Document Number
Tax Type
Corporation Income Tax
Administration : Status Change - Separate to Combined, Inclusion Eligibility Year End, Income from Virginia Sources; Return - Filing Requirements; Apportionment : Calculation - Decimal Places; Pass-through Entity (PTE) : Limited Liability Company
Date Issued

November 10, 2020

Re: Corporate Income Tax:  Request for Filing Status Change

Dear *****:  

This will respond to your letter in which you request permission for ***** (A Corp) and a number of affiliated entities to change from filing separate Virginia corporation income tax returns to a combined return effective for the taxable year ended December 31, 2018.


A Corp, headquartered in ***** (State A), is a member of a corporate family that includes a number of entities that have historically filed separate corporate returns in Virginia. These entities include A Corp, ***** (Asub1), ***** (Allc1), ***** (Asub2), ***** (Asub3), and ***** (Allc2). It is the Department’s understanding that both Allc1 and Allc2 have elected treated as corporations for federal income tax purposes under Treasury Reg. § 301.7701-1 et seq., also known as the “check the box” regulations.

During 2018, A Corp acquired a target corporation (Tsub1) and its related entities, which included two entities (***** (Tsub2) and ***** (Tsub3) that filed a Virginia combined return. Approximately a month after the acquisition, Tsub1 divested its interest in Tsub3. 

The request for a change in filing status only includes A Corp, Asub1, Allc1, Tsub2 and Tsub3. Pending the Department’s permission, A Corp filed a combined return including all of the entities enumerated above. Because the Department has historically allowed affiliated corporations to switch from separate to combined filing, A Corp requests the Department to grant its request to file a combined return. 


Virginia Code § 58.1-441 requires every corporation organized under Virginia law or having income from Virginia sources to file a return. In addition, Title 23 VAC 10-120-310 A 1 requires every foreign corporation registered to do business in Virginia with the State Corporation Commission (SCC) to file a return even if it has no income from Virginia sources and no income tax is due.

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 Virginia 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.

Pursuant to Title 23 VAC 10-120-324, permission to change to or from filing separate to filing combined returns will generally be granted because such change does not affect the allocation and apportionment formulas for each corporation. A combined return must be filed under the name and identification number of a designated lead affiliate and include all affiliates subject to Virginia income tax. See Public Document 85-37 (2/28/1985). Although A Corp did not include all of the related entities in its request, the Department must consider each member of the corporate family to determine if they are eligible to be included in an affiliated group.

Acquiring Group

A Corp has filed returns for each taxable year from 2008 through 2017 without reporting any positive apportionment factors or income from Virginia sources. On the 2018 return, A Corp reported pass-through entity withholding from ***** (VAllc), a limited liability company. It appears VAllc transacted all of its business within the Commonwealth. Because the withholding form indicates A Corp owns 25% of Vallc, the Department would expect A Corp’s proportionate share of Vallc’s property, payroll and sales to be reflected in the numerator and denominator of the apportionment formula. Thus, contrary to what it reported, it appears A Corp should have reported a positive apportionment factor on the 2018 return. 

A Corp claims Asub1 and Allc1 had nexus and filed Virginia returns in 2016 and 2017. Department records indicate separate returns were filed for Asub1 for 2015 through 2017 taxable years, but no income from Virginia sources was reported. The Department has no record of corporate income tax return being filed by Allc1 since 2005. Neither entity reported positive apportionment factors or income from Virginia sources on the 2018 return. 

Asub2 filed separate income tax returns for the 2016 and 2017 taxable years, showing positive apportionment factors and reporting an income tax liability in each year. Likewise, Asub3 filed separate 2016 and 2017 returns showing positive apportionment factors and income from Virginia sources. Both entities reported income from Virginia sources on the 2018 return. They are joined by Allc2, which reported income from Virginia sources for 2018, but had not previously filed Virginia returns. 

Target Group

Tsub2 and Tsub3 have filed combined Virginia returns since 2012. Both entities reported a positive apportionment factor and income from Virginia sources on the 2018 short combined return. Tsub3, however, left the group within 2 months of its acquisition by A Corp and, therefore, did not share a common year end with the rest of the group. 

Eligible Entities

Under Title 23 VAC 10-120-323 B, members of an affiliated group are eligible to file a combined return if they are: (i) subject to Virginia income tax if a separate return were to be filed, (ii) affiliated as defined by Virginia Code § 58.1-302, and (iii) filing, using the same taxable year. 

Subject to Income Tax

Public Law (P.L.) 86-272, codified at 15 U.S.C.A. §§ 381-384, prohibits a state from imposing a net income tax where the only contacts with a state are a narrowly defined set of activities constituting solicitation of orders for sales of tangible personal property. Virginia Code § 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.”  Generally, a corporation will have income from Virginia sources if there is sufficient business activity within Virginia to make the applicable apportionment factor positive. See Virginia Code §§ 58.1-408 through 58.1-414. The existence of a positive Virginia apportionment factor establishes income from Virginia sources.

Under certain conditions, a corporation may have income from Virginia sources resulting from a positive apportionment factor, but not be subject to tax by virtue of the protections afforded under P.L. 86-272. Further, corporations that do not have a positive apportionment factor are not considered to be subject to Virginia income tax if separate returns are filed. When appropriate circumstances arise, however, the Department is authorized under Virginia Code § 58.1-446 to determine that income of an affiliate be deemed Virginia income even if the affiliate does not have nexus. See P.D. 96-346 (11/25/1996) and P.D. 11-162 (9/26/2011).

In P.D. 99-34 (3/24/1999), the Department ruled that a corporation registered to do business in Virginia, but not transacting any business in Virginia, is not subject to tax in Virginia and is not eligible to be included in a consolidated or combined Virginia return, even though it may be required to file a Virginia return. See also P.D. 12-91 (6/5/2012).

Based on the information provided, Asub2, Asub3, Tsub2 and Tsub3 were subject to income tax for the 2018 taxable year because they reported income from Virginia sources. Assuming Allc2 elected to be treated as a corporation for federal income tax purposes as explained in P.D. 97-343 (8/28/1997), it was likewise subject to Virginia income tax in 2018. Because no income from Virginia sources was reported by Asub1 and Allc1, it does not appear that they were eligible to be included in a combined return, although they may still have a filing requirement under Virginia Code § 58.1-441.

A Corp also failed to report income from Virginia sources on its returns. However, because it was a member of VAllc, each item of pass-through entity income, gain, loss or deduction had the same character for A Corp as for federal income tax purposes, or, if not characterized for federal income tax purposes, it had the same character for A Corp as if realized directly from the source by VAllc. See Virginia Code § 58.1-392. Because A Corp was considered the owner of all the Vallc’s assets and liabilities for federal income tax purposes, the Department regards A Corp as having the attributes and conducting the activities of the VAllc in Virginia. See P.D. 97-343. Based on the Department’s findings, it appears A Corp incorrectly reported that it had no income from Virginia sources when, in fact, income subject to Virginia income tax was passed through from VAllc.

Affiliated Group

As indicated above, all entities included in a combined Virginia return must be affiliated in accordance with the definition enumerated in Virginia Code § 58.1-302. Under this statute “affiliated” is defined as “ . . . two or more corporations subject to Virginia income taxes whose relationship to each other is such that (i) one corporation owns at least 80 percent of the voting stock of the other or others or (ii) at least 80 percent of the voting stock of two or more corporations is owned by the same interests.”  The facts provided indicate all of the entities subject to this ruling were affiliated as required by statute.

Same Taxable Year

Generally, for the purpose of determining eligibility to be included in a combined return, all of the corporations must have the same taxable year. However, under Title 23 VAC 10-120-323 B, a corporation that files a return for a period of less than 12 months is not considered to be using a different taxable year if all of the months included in the short period are within the taxable year of the combined group.

Under this regulation, a separate short taxable year Virginia return is not required when the short period results from the acquisition or disposition of a corporation. Under such circumstances, two short year returns are filed for the periods before and after acquisition, and the short year return for the period the corporation was affiliated, either before a disposition or after an acquisition, is included in the affiliated group’s combined return. See also P.D. 88-241(8/22/1988) and P.D. 90-170 (9/21/1990).

Both Tsub2 and Tsub3 were acquired during the 2018 taxable year and, therefore, did not share the same taxable year as A Corp’s affiliated group. In addition, Tsub3 was sold to yet another entity less than two months after its acquisition by A Corp. As required, Tsub2 and Tsub3 filed a combined Virginia return for the short 2018 period prior to their acquisition. Under Virginia’s regulation, Tsub2 and Tsub3 could be eligible to be included in a combined return, but only for the portion of the year they were ultimately owned by A Corp.


Based on the Department’s understanding of the facts and documentation available, Asub1 and Allc1 did not appear eligible to be included in a Virginia affiliated group and must file separate Virginia returns. Asub2, Asub3, Tsub2 and Tsub3 were eligible to be included in a combined return for the 2018 taxable year. It also appears A Corp and Allc2 could be eligible if it can be determined definitively that they would be required to file separate return. 

In order to be included, A Corp will have to determine whether its interest in VAllc creates more than a diminimus connection with Virginia under P.L. 86-272 and compute the amount of Vallc’s property, payroll, and sales would be required to be included in the numerator and denominator of its apportionment formula. 

For Allc2, a check of its federal filing status will be required to ascertain whether it filed as a separate corporation or was treated as a pass through entity. If it was treated as a separate corporation for federal income tax purposes, it would be included in the Virginia affiliated group. If it was treated as a pass through entity, its member or members will have to perform the same analysis as A Corp to establish their eligibility to be included in a Virginia combined return.

If it is eligible to be included, the return should be filed under A Corp (*****). If not, Asub2 (*****) will be the designated lead corporation. If a new corporation becomes a member of the affiliated group and has a positive Virginia apportionment factor, then the new corporation must follow the combined filing method selected by the group. 

In accordance with this ruling, the Virginia combined return filed for 2018 must be amended to remove those entities ineligible for inclusion in a Virginia affiliated group. Corporations removed from the combined return are required to file a separate Virginia corporate income tax return if the requirements of Virginia Code § 58.1-441. A copy of this letter should be attached to the amended 2018 combined return and separate corporate returns.

The Code of Virginia sections, regulations and public documents cited are available on-line at in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.



Craig M. Burns
Tax Commissioner



Last Updated 01/25/2021 08:53