Tax Type
Corporation Income Tax
Description
Retroactive consolidated filing denied
Topic
Returns and Payments
Date Issued
03-31-2000
March 31, 2000
Re: Request for a Ruling: Corporate Income Taxation
Dear ****
This will reply to your letter in which you requested permission for your client (the "Taxpayer") and all of its subsidiaries (the "Subsidiaries") to be included in a consolidated income tax return retroactive to the 1995 taxable year.
FACTS
The Taxpayer is a holding company incorporated in Delaware that moved its headquarters to Virginia in 1995. The Taxpayer's income consists of dividends from subsidiaries that it owns, interest on bank accounts and other miscellaneous income. It has filed a corporate Virginia income tax return for the 1995 and subsequent tax years. The Subsidiaries are commercially domiciled in Virginia but have not filed Virginia income tax returns for the 1995, 1996 and 1997 taxable years because they had no taxable income. Most of the income of these Subsidiaries consists of interest and dividends which would qualify for the foreign source income subtraction or the subtraction for dividends from 50% owned corporations. However, three of the Subsidiaries do have operating income. These include:
A subsidiary ("FS") based outside the United States ("U.S.") that began providing services to customers through subcontractors in the U.S. in 1997;
An equipment purchasing subsidiary ("PS") that sells equipment to subsidiaries located outside the U.S.; and
An employee leasing subsidiary ("ES") that provides employees primarily for subsidiaries located outside the U.S.
PS and ES do not own any assets, and all their operating and administrative functions are performed by employees of the Taxpayer.
The Taxpayer requests that it be allowed to amend the Taxpayer's 1995, 1996 and 1997 Virginia income tax returns and retroactively file consolidated returns with the Subsidiaries. In the alternative, if the Taxpayer is not allowed to file consolidated returns, it requests permission to file on a combined basis. Finally, the Taxpayer requests permission to file spreadsheets or schedules in lieu of amended consolidated income tax returns.
RULING
Subsidiaries Except for FS
Code of Virginia § 58.1-400 imposes income tax "on the Virginia taxable income for each taxable year of every corporation organized under the laws of the Commonwealth and every foreign corporation having income from Virginia sources." Thus, every corporation, whether incorporated in Virginia or elsewhere, that has Virginia taxable income is subject to the tax. Because the tax is imposed on the income of the corporation and not the corporation itself, a corporation, whether incorporated in Virginia or elsewhere, having no Virginia taxable income cannot be subject to the tax.
Pursuant to Code of Virginia § 58.1-442, an affiliated group of corporations may elect to file a consolidated Virginia income tax return. Title 23 of the Virginia Administrative Code (VAC) 10-120-322 provides that a corporation cannot be included in a consolidated return if it is exempt from Virginia income tax under Code of Virginia § 58.1401, exempt from Virginia income tax under Public Law (P.L.) 86-272, not affiliated as defined by § 58.1-302 of the Code of Virginia, not subject to Virginia income tax if separate returns were to be filed, or using different taxable years. (Emphasis added.)
Generally, corporations organized under Virginia law and foreign corporations having income from Virginia sources are subject to Virginia tax. A corporation will have income from Virginia sources if there is sufficient business activity within Virginia to make any one or more of the applicable apportionment factors positive. The existence of positive Virginia apportionment factors clearly establishes income from Virginia sources. This would be the case whether or not a corporation is incorporated in Virginia.
Code of Virginia § 58.1-441 does require every corporation organized under the laws of the Commonwealth to file an income tax return annually with the department. However, a filing requirement does not subject a corporation to the Virginia tax on its income. Public Document (P.D.) 94-368, (12/12/94), copy attached, states that a corporation registered to do business in Virginia, but has not conducted any business in Virginia is not subject to tax in Virginia and is not eligible to be included in a consolidated Virginia return pursuant to 23 VAC 10-120-322 (formerly Virginia Regulation 630-3-442).
Based on the information provided, it appears that only the Taxpayer and FS have income subject to Virginia tax. As such, because none of the other Subsidiaries have Virginia-source income subject to Virginia tax, they cannot be included in a consolidated or combined return. Any of these Subsidiaries incorporated in Virginia would, however, be required to file a separate Virginia corporate return.
FS Subsidiary
FS began operations in 1996 with sales activities in a foreign country. In 1997 some of the services sold to customers in the foreign country required that the services be performed in the customers' U.S. locations. These U.S. services, some of which were performed in Virginia, were performed by an independent contractor acting as FS's agent.
P.L. 86-272, codified at 15 U.S.C.A. §§ 381-384, prohibits Virginia from imposing a net income tax on a taxpayer when the only contact with Virginia is the solicitation of sales of tangible personal property. P.L. 86-272 protection has been extended by the U.S. Supreme Court to include activities which are ancillary to direct sales solicitation, as well as de minimis activities. See Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 112 S Ct. 2447 (1992).
FS is selling services that must be performed in Virginia. An independent contractor performs the services in Virginia on behalf of FS. The activities performed by the independent contractor in Virginia clearly serve a business function of FS that is separate from and exceeds the solicitation of sales. As such FS's activities in Virginia are not protected under P.L. 86-272.
Although the furnished information does not provide a clear indication as to whether the activities of FS would be considered de minimis, it is doubtful that these activities would not constitute a continuous pattern of activity that is not de minimis. As such, it appears that FS has been subject to Virginia tax on its income beginning with the 1997 taxable year.
Filing Status
Because FS would have been subject to Virginia income tax on a separate return basis in 1997, the issue becomes whether the Taxpayer and FS may file retroactive consolidated corporate returns for the years in question. 23 VAC 10-120-320 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 combined return, or a consolidated return. All returns for subsequent years must be filed on the same basis unless permission to change is granted by the department. In this case, 1997 was the first year two or more members of the Taxpayer's affiliated group was subject to Virginia income tax.
For 1997, the Taxpayer filed a separate income tax return. FS failed to timely file an income tax return for 1997. Under such circumstances, the department considers the Taxpayer and FS to have made an election to file on a separate basis. See Public Document ("P.D.") 96-145 (6/20/96), copy attached.
Absent extraordinary circumstances, 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. Further, permission to change will generally be effective only for returns filed on or after the date the request for permission to change was filed.
Pursuant to P.D. 96-145, failure to file a consolidated return because of a belief that affiliated corporations are not subject to Virginia tax is not an extraordinary circumstance which would allow retroactive consolidated filing. In the instant case, the Taxpayer did not file consolidated Virginia income tax returns for the 1995 through 1997 taxable years because it believed that the Subsidiaries, including FS, were not liable for Virginia income tax. Based on the facts provided, no extraordinary circumstances exist to warrant granting permission to change to filing on a consolidated basis. Accordingly, permission to file a retroactive Virginia consolidated return cannot be granted.
In addition, the Taxpayer has requested that its income tax returns be consolidated with its Subsidiaries' returns under Code of Virginia § 58.1-446. This code section authorizes the Department of Taxation to equitably adjust the tax of a corporation when it determines that a corporation's business done in Virginia or taxable income earned from Virginia sources is improperly reflected. There is no evidence that any of the transactions between FS and the Taxpayer would cause an improper reflection of income. In addition, almost all the income generated by the other Subsidiaries qualifies for the foreign income subtraction resulting in little or no Virginia taxable income, virtually eliminating the chances of an improper reflection of Virginia taxable income from occurring. Therefore, there is no evidence on which to base an improper reflection of income that would require the consolidation of the affiliated group for Virginia income tax purposes under Code of Virginia § 58.1-446.
In the alternative, you have requested permission to file a combined return in the event that consolidated filing is denied. Permission is hereby granted for the Taxpayer and FS to file on a combined basis prospectively, beginning with the return for the 1998 taxable year. Any additional affiliates beginning business in Virginia would be required to file as members of the combined return.
Alternative Income Tax Returns
In addition, Code of Virginia § 58.1-411 provides that returns filed with the department@... shall be made on forms prescribed by the Department . . .". The department has mandated that tax reports be made on Virginia tax return forms. Therefore, your request to file spreadsheets or similar schedules in lieu of formal amended returns is denied.
I hope that the aforementioned ruling has answered your request. If you have any questions, you may contact **** at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/23062B
Related Documents
Rulings of the Tax Commissioner