Tax Type
Corporation Income Tax
Description
Price manipulation and intercorporate transactions; Dividend from subsidiary
Topic
Returns and Payments
Date Issued
03-24-2000
March 24. 2000
Re: Ruling Request: Corporate Income Tax
Dear ****
This will reply to your letter in which you request a ruling from the department with respect to certain transactions between affiliated corporations.
FACTS
The transactions involve a multistate corporation ("C") which does business in Virginia, is incorporated in another state, and decides to establish a subsidiary corporation ("S") by contributing assets and a note in exchange for common and preferred stock. The department understands that all transactions will be conducted using fair market value, the note will bear an arm's length rate of interest, and the preferred stock's dividend rate will also be set at arms' length. Following S's establishment, C will pay (and deduct for federal tax purposes) interest to S, and S will pay dividends on its preferred and common stock to C.
With respect to the above facts, you have asked whether the department will respect the federal interest deduction included in C's computation of federal taxable income on loans due to S, and exclude the dividend from S to the C from Virginia taxable income to the same extent excluded for federal purposes as reported on a separate company basis.
RULING
Code of Virginia § 58.1-446 (copy enclosed) provides in pertinent part:
Any corporation liable to taxation under this chapter and either owned or controlled by or owning or controlling, either directly or indirectly, another corporation may be required by the Department to make a report consolidated with such other corporation showing the combined gross and net income and such other information as the Department may require, but excluding intercorporate stockholdings and the intercorporate accounts. In case it appears to the Department that any arrangements exist in such a manner as improperly to reflect the business done or the Virginia taxable income earned from business done in this Commonwealth, the Department may, in such manner as it may determine, equitably adjust the tax. In all cases mentioned in this paragraph, such other corporations not otherwise liable to taxation under this chapter shall, for the purposes of this chapter, be deemed to be doing business in Virginia through the agency of the corporation liable to taxation under this chapter.
The transactions, as described above, fit the pattern of transactions that the department would examine in light of Section 58.1-446. A determination as to the proper treatment of the transactions between C and S cannot be made without examining all of the facts and circumstances surrounding the relationship between the affiliates and analyzing the intercompany arrangements. This is consistent with the department's long established policy of not issuing advanced rulings on the application of Section 58.1-446. See Public Document 95-176, 6/28/95, copy enclosed.
Effective for taxable years beginning on or after January 1, 1993, the department issued expanded regulations related to the application of Section 58.1-446. These regulations are promulgated in Title 23 of the Virginia Administrative Code (VAC) 10-120-360 through 364, copy enclosed. 23 VAC 10-120-361 sets forth a number of safe harbors that will not create an improper reflection of income under Section 58.1-446. With regard to lending transactions, the regulation states:
In an intragroup leading transaction, the lending party must be a discrete, separate business with its own employees, office space, and books and records. Funds must be loaned at a fair market value interest rate, with collateral, payments, and credit standing substantially similar to those which the borrower could obtain from an unrelated lending institution.
If the facts surrounding the Taxpayer's transaction meet this safe harbor, the interest deduction would be allowed.
As for the dividends of S, because federal taxable income is the starting point for determining a corporation's Virginia taxable income pursuant to Code of Virginia §§ 58.1-301 and 58.1-402, the dividend from S to the C will be excluded from Virginia taxable income to the same extent it is excluded for federal purposes. However, if a dividend received by a multistate corporation is not excluded for federal purposes, it would be allocated to the corporation's state of commercial domicile.
If you have any further questions, you may call **** in the Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/25907G
Re: Ruling Request: Corporate Income Tax
Dear ****
This will reply to your letter in which you request a ruling from the department with respect to certain transactions between affiliated corporations.
FACTS
The transactions involve a multistate corporation ("C") which does business in Virginia, is incorporated in another state, and decides to establish a subsidiary corporation ("S") by contributing assets and a note in exchange for common and preferred stock. The department understands that all transactions will be conducted using fair market value, the note will bear an arm's length rate of interest, and the preferred stock's dividend rate will also be set at arms' length. Following S's establishment, C will pay (and deduct for federal tax purposes) interest to S, and S will pay dividends on its preferred and common stock to C.
With respect to the above facts, you have asked whether the department will respect the federal interest deduction included in C's computation of federal taxable income on loans due to S, and exclude the dividend from S to the C from Virginia taxable income to the same extent excluded for federal purposes as reported on a separate company basis.
RULING
Code of Virginia § 58.1-446 (copy enclosed) provides in pertinent part:
Any corporation liable to taxation under this chapter and either owned or controlled by or owning or controlling, either directly or indirectly, another corporation may be required by the Department to make a report consolidated with such other corporation showing the combined gross and net income and such other information as the Department may require, but excluding intercorporate stockholdings and the intercorporate accounts. In case it appears to the Department that any arrangements exist in such a manner as improperly to reflect the business done or the Virginia taxable income earned from business done in this Commonwealth, the Department may, in such manner as it may determine, equitably adjust the tax. In all cases mentioned in this paragraph, such other corporations not otherwise liable to taxation under this chapter shall, for the purposes of this chapter, be deemed to be doing business in Virginia through the agency of the corporation liable to taxation under this chapter.
The transactions, as described above, fit the pattern of transactions that the department would examine in light of Section 58.1-446. A determination as to the proper treatment of the transactions between C and S cannot be made without examining all of the facts and circumstances surrounding the relationship between the affiliates and analyzing the intercompany arrangements. This is consistent with the department's long established policy of not issuing advanced rulings on the application of Section 58.1-446. See Public Document 95-176, 6/28/95, copy enclosed.
Effective for taxable years beginning on or after January 1, 1993, the department issued expanded regulations related to the application of Section 58.1-446. These regulations are promulgated in Title 23 of the Virginia Administrative Code (VAC) 10-120-360 through 364, copy enclosed. 23 VAC 10-120-361 sets forth a number of safe harbors that will not create an improper reflection of income under Section 58.1-446. With regard to lending transactions, the regulation states:
In an intragroup leading transaction, the lending party must be a discrete, separate business with its own employees, office space, and books and records. Funds must be loaned at a fair market value interest rate, with collateral, payments, and credit standing substantially similar to those which the borrower could obtain from an unrelated lending institution.
If the facts surrounding the Taxpayer's transaction meet this safe harbor, the interest deduction would be allowed.
As for the dividends of S, because federal taxable income is the starting point for determining a corporation's Virginia taxable income pursuant to Code of Virginia §§ 58.1-301 and 58.1-402, the dividend from S to the C will be excluded from Virginia taxable income to the same extent it is excluded for federal purposes. However, if a dividend received by a multistate corporation is not excluded for federal purposes, it would be allocated to the corporation's state of commercial domicile.
If you have any further questions, you may call **** in the Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/25907G
Rulings of the Tax Commissioner