Document Number
06-111
Tax Type
Corporation Income Tax
Description
Combined corporate income tax return, Virginia domiciled company
Topic
Appropriateness of Audit Methodology
Domicile
Nexus
Date Issued
10-10-2006

October 10, 2006




Re: § 58.1-1821 Application: Corporate Income Tax

Dear *****:

This will reply to your letter in which you seek correction of the corporate income tax assessment issued to ***** (the "Taxpayer"), for the taxable year ended December 28, 2003. I apologize for the delay in responding to your appeal.

FACTS


The Taxpayer, a Virginia domiciled company, acquired ***** (the "Subsidiary") in August 2000. Prior to its acquisition, the Subsidiary was headquartered outside Virginia. The Subsidiary is a holding company that wholly owns several other companies. It also owns interests in limited partnerships.

The Subsidiary has no employees or real or tangible assets. Its offices and books are maintained at the Taxpayer's headquarters. All of the Subsidiary's operations, such as investment, accounting and legal, are performed by the Taxpayer's employees in Virginia. All of the officers of the Subsidiary during the periods at issue were also officers of the Taxpayer who were physically located at the Taxpayer's headquarters.

The Taxpayer received permission from the Department to file a combined corporate income tax return for the taxable year ended December 31, 2001, and for all subsequent years. The Taxpayer's combined returns filed for the 2001 and 2002 taxable years did not include the Subsidiary. The Taxpayer included the Subsidiary, which reported a loss, in the combined return for the 2003 taxable year. All of the limited partnerships in which the Subsidiary was a limited partner reported losses in 2003.

The Department audited the Taxpayer for the taxable year ended December 28, 2003. The auditor removed the Subsidiary from the combined return on the basis that it lacked nexus with Virginia. The Taxpayer contends that the Subsidiary is commercially domiciled in Virginia. In addition, the Taxpayer states that it has filed amended Virginia combined returns that include the Subsidiary for the 2001 and 2002 taxable years.

DETERMINATION


Combined Return

Pursuant to Va. Code § 58.1-442, an affiliated group of corporations may elect to file a combined Virginia corporate income tax return. Title 23 of the Virginia Administrative Code ("VAC") 10-120-323 provides that a corporation may be included in a combined Virginia income tax return if it would be subject to Virginia income tax if a separate return were to be filed, is affiliated with a group of corporations as defined by Va. Code § 58.1-302, and uses the same taxable year for income tax filing.

In general, a corporation that is commercially domiciled in Virginia will be subject to tax on its income and be eligible to be included in a combined Virginia income tax return. Under Title 23 VAC 10-120-140, the commercial domicile of a corporation is defined as the location of the principal office where "the business affairs of the corporation are normally directed or managed." This is usually a corporation's headquarters. The regulation goes on to state:
    • If the corporation has no office then the commercial domicile may be where the officers, directors and shareholders regularly meet or where the principal officer or majority shareholder/officer conducts the affairs of the corporation, depending upon the facts and circumstances.

In this case, the Subsidiary has no office, employees, or tangible assets. The Taxpayer has provided evidence to show that the Subsidiary's affairs are conducted primarily by officers located at the Taxpayer's headquarters in Virginia. As such, Virginia is considered the commercial domicile of the Subsidiary for Virginia corporate income tax purposes. See also, Public Documents 03-35 (4/12/03), 05-28 (3/7/05) and 05-90 (6/9/05). The Subsidiary is eligible to be included in a combined Virginia corporate income tax return filed by the Taxpayer.

Apportionment

The Subsidiary reported a net operating loss for the 2003 taxable year. Its primary source of income resulted from losses passed through from limited partnerships. The Taxpayer contends that the Subsidiary is not required to include its share of partnership property, payroll, and sales for purposes of determining its apportionment factor.

Public Document 95-19 (2/13/95) provides that a corporation that is a limited partner is required to include its share of partnership property, payroll and sales for purposes of determining its Virginia apportionment factor unless:

i) a corporation holds a limited partnership interest;
ii) all general partners are unrelated third parties;
iii) the combined partnership interests held by the corporation and all
    • related parties constitute 10% or less of the profit and capital
      interests of the limited partnership; and
iv) the structure is not a device primarily designed to avoid Virginia
    • taxation of the limited partnership's income.

The Subsidiary held an interest in excess of 10% in one limited partnership (the "Partnership"). This Partnership holds limited partnership interests in various other limited partnerships. The Taxpayer has provided evidence that the aggregate interest of the Subsidiary in each of the limited partnership interests owned by the Partnership is less than 10%. As such, the Subsidiary is not required to include the Partnership's sales, property, and payroll factors when determining its own apportionment factors.

CONCLUSION


The Taxpayer properly included the Subsidiary in its combined Virginia corporate income tax return filed for the taxable year ended December 28, 2003. In determining its apportionment factor, the Subsidiary was correct to not include its share of the Partnership's property, payroll, and sales. Accordingly, the assessment for the taxable year ended December 28, 2003, has been abated.

The Code of Virginia section, regulations and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this determination, please contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
                • Sincerely,

                • Janie E. Bowen
                  Tax Commissioner



AR/56814B

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46