia consolidated return may not include corporations required to use different apportionment factors if separate returns were to be filed. You assert that Va. Code §58.1-445 creates an exception to this rule when the consolidation of accounts of related trades or businesses of affiliates is necessary to make an accurate distribution or apportionment of income.
Paragraph A.2. of VR 630-3-445 provides that "This section applies to situations in which the federal taxable income is accurately stated but the income from Virginia sources taxable by Virginia is inaccurate." The primary reason for the alleged inaccuracy of Taxpayer #2's Virginia source income is that the parent advanced funds to Taxpayer #2 but did not charge interest. This indicates that the federal taxable income of the affiliates may not be accurate; thus, the consolidation provisions of Va. Code §58.1-445 cannot be invoked by Taxpayer #2. In addition, allowing the financial corporation to be included in the Virginia consolidated return under this provision would circumvent the department's regulation prohibiting corporations required to use different apportionment factors from joining in a single consolidated return.
The auditor properly excluded Taxpayer #2 from the Virginia consolidated return.
Consolidated filing may be available for tax years beginning on or after January 1, 1990. Groups which file a consolidated federal return and include affiliates with different apportionment factors may request permission to file on a consolidated basis in 1990 (HB 159, 1990 Acts of Assembly, chapter 619). The department is in the process of drafting a regulation which will explain how a mixed factor group computes a consolidated apportionment factor. The regulation is also expected to set forth the circumstances when existing mixed factor groups may be allowed to switch to consolidated returns. We have added your name to the list of interested parties who will be mailed a copy of the draft regulation.
Alternative Method
You request permission to use an alternative method of allocation and apportionment if the taxpayers are not permitted to be included in the Virginia consolidated return, in order to accurately reflect income.
The policies which apply to requests for an alternative method under Va. Code §58.1-421 are well established. See VR §630-3-421 and the Ruling Letter dated September 18, 1986, P.D. No. 86-184 (copies enclosed). After considering the facts set forth, you have not demonstrated by clear and cogent evidence that the statutory method is unconstitutional or inapplicable as applied in your situation. Accordingly, permission to use an alternative method of allocation and apportionment is denied.
Change in Return Filing Status
You ask that, in the alternative, the affiliated group should be permitted to change its filing status from consolidated to the combined method to more accurately reflect its Virginia income.
It is well established that permission to change to or from consolidated returns will generally not be granted, as the change affects the allocation and apportionment factors and distorts business done in Virginia and the income arising from activity in Virginia. VR §630-3-442(E). Based on the facts as presented, I find no reason to grant permission for the affiliated group to change from the consolidated basis to filing on the combined basis. Permission to change is denied.
Determination
Accordingly, the assessment is correct as made and is now due and payable. You will shortly receive an updated bill with interest accrued to date. The bill should be paid within thirty days to avoid the accrual of additional interest. Although you requested a conference, this letter has been issued without one because the application of the law is clear. If you still desire a conference you should request one within thirty days.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner