Tax Type
Corporation Income Tax
Description
Health Maintenance Organizations
Topic
Taxpayers' Remedies
Date Issued
04-02-1991
April 2, 1991
Re: §58.1-1821 Application; Corporation Income Tax
Dear*********************
This will reply to your letter of June 20, 1990, in which you seek correction of corporation income tax assessments for**************** (the "Taxpayer").
FACTS
The taxpayer filed Virginia consolidated corporation income tax returns for 1986 and 1987. The taxpayer included the taxable income of two of its health maintenance organizations ("HMO's") in the return. The returns were audited and numerous adjustments were made. You contest three adjustments. The average value of property for the property factor was adjusted, intercompany eliminations in the sales factor were disallowed, and the HMO's were removed from the consolidated return.
DETERMINATION
Average Value of Property: The auditor adjusted the average value of inventory by averaging the values at the beginning and ending of the taxable year. You state the inventory was held approximately half the year and request averaging on a monthly basis.
Averaging property on the basis of monthly values may be elected by taxpayers where a substantial amount of property is acquired after the beginning of the taxable year or disposed of before the end of the taxable year. § A. 2. of Virginia Regulation (VR) 630-3-411. In this case, the taxpayer disposed of inventory in the middle of the taxable year and may use monthly values to determine the average value of the inventory.
Accordingly, you will be permitted to furnish additional information to show the average value of the inventory on monthly basis.
Expense Reimbursements in the Sales Factor: In its consolidated Virginia return the taxpayer adjusted the sales factor to exclude gross receipts attributable to expense reimbursements between affiliates that were included in the federal return and not eliminated. Federal regulations require consolidated income to include gain or loss arising from intercompany transactions except for "deferred intercompany gain or loss." U.S. Treas. Reg. §1.1502-13. The expenses were incurred or paid by one affiliate on behalf of another affiliate and billed at cost, no gain or loss was realized. One example of such expenses is centralized data processing services provided at cost to affiliates.
Although the cited federal regulation could be interpreted as requiring the inclusion of gross receipts in a consolidated state apportionment factor even if no gain or loss is realized, a more accurate apportionment is obtained if the sales factor includes only the gross receipts arising from transactions in the normal course of business. This could include receipts arising from intercompany transactions if, for example, the affiliates deal with each other at arm's length as if they were ordinary customers. This does not appear to be the case in the taxpayer's situation. The expenses were billed and reimbursed at cost and the taxpayer's accounting system resulted in some expenses generating multiple reimbursements by several affiliates. Therefore, the adjustment to the sales factor to exclude expense reimbursements will be allowed. The proper form for showing such adjustments is in a schedule prepared in accordance with §C.3 of VR 630-3-442.
HMO's: The auditor excluded Health Maintenance organizations (HMO) from the consolidated Virginia return in the belief that they were subject to a tax under Chapter 25 of Title 58.1 in lieu of the income tax, See Va. Code §§58.1-401 and 58.1-2508.
We have verified with the State Corporation Commission that an HMO is not considered an insurance company and is not subject to a tax under Chapter 25 of Title 58.1. Therefore, an HMO is subject to income tax and is includible in a consolidated Virginia return.
Another exemption from the Virginia corporation income tax is found in Va. Code §58.1-401(5), which exempts corporations which are not organized or conducted for profit and are exempt from income tax under the laws of the United States. A nonprofit HMO may qualify for this exception, if it is exempt from tax under federal law. However, this is not applicable to the taxpayer's HMO's, which are organized for profit. Because there are no provisions in Va. Code §58.1-401 to exclude the taxpayer's HMO's from the Virginia corporation income tax, they are subject to the tax.
Accordingly, the audit report will he revised to include the taxable income or loss of the HMO's in the Virginia consolidated corporation income tax return and apportionment factors of the taxpayer. Please submit the additional information relating to the average monthly value of the inventory and a detailed schedule of intercompany eliminations, prepared in accordance with §C.3. of VR 530-3-442, to the department's Technical Services Division, P.O. Box 6-L, Richmond, Virginia 23282, within 30 days.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner