January 21, 2020
Re: Request for Ruling: Corporate Income Tax
Dear *****:
This will respond to your letter in which you seek a ruling regarding ***** (the “Taxpayer”) and its subsidiaries receiving permission to file a consolidated return.
FACTS
The Taxpayer and *****, *****, *****, *****, *****, *****, and ***** (the “Virginia Group”) are affiliated corporations. The Virginia Group is subject to Virginia income tax and files separate Virginia corporate income tax returns.
In July 2018, ***** (Affiliate A) was created and became the parent company of the Virginia Group. The Taxpayer has requested a ruling asking what steps need to be taken in order for the Virginia Group to file a consolidated return.
RULING
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.
Permission to Change Filing Status
Under Title 23 VAC 10-120-324 C, filing methods are deemed to be made by the affiliated group as a whole. Changes in the membership of an affiliated group do not affect the original election by the affiliated group. If a new corporation becomes a member of the affiliated group, the new corporation must follow the filling method previously elected by the group.
Permission to change to or from the consolidated filing method is generally not granted by the Department, because this change can affect the allocation and apportionment factors and possibly distort the reporting of the portion of business done in Virginia. See Public Document (P.D.) 95-25 (2/17/1995). In this case, Affiliate A has become the new parent of the Virginia Group. In P.D. 95-10 (1/18/1995) the Department ruled that when a parent corporation becomes a member of a Virginia affiliated group and the Virginia affiliated group has previously established an election, then the affiliated group remains subject to the established election. The creation of a new parent company is not an extraordinary circumstance sufficient to warrant granting permission to change to filing on a consolidated basis.
New Election
The mere formation of a parent corporation or corporate reorganization by an affiliated group would not create a new filing election. See P.D. 92-75 (5/29/1992) and P.D. 97-397 (9/30/1997). However, in P.D. 94-185 (6/17/1994), all but one of the affiliated corporations that filed a consolidated Virginia corporate income tax return were sold, leaving the one affiliate operating in Virginia to file a separate return. The Department determined that this affiliate could begin filing a consolidated return with a newly created affiliate if a reasonable time elapsed. A full two taxable year period was determined to be a reasonable period before a new election could be allowed.
In order for the two taxable-year period rule for a new election to be applicable, all but one of the affiliated corporations must cease all operations in Virginia and not be subject to Virginia corporate income tax. Merely closing a corporate account does not commence the two-year waiting period. As such, all but one member of the Virginia Group would have to cease operations in Virginia in a manner under which each entity would be eligible for the protections afforded under Public Law (P. L.) 86-272, codified at 15 U.S.C. §§ 381-384, or otherwise and subject to Virginia’s income tax. It can begin filing consolidated Virginia corporate income tax returns as a new election after a two-year period has passed.
20-Year Rule
Virginia Code § 58.1-442 C allows a group of affiliated corporations that has filed Virginia income tax returns on the same basis for at least the preceding 20 years to be granted permission to change the basis of the type of return filed from consolidated to separate or from separate or combined to consolidated. The Taxpayer indicates that two affiliates will have filed separate Virginia corporate returns for 20 years by the 2025 taxable year.
Currently, the Virginia Group includes seven affiliated entities. Two of the entities would have filed in Virginia for 20 years by 2025. The statute does not require all entities of the affiliated group to meet the 20-year requirement. Because the statute was enacted as a way for affiliated groups to change their filing status and affiliated groups tend to change membership over time, it is the opinion of the Department that, so long as a group remains affiliated, as defined under Virginia Code § 58.1-302, for 20 years and satisfies the other requirements of the statute, the affiliated group will be eligible to change its filing status. Eligibility would not be impacted by the length of time any single entity remained in the group as long as the group remains affiliated for the required number of years. Thus, even if the original members of an affiliated group are no longer members, the remaining members could be eligible if the group in some form remained affiliated for 20 years.
In order to get permission to change a corporate filing status under Virginia Code § 58.1-442 C, a taxpayer must show that: (1) for the taxable year immediately preceding the taxable year for which the new election would be applicable, there would have been no decrease in tax liability computed under the proposed election as compared to the affiliated group’s former filing method; and (2) the affiliated group agrees to file returns computing its Virginia income tax liability under both the new filing method and the former method and will pay the greater of the two amounts for the taxable year in which the new election is effective and for the immediately succeeding taxable year.
CONCLUSION
In accordance with established policy, the mere formation of a new parent corporation does not automatically make the Virginia Group eligible for a new election or constitute extraordinary circumstances for which the Department would grant permission to change. As long as the Virginia Group has been affiliated in some manner for a 20-year period and the group meets the restrictions of Virginia Code § 58.1-442 C, they may be able to elect to change in 2015 for the 2016 taxable year.
The Code of Virginia sections, regulations and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this response, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1945.B