Tax Type
Corporation Income Tax
Description
Retroactive permission to file combined returns
Topic
Returns/Payments/Records
Date Issued
07-23-1993
July 23, 1993
Dear ****
This will reply to your letter of September 22, 1992 in which ***** (the "Taxpayer") seek permission to change from filing separate Virginia income tax returns to filing a combined Virginia income tax return, beginning with the year ended December 31, 1989.
FACTS
The Taxpayer and its subsidiaries filed separate Virginia tax returns prior to 1989. During 1989, the Taxpayer acquired an affiliated group of corporations. The acquired group of corporations (a "parent-subsidiary" group) was already doing business in Virginia, and had filed separate Virginia returns prior to 1989. Taxpayer believed that the addition of new members to its Virginia affiliated group created a "first year" election situation, thereby allowing the group to elect the combined method of filing in Virginia for 1989. The Taxpayer filed returns for 1989 and thereafter on a combined basis.
RULING
Va. Code § 58.1-442 allows corporations to elect to file returns on the basis of one of three filing statutes (separate, combined or consolidated) regardless of how the corporations filed their federal income tax return. Once an affiliated group has made an election, the group may not change its status unless permission is granted by the department.
Prior to the acquisition of the parent-subsidiary group of corporations in 1989, the Taxpayer and its already existing subsidiaries were an affiliated group within the meaning of Va. Code § 58.1-302. These corporations filed their Virginia returns on a separate basis, thereby electing the separate filing status for all subsequent returns. Therefore, 1989 was not an initial election year for the Taxpayer, and the Taxpayer's affiliated group remained subject to an election to file separate returns.
When a combined return is filed without first receiving permission to change from filing separate returns, a significant administrative burden is created for the department. Each separate account (for each affiliate) must be adjusted to transfer payments and credits to the combined account. Furthermore, the department must address nonfiler notices and other correspondence for each account.
A review of the returns and our files indicates that significant administrative problems were created by the Taxpayer filing combined returns on its own initiative. Up to 12 separate affiliate accounts are involved for each year, and at least 7 of the corporations reported a federal net operating loss in each year. In 1989, several members of the group made estimated tax payments or extension payments, indicating that combined filing may only have been considered after year end, in consideration of the potential tax savings. Furthermore, a review of our system indicates that 11 or more members of the Taxpayer's affiliated group received nonfiler notices, some for multiple years. Each nonfiler notice required the attention of a member of the department, in addition to the consideration of nonfiler penalty abatements.
In view of the significant administrative burden caused by allowing a change in filing status without receiving prior approval, I am unwilling to grant permission in the absence of extraordinary circumstances. You have shown no such circumstances.
You have cited Public Document (PD) 91-271 (10/23/91), in which the department denied retroactive permission to file amended returns on a combined basis. You aver that because the Taxpayer filed on a combined basis (without requesting permission), no amended returns are necessary and therefore the department is not under an administrative burden. I do not agree.
P.D. 91-271 in no way implies that a taxpayer may automatically change filing methods as long as such change does not create an administrative burden. In P.D. 91-271 the taxpayer requested permission to change filing methods; the change would have been accomplished with amended returns. In the instant case, no prior permission was requested. Therefore, the Taxpayer's facts are consistent with P.D. 91-271, in that permission is being requested to file combined returns on a retroactive basis (after the due date of the returns). The department has never implied that taxpayers may automatically change from filing separate to combined returns, nor does it do so now. As previously discussed, the actions of the Taxpayer have already caused the department a significant administrative burden, perhaps exceeding the potential problems cited in P.D. 91-271.
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 absent, in these letters. The letters themselves are silent on these issues.
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.
As provided in Virginia Regulation § 630-3-442, a change in filing methods is not allowed without the permission of the department. A change in filing methods is not intended to be utilized as a tax planning tool at the sole discretion of the taxpayer.
After considering all of the factors, I decline to grant retroactive permission to file combined returns for 1989 and 1990. Because the request to change was filed before the extended due date for the 1991 return, permission is granted to file a combined return for 1991 and thereafter, if the combined return includes all affiliated corporations subject to the Virginia income tax and if they use the same taxable year. This is consistent with P.D. 91-271, a copy of which is attached.
Because the 1989 and 1990 returns were not filed as separate returns, they must be resubmitted. If such separate returns, including full payment of any taxes owed, are received by the department within 30 days of the date of this letter, no late filing or underpayment of estimated tax penalty will be imposed. However, interest will be calculated from the original due date of the returns (not including extensions) through the date of payment. If such returns are not received within 30 days of the date of this letter, statutory assessments will be made based on the information contained in the combined returns, including all applicable penalties.
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner