Tax Type
Corporation Income Tax
Description
Property factor; Leased property of subsidiary
Topic
Allocation and Apportionment
Date Issued
10-31-1996
October 31, 1996
Re: § 58.1 -1821 Application: Corporate Income Tax
Dear**************
This will reply to your letter in which you are requesting a redetermination of the department's ruling previously issued to****** (the "Taxpayer") and *********("S") for taxable year ended March 31, 1990. A copy of this ruling, Public Document ("P.D.") 94-175, (6/8/94), is attached.
FACTS
The Taxpayer filed a Virginia return which included a subsidiary for the taxable year ended March 31, 1990. The Taxpayer and S filed consolidated returns for the taxable years ended March 31, 1991 through 1995. S is a leasing company which leases moveable tangible personal property to the Taxpayer. S's only contact with Virginia is the presence of its moveable tangible personal property use in the Taxpayer's operation.
The Taxpayer was audited for the taxable years ended March 31, 1988 through 1990 and subsequently for the taxable years ended March 31, 1991 and 1992. Under the audit of the taxable year ended March 31,1990, the department determined that the Taxpayer had elected to file a combined return with S. This was confirmed in a subsequent ruling (P.D. 94-175). In addition, P.D. 94-175 stated that while S has nexus with Virginia, it did not have a positive apportionment factor.
The Taxpayer asserts its intention was to file consolidated Virginia returns from the taxable year ended March 31, 1990 to the present. Evidence to support this position has been provided in the way of a copy of Virginia Form 500 and a separate federal 1120 "pro forma" for each taxable year ended March 31, 1990 through 1994. You believe the department was confused by statements in the Taxpayer's letter dated April 22, 1992, which used combined and consolidated interchangeably. As such, the Taxpayer is requesting the department reverse an earlier determination and accept the Taxpayer's intention to file a consolidated return.
In addition, you request the department reconsider the property factor of S, asserting that S should have a positive property factor.
DETERMINATION
Filing Status
The first year two or more affiliated corporations are subject to Virginia income tax, the group may elect to file either separate, consolidated, or combined returns. Virginia Regulation (VR) § 630-3442 provides that the election is made upon the filing of the first return for a 12 month taxable year beginning on or after the date of organization or acquisition of the corporations creating the affiliated group.
The fact that the Virginia corporation income tax return lists both "consolidated" and "combined" filing choices, puts taxpayers on notice to investigate the difference, particularly when there are differing meanings assigned to these terms in other states. In a consolidated return in Virginia, federal taxable income of the group is computed with eliminations, and a single apportionment factor is used for the entire group's apportionable income. In a combined return, federal taxable income is the sum of each member's separate income without eliminations, and a separate apportionment factor is used for each member of the group. Virginia law, regulations and the instructions distributed with the return forms all clearly indicated the difference. In particular, the 1989 instructions stated that a consolidated return was to be prepared in accordance with I.R.C. § 1502, while a combined return computes income, allocation, and apportionment separately for each member.
In this case, the Taxpayer and S marked the "combined" box on the initial return for the taxable year ended March 31, 1990. The return as filed is consistent with combined filing in that the federal taxable income was the sum of the separate incomes without eliminations. Also, the income from each affiliate was allocated and apportioned on a separate "pro forma" Virginia return, consistent with a combined filing. In fact, the combined Schedule A for Form 500 notes "See separate company detail."
By contrast, a consolidated filing requires that a single apportionment factor be applied to the total income of the affiliated group.
There has been no confusion on the part to the department in this case. Whether the Taxpayer intended to elect consolidated filing or not, based on the facts presented, I find the Taxpayer and S made an election to file a combined return by marking the "combined" filing status box on the initial return and computing its tax liability in all material respects on a combined basis in the election year.
Once an affiliated group has made an election, the group may not change its filing status unless permission is granted by the department. It is well established that permission to change to or from a consolidated return will generally not be granted, as the change affects the allocation and apportionment factors and possibly distorts business done in Virginia and income arising from activity in Virginia. See VR §630-3-442(E). Absent extraordinary circumstances, there is no basis to allow a change to a consolidated filing. Based upon the facts as presented, I find no extraordinary circumstances to warrant the granting of permission for the taxpayer and affiliated corporations to change to a consolidated filing for the years in question.
Property Apportionment Factor
S's only contact with Virginia is the presence of its tangible personal property in Virginia as needed by the Taxpayer's operation. As a part of the Taxpayer's service activities, S's property moves in and out of Virginia under the direction and control of the Taxpayer. In addition, the Taxpayer is responsible for and performs any maintenance or repairs to S's property while it is in Virginia. Based on the information provided, there is no evidence that S has knowledge or control over the use or location of the property by the Taxpayer.
Both the Taxpayer and S are based outside the state of Virginia. Since S only leases its property to the Taxpayer, it is deemed that S has intended to direct the use of its tangible personal property only toward the Taxpayer at its headquarters outside of Virginia. In the absence of any evidence that S has any intention to direct the use of its tangible personal property to Virginia markets or enjoyed any rights or privileges from Virginia as a result of such use, the department finds that the S's property presence is de minimus as not to warrant inclusion in the property factor. Therefore, a zero Virginia property factor for S is appropriate in this circumstance.
The determination in P.D. 94-175, as affirmed herein, is based on the unique circumstances and relationships between S, the Taxpayer, and Virginia.
Accordingly, the assessments are correct. Attached is a schedule of the assessments for the taxable years ended March 31, 1991 and 1992 which must be paid in full within 60 days to avoid accrual of additional interest. Please forward your payment to***** Office of Tax Policy, Virginia Department of Taxation, P.O. Box 1880, Richmond, Virginia 23218-1880.
In addition, the Taxpayer is advised to amend their Virginia corporation income tax
returns for the taxable years ending March 31, 1993 through 1995 to conform with this ruling. If you have any questions regarding this matter, you may contact*******at **********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10374O
Rulings of the Tax Commissioner