06-47 | Virginia Tax

Tax Type

Corporation Income Tax

Description

Airline filing requirements in Virginia for corporate income tax purposes

Topic

Allocation and Apportionment

Property Subject to Tax

Date Issued

04-11-2006

April 11, 2006

Re: Ruling Request: Corporate Income Tax

Dear *****:

This will reply to your letter in which you request a ruling on behalf of ***** (the "Taxpayer") regarding its filing requirements in Virginia for corporate income tax purposes.

FACTS

The Taxpayer, a regional airline headquartered in ***** ("State A") that operates in several states, including Virginia, was an S corporation prior to 1994. On January 1, 2004, the shareholders contributed their stock to ***** (the "Parent"), which is also headquartered in State A, for an equal number of shares of the Parent. The Parent then made an S corporation election, which in turn, made the Taxpayer a qualified Subchapter S corporation subsidiary of the Parent. These changes qualified as a reorganization under Internal Revenue Code ("IRC") § 368 (a)(1)(F). The Parent succeeded the Taxpayer and continued the Sub S election and Federal Employer ID Number ("FEIN") of the Taxpayer.

In February 2004, the Parent formed ***** ("LLCA") as a single member limited liability company. LLCA's inventory of aircraft parts and engines were contributed by the Parent, after a distribution from the Taxpayer of the same parts, or purchased directly from the Taxpayer, then leased back to the Taxpayer. LLCA leases only to the Taxpayer. The parts and engines are located outside of Virginia. As a limited liability company, LLCA's assets, liabilities, income, losses and credits are treated as those of its sole member, the Parent, for purposes of federal income tax purposes.

The Taxpayer and LLCA are currently disregarded entities for federal income tax purposes. The Parent, as the owner of their assets and liabilities, will file a 2004 taxable year corporate income tax return under its name and the Taxpayer's FEIN. You have asked several questions concerning corporate filing requirements and apportionment with respect to the restructuring.

RULING

1. Filing requirements for your state. Based on the details, which entities will be required to file a tax return? Will separate returns be required or does your state follow federal in that only one return will need to be filed under the Parent?

Because Virginia generally conforms to the Internal Revenue Code ("IRC"), the Parent will be considered the owner of all the assets and liabilities of the disregarded entities, the Taxpayer and LLCA.

The Parent will be required to file a Pass-Through Entity Return of Income, Form 502 that include the assets, liabilities, items of income, deductions, and credits of its disregarded entities. The Taxpayer and LLCA, as disregarded entities, are not required to file separate returns unless they are also required to file separate federal income tax returns. See Public Document ("P.D.") 97-341 (8/27/97) and P.D. 97-343 (8/27/97) for additional information.

2. How should apportionment be determined for your state?

If a corporation is subject to taxation in Virginia and at least one other state (as determined by Va. Code § 58.1-405) then all Virginia taxable income, other than dividends allocable under Va. Code § 58.1-407, is apportioned by the appropriate formula as provided in Va. Code §§ 58.1-407 through 58.1-421. Except as noted below, all corporations are required to use a three-factor formula based on the property, payroll and sales within Virginia, with the sales factor counted twice. If the denominator of any fraction is zero, then that fraction is not included in the average. Based on the information available, the three-factor formula will be used.

The Code of Virginia provides special single factor formulas for motor carriers, financial corporations, construction corporations and railroad companies in §§ 58.1-417, 58.1-418, 58.1-419 and 58.1-420, and provides for an alternative method of allocation under 58.1-421, if the statutory method of allocation and apportionment unfairly states the income from Virginia sources.

3. If composite returns for Taxpayer have been filed in the past in your state, does the restructuring at all affect the ability to file composite returns?

A unified return may be filed without prior approval from the Department provided that the pass-through entity and all of the qualifying participants agree to comply with the rules set forth in the instructions for Form 765. If all of those rules cannot be met, the pass-through entity must receive written approval from the Tax Commissioner before submitting a unified return.

The Taxpayer may continue to file a unified nonresident individual income tax return on behalf of the Taxpayer's shareholders provided that it and all of the qualifying participants agree to comply with the rules set forth in the instructions for Form 765.

4. For federal income tax purposes, the Parent will succeed to the FEIN of the Taxpayer. The Parent also has its own FEIN. For purposes of filing a tax return with your state, which FEIN should be used?

File the Virginia return using the same name and FEIN required by the Internal Revenue Service for reporting the Taxpayer's income.

5. Estimated payments may have continued to be made during the current year under the QSUB's FEIN number. Is it necessary to transfer these payments to the FEIN of the Parent?

Transfer of payments may be required if a different FEIN is used for filing the Virginia income tax return.

6. Is there any registration process that the Parent would be required to fulfill in your state?

The Parent must register as a corporation with the Department of Taxation. The Taxpayer, which is already registered with the Department, may need to update its registration information pursuant to the change in its corporate structure. The Registration Form, R-1, is available on the Department's website, located at www.tax.virginia.gov.

If you have additional questions or if the Department may be of further assistance, please contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/53288E

Rulings of the Tax Commissioner