Tax Type
Corporation Income Tax
Description
Request to amend separate returns on a combined basis
Topic
Returns/Payments/Records
Date Issued
10-23-1991
October 23, 1991
Re: Request for Ruling:
Dear******************
This is in response to your letters dated October 10, 1990 and November 6, 1990 in which you filed amended returns for 1986, 1987 and 1988 prepared on a combined basis and requested permission to change from separate to combined filing for 1986 and thereafter.
FACTS
The taxpayer and its subsidiaries filed separate returns for the above years, are part of an affiliated group as defined in Va. Code §58.1-302, are subject to the Virginia income tax on a separate return basis, and file using the same taxable year.
RULING
Virginia Regulation (VR) §630-3-442(E) provides that changes between separate and combined filing are generally allowed because allocation and apportionment among the members of the affiliated group are unaffected by either of these two filing methods.
When a combined return is filed for a year in which the members have already filed separate returns, the filing causes a significant administrative burden for the department. In addition to auditing and reconciling the amended return, each separate account must be adjusted to transfer payments and credits to the combined account. Furthermore, when a separate return reports a federal net operating loss, some or all of it may have been carried back to years prior to the combined return and generated a refund of Virginia tax. If the separate loss is subsequently included in an amended combined Virginia return, then there would be a change in the amount of the Virginia modification that follows the separate loss. We might then have to assess and collect an erroneous form 500-NOLD refund for years preceding the amended combined return.
A review of your amended returns indicates that both of these issues are present. In particular, up to 21 separate accounts are involved, and 2 of the corporations appear to have incurred a federal net operating loss in 1986. In view of the significant administrative burden caused by allowing a retroactive change in filing status I am unwilling to grant permission in the absence of extraordinary circumstances. You have shown no such circumstances.
A review of prior letters granting permission to change from separate to combined returns indicates that the vast majority respond to a request filed on or before the extended due date for the first combined return. Nevertheless, a few letters have granted permission to file one or more amended returns on a combined basis. At this point in time it is not possible to determine if any special circumstances were present, or NOLD issues absent, in these letters. The letters themselves are silent on these issues.
You claim that because the department has previously allowed retroactive filing changes to combined, this practice has become a rule or regulation which can only be changed by regulation under the Virginia Administrative Process Act (APA). However, this ignores the fact that the regulation on point, VR 630-3-442.E.2 says only that "permission to change from separate to combined returns . . . will generally be granted." The regulation is silent on whether permission will be granted retroactively or prospectively. Indeed, the word "generally" implies a case-by-case adjudication based on an analysis of the facts and circumstances. Although tax regulations must be promulgated under the APA, rulings in tax cases are specifically exempted from the APA. Va. Code §58.1-205.
In comparing the equities of the significant administrative issues and the potential impact on the taxpayer, I find that the primary difference in granting or denying retroactive combination is merely the timing of loss utilization for Virginia purposes. Over an extended period of time the overall Virginia tax liability of the group is not likely to be significantly different unless there are changes in the group's membership or their apportionment factors.
After considering all of the factors, I decline to grant permission to file amended combined returns for 1986, 1987, and 1988. Because the request to change was filed before the extended due date for the 1989 return, permission is granted to file a combined return for 1989 and thereafter.
Sincerely,
W. H. Forst
Tax Commissioner
TPD/5612G
Rulings of the Tax Commissioner