Tax Type
Corporation Income Tax
Description
Consolidated returns; Nexus
Topic
Appropriateness of Audit Methodology
Assessment
Filing Status
Nexus
Date Issued
12-09-2011
December 9, 2011
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 assessments issued to ***** (the "Taxpayer") for the taxable years ended December 2006 and 2007. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer, a parent corporation commercially domiciled in Virginia, filed consolidated Virginia corporate income tax returns with a number of its subsidiaries for the 2006 and 2007 taxable years. Under audit, ***** (Sub A) and ***** (Sub B) were removed from the consolidated return. The Department's auditor determined that the corporations at issue lacked nexus with Virginia and did not have income from Virginia sources. The Taxpayer contests the adjustments, asserting that these companies had nexus with Virginia for the taxable years at issue and were properly included in the consolidated returns.
DETERMINATION
Pursuant to Va. Code § 58.1-442, an affiliated group of corporations may elect to file a consolidated Virginia income tax return. If such an election is made, Title 23 of the Virginia Administrative Code (VAC) 10-120-322 provides that, once an election to file a consolidated return is made, a related corporation must be included in the Virginia consolidated return unless it is not affiliated as defined under Va. Code § 58.1-302, exempt from Virginia income tax under Va. Code § 58.1-401, exempt from Virginia income tax under Public Law (P.L.) 86-272, not subject to Virginia income tax if separate returns were to be filed, or using different taxable years.
Virginia Code § 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.) 99-34 (3/24/1999) states that a corporation registered to do business in Virginia but not conducting any business in Virginia is not subject to tax in Virginia and is not eligible to be included in a consolidated Virginia return, even though it may be required to file a Virginia return. Thus, a business incorporated under the laws of Virginia may be required to file a Virginia return, but may not be subject to the Virginia tax on its income.
Accordingly, a corporation that is incorporated under the laws of Virginia and required to file a Virginia return, but that is not subject to the tax imposed by Virginia on its income, cannot be included in an affiliated group for the purposes of filing a Virginia consolidated corporation income tax return. See P. D. 99-34 (3/24/1999).
In order for a corporation to be subject to Virginia income tax, it must have income from Virginia sources. Generally, 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. For corporations using the three-factor formula, the existence of one positive Virginia apportionment factor clearly establishes income from Virginia sources.
Sub A
Sub A, a Virginia corporation, was commercially domiciled and operated in a foreign country. Sub A reported no property, payroll or sales attributable to Virginia on the Taxpayer's 2006 and 2007 corporate returns.
The Taxpayer argues that Sub A should be included in the consolidated return because it was affiliated with the Taxpayer under Va. Code § 58.1-302. The Taxpayer further indicates that all of the members of Sub A's board of directors were based in Virginia. As indicated above, Sub A would be required to have income from Virginia sources in order to be included in the consolidated returns for the taxable years at issue. Because Sub A did not have a positive apportionment factor and, therefore, no income from Virginia sources, the auditor's adjustment to remove Sub A from the Taxpayer's consolidated 2006 and 2007 taxable year returns is upheld.
Sub B
The Taxpayer acquired Sub B in July 2006. Sub B, commercially domiciled in ***** (State A), operated until September 2006 when it was merged into the Taxpayer. The merger was treated as a complete liquidation under Internal Revenue Code (IRC) § 332.
The Taxpayer argues that Sub B had employees traveling into Virginia that performed services that exceeded the protection afforded under P.L. 86-272. In addition, Sub B entered into a voluntary disclosure agreement with the Department to mitigate potential sales and use tax liabilities. As indicated above, Sub B would be required to have income from Virginia sources in order to be included in the consolidated returns for the taxable years at issue. Because Sub B did not have a positive apportionment factor and, therefore, no income from Virginia sources, the auditor's adjustment to remove Sub B from the Taxpayer's consolidated 2006 and 2007 taxable year returns is upheld.
Net Operating Loss
Even if Sub B is not eligible to be included in the consolidated returns, the Taxpayer asserts that it would be permitted to deduct the net operating loss (NOL) incurred by Sub B between the date it was acquired and the date it was liquidated. In a transaction subject to IRC § 381(a), an acquiring corporation inherits and is entitled to take into account the NOL carryovers of the liquidated corporation. The acquiring corporation is not permitted to carryback an NOL loss for a taxable year ending after the liquidation date against the income of the liquidated corporation. See IRC § 381(b)(3).
For the acquiring corporation's first taxable year ending after the date of liquidation, the amount of NOL attributable to the liquidated corporation is limited. The limitation is equal to the acquiring corporation's post acquisition taxable income. Post acquisition taxable income equals the acquiring corporation taxable income without regard to any NOL deduction (NOLD) multiplied by a fraction, the numerator of which is the number of days after the liquidation date to the end of the taxable year and the denominator of which is the number of days such taxable year. See Treas. Reg. § 1.381(c)(1)-1(d).
After applying the limitation to the Taxpayer for the 2006 taxable year, post acquisition taxable income exceeded the NOL carried over from Sub B. Accordingly, the Taxpayer would be entitled to a deduction for the full amount of the NOL incurred by Sub B during the period between July 2006 and September 2006.
Conclusion
Based on this determination, the assessment for the 2007 taxable year is upheld. The audit will, however, be returned to the audit staff to adjust the 2006 assessment as noted above. After the auditor makes the appropriate adjustments, the Taxpayer will receive a revised bill. The Taxpayer should remit its payment for the outstanding balance as shown on the revised bill within 30 days from the date of the bill to avoid the accrual of additional interest.
The Code of Virginia sections, regulation 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 Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
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AR/1-4277676257.E
Rulings of the Tax Commissioner