Rulings of the Tax Commissioner

March 17, 2016

Re:    Request for Ruling:  Corporate Income Tax

Dear *****:

This will reply to your letter in which you request a ruling as to the filing status of two affiliated corporations.

FACTS

***** (the "Taxpayer"), and its subsidiaries have been filing a consolidated Virginia corporate income tax return since the 2003 taxable year.  According to the Taxpayer, only one of the subsidiaries, ***** (Corporation A), had nexus with Virginia prior to 2007.  The Taxpayer states that another subsidiary, ***** (Corporation B), established nexus with Virginia in 2007 and had income from Virginia sources. The Taxpayer requests rulings regarding (1) whether an entity must have income from Virginia sources to be included on a consolidated Virginia corporate income tax return; and (2) whether Corporation A and Corporation B are permitted to file amended consolidated returns for the 2012 and 2013 taxable years to exclude affiliates it claims did not have nexus with Virginia.

RULING

Eligibility

Virginia Code § 58.1-442 allows corporations to elect to file returns as separate, combined, or consolidated entities regardless of how the corporations file their federal income tax returns.  Title 23 of the Virginia Administrative Code (VAC) 10-120-320 provides that in the first full taxable year, two or more members of a group of corporations affiliated pursuant to Va. Code § 58.1-302 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.

If the affiliated group of corporations elects to file a consolidated return, the return must include the net income and apportionment factors of all members of the affiliated group which would be subject to Virginia income tax if separate returns were to be filed.  See Title 23 VAC 10-120-322 B 1.  In order for a corporation to be subject to Virginia income tax, it must have income from Virginia sources.  See Public Document (P.D.) 11-199 (12/9/2011).  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.

Corporations may not be included on a consolidated Virginia income tax return, however, if they are 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.  See Title 23 VAC 10-120-322 B 2.  According to the Taxpayer, only Corporation A had nexus and Virginia source income prior to 2007.  If this was the case, the other entities were not eligible to be included in a consolidated return and Corporation A should have been filing separate Virginia returns.

Election

The election to use a certain filing status is determined by the affiliated group at the time such group meets the definition of affiliated under Va. Code § 58.1-302. A corporation included in a federal consolidated return but which is not subject to Virginia income tax is not an affiliate for Virginia purposes.  See Title 23 VAC 10-120-320 C. The Taxpayer indicates that Corporation B established nexus in Virginia and had income from Virginia sources beginning in 2007.  If no other entities were affiliated previously, an affiliated group did not exist until 2007.

Corporation A and Corporation B were a part of the consolidated returns for the 2007 through 2013 taxable years.  Because the filing of a consolidated return is deemed to be consented to by all eligible corporations included therein pursuant to Title 23 VAC 10-120-322 D 1, the Department will consider Corporation A and Corporation B to have elected to file a consolidated return as of the first taxable year the affiliated group existed.