Tax Type
Corporation Income Tax
Description
Returns of affiliated corporations; Additions to the affiliated group
Topic
Returns and Payments
Date Issued
01-18-1995
January 18, 1995
Re: §58.1-1821 Application: Corporate Income Tax
Dear***************
This will reply to your letter of July 12, 1994, in which you seek correction of corporate income tax assessments for **************(the "Taxpayer") and***************.
FACTS
Prior to the 1990 taxable year, the Taxpayer and its subsidiary ("Company A") filed combined Virginia returns. The Taxpayer's parent corporation ("Parent") does not file a Virginia return. The Parent also had two other subsidiaries filing in Virginia ("Company B" and "Company C"). Company B and C filed separate Virginia returns. The department was not aware that the Taxpayer was affiliated with Company B and Company C.
In calendar year 1990, the Parent acquired an affiliated group of corporations (the "Target Corporations") through purchases and a merger. The Parent became the "owner" of the Target Corporations for federal income tax purposes, and the Target Corporations began filing as part of the Parent's federal consolidated return. Beginning with the 1990 taxable year, the Taxpayer and its affiliated corporations began filing a consolidated Virginia return without first receiving permission from the department to change its filing method. On audit, the department adjusted these filings to a combined status, and assessments were issued for the resulting increase in tax.
The Taxpayer believes that the addition of the Target Corporations to its Virginia affiliated group created a "first year" election situation, thereby allowing the group to elect a consolidated Virginia filing for 1990.
RULING
A group of corporations may not file a Virginia consolidated or combined return unless they are "affiliated" as defined in Code of Virginia §58.1-302. This statute defines affiliated as two or more corporations subject to Virginia income taxes whose relationship to each other is such that (i) one corporation owns at least eighty percent of the voting stock of the other or others, or (ii) at least eighty percent of the voting stock of two or more corporations is owned by the same interests.
Code of Virginia §58.1-442 allows corporations to elect to file returns on the basis of one of three filing statuses (separate, combined, or consolidated) regardless of how the corporations filed their federal income tax return. Virginia Regulation (VR) 630-3-442 A 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 consolidated return, or a combined return. All returns for subsequent years must be filed on the same basis unless permission to change is granted by the department. Permission to change to or from the consolidated filing method is generally not granted by the department, because this change can affect the allocation and apportionment factors and possibly distort the reporting of the portion of business done in Virginia.
Prior to the Parent's acquisition of the Target Corporations, the Taxpayer and Company A were members of an affiliated group within the meaning of Code of Virginia §58.1-302. The Taxpayer and its subsidiary filed their Virginia returns on a combined basis, thereby electing the combined filing status. If the Taxpayer was affiliated with Company B and C at the time that the combined filing method was elected, Company B and C would have been required to have been included in the combined return. Likewise, if Company B and C became affiliated with the Taxpayer after the Taxpayer's election to file combined returns, they were required to be included in the Taxpayer's combined return. The department was unaware that the affiliation between the companies existed. Given the nature of combined return filing, no distortion of the allocation and apportionment factors resulted from the Taxpayer's failure to properly include all corporations in its combined return. However, VR 630-3-442 E.3. provides that "If a new corporation becomes a member of the affiliated group, the new corporation must follow the filing method previously elected by the group."
When the Parent acquired the Target Corporations, the Target Corporations became new members of the Taxpayer's Virginia affiliated group. The Virginia affiliated group had previously made an election to file combined returns. The Target Corporations are required by VR 630-3-442 E to follow the filing method previously elected by the Virginia affiliated group. Therefore, 1990 was not an initial election year for the Taxpayer, and the Taxpayer's affiliated group remained subject to an election to file combined returns. See Public Document 94-207 (715194), copy attached.
Based on the facts as presented, the department finds no extraordinary circumstances which justify granting permission to change filing methods to a consolidated basis. The department finds that the addition of new corporations to an affiliated group represents a common business transaction that regularly occurs. Thus, permission to change to the consolidated filing method cannot be granted.
Accordingly, the assessments are correct. Attached is a schedule indicating the tax liability plus interest accrued through the date of this letter. The assessments must be paid in full within 30 days to avoid accrual of additional interest. Please forward your payment to the Office of Tax Policy, the Virginia Department of Taxation, P.O. Box 1880, Richmond, Virginia 23282. Should you have additional questions regarding this matter, please contact******************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8288L
Rulings of the Tax Commissioner