Tax Type
Corporation Income Tax
Description
Exempt Organizations
Topic
Taxpayers
Date Issued
09-27-1999
September 27, 1999
Re: Request for a Ruling: Income Taxation
Dear***
This will reply to your letter in which you request a ruling on the application of Virginia income tax law to the ***** (the "Trust') and its subsidiary, ***** (the "Subsidiary').
FACTS
The Trust is a qualified settlement fund ("QSF') under Sec.468B of the Internal Revenue Code ("IRC') which is located out-of-state. The Trust was formed pursuant to a corporate bankruptcy for the purpose of settling personal injury cases brought against the bankrupt company. All of the Trust's income derives from the various investments that are managed for the Trust by unrelated third parties. The Trust's employees and the investment managers all live and work out-of-state.
The Subsidiary is a Virginia stock corporation which is a wholly-owned subsidiary of the Trust. The Subsidiary's principal office and numerous employees are located in Virginia. Its Board of Directors consists of five members, four of whom are also Trust trustees. The primary activities of the Subsidiary are to handle the claims resolution process for the Trust. In addition, the Subsidiary provides certain administrative, accounting and consulting services for the Trust.
The Subsidiary is compensated by the Trust on a cost plus profit basis. The Subsidiary pays federal and Virginia income tax on its net annual income. For purposes of this ruling, payments made by the Trust to the Subsidiary are assumed to represent fair value for the services rendered. The Trust is considering a merger whereby the Subsidiary would be liquidated with its activities performed directly be the Trust.
You are requesting a ruling as to whether the Trust would be considered a corporation or a nonresident trust for Virginia income tax purposes and whether the Trust is currently required to pay Virginia income tax. Further, if the Subsidiary is liquidated, would the Virginia activities assumed by the Trust subject the merged income to Virginia tax?
RULING
Entity Classification of the Trust
he department has previously addressed the Virginia treatment of QSFs in Public Documents ("P.D.') 92-224 (11/5/92) and P.D. 95-13 (1/24/95), copies enclosed. You contend that the department's rulings did not conclusively hold that QSFs would be treated as corporations for Virginia tax purposes. Rather, these rulings held that QSFs would be treated as corporations for Virginia tax purposes only "if' they are treated as corporations for federal tax purposes.
Treasury Regulation Sec.1.468B-1 (b) provides that
Title 23 of the Virginia Administrative Code (VAC) 10-120-20 defines a "corporation' for Virginia tax purposes as:
Current Virginia Tax Liability of the Trust
Under Code of Virginia Sec. 58.1-400, every corporation having income from Virginia sources is subject to the corporate income tax. Public Law ("P.L.') 86-272, however, prohibits a state from imposing an income tax on businesses when the only contacts with the state are a narrowly defined set of activities. The department limits the scope of P.L. 86-272 to only those activities that constitute solicitation, are ancillary to solicitation, or are de minimis in nature.
Currently, all of the Trust's income comes from various investments managed and held out-of-state. None of the Virginia sources comes from Virginia income, nor does it perform any activities in the Commonwealth which would create nexus. The only connection between Virginia and the Trust at this time is the Trust's ownership of the Subsidiary which operates solely in Virginia. Thus, the Trust would not be subject to Virginia income taxation.
However, the department does have the authority to adjust the taxable income of two or more corporations in accordance with Code of Virginia Sec. 58.1-446. In the event that the department finds that the service transactions between commonly-owned entities improperly reflects Virginia taxable income from business done in Virginia, the department can, and if necessary will, seek remedies which may include consolidating the accounts of one or more of the entities. Because the application of Code of Virginia Sec. 58.1-446 is highly dependent on the facts and circumstances, the department cannot issue an advance ruling with respect to the transactions between the Trust and the Subsidiary.
Virginia Tax Liability after Subsidiary Liquidation
The Trust is considering liquidating the Subsidiary and taking over its operations. The employees and the actual operations would remain in Virginia. There would be a large number of employees conducting claims settlement, consulting and accounting support services for the Trust. Such contacts would be sufficient to create nexus with Virginia. Because the Trust would be required to file as a corporation for Virginia income tax purposes, all of the Trust's income, except for dividends would be subject to apportionment pursuant to Virginia statutory law. Dividends would be allocated to the state of commercial domicile.
In conclusion, the Trust is an out-of-state corporation, not a nonresident trust for Virginia income tax purposes. The Trust is not currently liable for Virginia corporate income tax. The Subsidiary is a Virginia corporation which is liable for Virginia corporate income tax. If the Subsidiary is liquidated and absorbed into the Trust, but the operations remain in Virginia, the Trust's income would be subject to corporate income taxation.
This ruling has been made subject to the facts presented to the department as summarized above. Any change in these facts or the introduction of facts by another party may lead to a different result. I hope that the foregoing answers your inquiry. If you have any other questions, you may contact ***** at *****
Sincerely,
Danny M. Payne
Tax Commissioner
Re: Request for a Ruling: Income Taxation
Dear***
This will reply to your letter in which you request a ruling on the application of Virginia income tax law to the ***** (the "Trust') and its subsidiary, ***** (the "Subsidiary').
FACTS
The Trust is a qualified settlement fund ("QSF') under Sec.468B of the Internal Revenue Code ("IRC') which is located out-of-state. The Trust was formed pursuant to a corporate bankruptcy for the purpose of settling personal injury cases brought against the bankrupt company. All of the Trust's income derives from the various investments that are managed for the Trust by unrelated third parties. The Trust's employees and the investment managers all live and work out-of-state.
The Subsidiary is a Virginia stock corporation which is a wholly-owned subsidiary of the Trust. The Subsidiary's principal office and numerous employees are located in Virginia. Its Board of Directors consists of five members, four of whom are also Trust trustees. The primary activities of the Subsidiary are to handle the claims resolution process for the Trust. In addition, the Subsidiary provides certain administrative, accounting and consulting services for the Trust.
The Subsidiary is compensated by the Trust on a cost plus profit basis. The Subsidiary pays federal and Virginia income tax on its net annual income. For purposes of this ruling, payments made by the Trust to the Subsidiary are assumed to represent fair value for the services rendered. The Trust is considering a merger whereby the Subsidiary would be liquidated with its activities performed directly be the Trust.
You are requesting a ruling as to whether the Trust would be considered a corporation or a nonresident trust for Virginia income tax purposes and whether the Trust is currently required to pay Virginia income tax. Further, if the Subsidiary is liquidated, would the Virginia activities assumed by the Trust subject the merged income to Virginia tax?
RULING
Entity Classification of the Trust
he department has previously addressed the Virginia treatment of QSFs in Public Documents ("P.D.') 92-224 (11/5/92) and P.D. 95-13 (1/24/95), copies enclosed. You contend that the department's rulings did not conclusively hold that QSFs would be treated as corporations for Virginia tax purposes. Rather, these rulings held that QSFs would be treated as corporations for Virginia tax purposes only "if' they are treated as corporations for federal tax purposes.
Treasury Regulation Sec.1.468B-1 (b) provides that
-
- If a fund, account, or trust that is a qualified settlement fund could be classified as a trust within the meaning of Sec.301.7701-4 of this chapter, it is classified as a qualified settlement fund for all purposes of the IRC. If a fund, account, or trust, organized as a trust under applicable state law, is a qualified settlement fund, and could be classified as either an association (within the meaning of Sec.301.7701-2 of this chapter) or a partnership (within the meaning of Sec.301.7701-3 of this chapter), it is classified as a qualified settlement fund for all purposes of the IRC. If a fund, account, or trust, established for contested liabilities pursuant to Sec.1.461-2(c)(1) is a qualified settlement fund, it is classified as a qualified settlement fund for all purposes of the IRC. (Emphasis Added.)
- If a fund, account, or trust that is a qualified settlement fund could be classified as a trust within the meaning of Sec.301.7701-4 of this chapter, it is classified as a qualified settlement fund for all purposes of the IRC. If a fund, account, or trust, organized as a trust under applicable state law, is a qualified settlement fund, and could be classified as either an association (within the meaning of Sec.301.7701-2 of this chapter) or a partnership (within the meaning of Sec.301.7701-3 of this chapter), it is classified as a qualified settlement fund for all purposes of the IRC. If a fund, account, or trust, established for contested liabilities pursuant to Sec.1.461-2(c)(1) is a qualified settlement fund, it is classified as a qualified settlement fund for all purposes of the IRC. (Emphasis Added.)
Title 23 of the Virginia Administrative Code (VAC) 10-120-20 defines a "corporation' for Virginia tax purposes as:
-
- ... any entity created as such under the laws of [any jurisdiction], or any association, joint stock company, partnership or any other entity subject to corporation income taxes under the [IRC] (Emphasis Added.)
- ... any entity created as such under the laws of [any jurisdiction], or any association, joint stock company, partnership or any other entity subject to corporation income taxes under the [IRC] (Emphasis Added.)
Current Virginia Tax Liability of the Trust
Under Code of Virginia Sec. 58.1-400, every corporation having income from Virginia sources is subject to the corporate income tax. Public Law ("P.L.') 86-272, however, prohibits a state from imposing an income tax on businesses when the only contacts with the state are a narrowly defined set of activities. The department limits the scope of P.L. 86-272 to only those activities that constitute solicitation, are ancillary to solicitation, or are de minimis in nature.
Currently, all of the Trust's income comes from various investments managed and held out-of-state. None of the Virginia sources comes from Virginia income, nor does it perform any activities in the Commonwealth which would create nexus. The only connection between Virginia and the Trust at this time is the Trust's ownership of the Subsidiary which operates solely in Virginia. Thus, the Trust would not be subject to Virginia income taxation.
However, the department does have the authority to adjust the taxable income of two or more corporations in accordance with Code of Virginia Sec. 58.1-446. In the event that the department finds that the service transactions between commonly-owned entities improperly reflects Virginia taxable income from business done in Virginia, the department can, and if necessary will, seek remedies which may include consolidating the accounts of one or more of the entities. Because the application of Code of Virginia Sec. 58.1-446 is highly dependent on the facts and circumstances, the department cannot issue an advance ruling with respect to the transactions between the Trust and the Subsidiary.
Virginia Tax Liability after Subsidiary Liquidation
The Trust is considering liquidating the Subsidiary and taking over its operations. The employees and the actual operations would remain in Virginia. There would be a large number of employees conducting claims settlement, consulting and accounting support services for the Trust. Such contacts would be sufficient to create nexus with Virginia. Because the Trust would be required to file as a corporation for Virginia income tax purposes, all of the Trust's income, except for dividends would be subject to apportionment pursuant to Virginia statutory law. Dividends would be allocated to the state of commercial domicile.
In conclusion, the Trust is an out-of-state corporation, not a nonresident trust for Virginia income tax purposes. The Trust is not currently liable for Virginia corporate income tax. The Subsidiary is a Virginia corporation which is liable for Virginia corporate income tax. If the Subsidiary is liquidated and absorbed into the Trust, but the operations remain in Virginia, the Trust's income would be subject to corporate income taxation.
This ruling has been made subject to the facts presented to the department as summarized above. Any change in these facts or the introduction of facts by another party may lead to a different result. I hope that the foregoing answers your inquiry. If you have any other questions, you may contact ***** at *****
Sincerely,
Danny M. Payne
Tax Commissioner
Rulings of the Tax Commissioner