Tax Type
Corporation Income Tax
Description
Telecommunications company; Consolidated vs. combined
Topic
Returns/Payments/Records
Date Issued
02-24-1993
February 24, 1993
Re: §58.1-1821 Application: Corporate Income Taxes
Dear ****
This will reply to your letter dated December 18, 1992 in which you apply for correction of the assessments for additional corporate income taxes to **** (the "Taxpayer") for the fiscal years ending March 31, 1990 and 1991, and to **** (the "Subsidiary") for the year ended March 31, 1989.
FACTS
The Taxpayer filed a combined return with the Subsidiary and other affiliated corporations for the fiscal years ended March 31, 1990 and 1991. The Subsidiary filed a separate return for the fiscal year ended March 31, 1989.
During the fiscal years 1989 through 1991, The Subsidiary was a partner in a general partnership (the "Partnership"). The Partnership's only other partner was a corporation (100% owned by the Subsidiary) whose sole function was to hold the partnership interest in the Partnership.
The Subsidiary and the Partnership were each fully certified by the Federal Communications Act of 1934 to provide telecommunications services throughout the United States.
The Subsidiary filed the annual Statement of Gross Receipts required by Va. Code §58.1-2628 with the State Corporation Commission (the "SCC"). The filing made by the Subsidiary contained the gross receipts of the Partnership. The Partnership never made a separate filing with the SCC.
Because the Subsidiary and the Partnership did not maintain separate records of gross receipts, they apportioned combined receipts using a single property factor. The Subsidiary calculated its telecommunications company tax using an apportioned share of the gross receipts reported to the SCC.
As a result of a audit by the department, it was determined that the Partnership was not a telecommunications company as certified by the SCC, and that an incorrect figure for gross receipts was used to calculate the telecommunication company minimum tax. The auditor's position is that the gross receipts that were certified by the SCC must be used to calculate the Subsidiary's telecommunications company minimum tax.
You contest this determination by the department's auditor, and aver the Partnership "was clearly a telecommunications company."
You also contest an adjustment made by the department's auditor with respect to the calculation of the telecommunication minimum tax for the fiscal year ended March 31, 1991, and request that the department correct an error that the Taxpayer made in calculating its combined taxable income for the fiscal year ended March 31, 1990.
DETERMINATION
Telecommunications Company Status:
Virginia Regulation (VR) 630-3-400.1 (copy attached) defines a telecommunications company as a company certified to the Department of Taxation by the SCC as a telecommunications company, and gross receipts as the amount of "gross receipts" certified to the Department of Taxation by the SCC. The regulation also states: "[The] SCC will make all determinations regarding a company's status as a telecommunications company. The SCC will determine and certify the amount of gross receipts, as defined by law, to the department annually."
VR 630-3-400.1 (11) provides:
- "[Telecommunications] companies may petition the SCC for review and correction of the company's status or the amount of gross receipts certified. The petition should be in compliance with the Rules of Practice and Procedures of the SCC.
[Any] application for correction of an erroneous pursuant to §58.1-1821 of the Code of Virginia §58.1-1821 Application) that is contingent upon the status of a company as a telecommunications company or upon the amount of gross receipts of a telecommunications company, will be held without action until a final determination has been made by the SCC on a petition filed pursuant to the Rules of Practice and Procedures of the SCC."
Nevertheless, you ask the department to ignore the amounts certified by the SCC and accept your breakdown of gross receipts because it represents the substance of what happened, even though it is contrary to the form in which the taxpayer reported gross receipts to the SCC. I cannot accept your "substance over form" analysis for two reasons.
First, the certification by the SCC is not a mere formality. The certification is based on reports filed with the SCC which are used for regulatory revenue tax, property assessment, and other purposes. The certification process is included in the telecommunications tax statute and regulation to prevent taxpayers from adopting different reporting positions for SCC and income tax purposes. This result was intended by the General Assembly when it included the certification process in the law. The legislative impact statements (copies enclosed) prepared by the department with respect to the Act which enacted Va. Code §58.1-400.1 states in pertinent part:
-
- "[Under] the provisions of the bill, the S.C.C makes the determination of which corporations are "telecommunications companies" subject to the minimum tax and credit provisions of the income tax law. The S.C.C must certify annually the name, address, and gross receipts of each telecommunications company to the Department of Taxation. In the case of any controversy over whether a particular corporation is subject to the minimum tax on gross receipts, or eligible for the credit, the S.C.C. must resolve the controversy because the regulatory revenue tax may also be affected."
- "[Under] the provisions of the bill, the S.C.C makes the determination of which corporations are "telecommunications companies" subject to the minimum tax and credit provisions of the income tax law. The S.C.C must certify annually the name, address, and gross receipts of each telecommunications company to the Department of Taxation. In the case of any controversy over whether a particular corporation is subject to the minimum tax on gross receipts, or eligible for the credit, the S.C.C. must resolve the controversy because the regulatory revenue tax may also be affected."
Therefore, the auditor properly refused to accept the taxpayer's breakdown of gross receipts and based the assessment on the gross receipts as certified by the SCC.
Proper Determination of Telecommunications Tax:
You contest the manner in which the department's auditor determined the amount of corporate income tax imposed by Va. Code §58.1-400 for purposes of determining the minimum tax on a telecommunications company when filing a combined return with other affiliates for the fiscal year ended March 31, 1991. VR 630-3-400.1 5 7(B)(1) states:
-
- "[To] determine the portion of the tax liability shown on the consolidated or combined return that is attributable to the telecommunications company, each corporation included in the consolidated or combined filing must recompute its tax liability as if it was filing a separate return. The separate income tax liability of the telecommunications company is compared to the total tax liability shown on the consolidated or combined return.
- "[To] determine the portion of the tax liability shown on the consolidated or combined return that is attributable to the telecommunications company, each corporation included in the consolidated or combined filing must recompute its tax liability as if it was filing a separate return. The separate income tax liability of the telecommunications company is compared to the total tax liability shown on the consolidated or combined return.
The department's auditor correctly used the combined tax, which was lower than separate company tax liability. Accordingly, the assessment is upheld.
Combined vs. Consolidated Filing:
You state that although combined filing was elected, the return for taxable year ended 3/90 was actually prepared on a consolidated basis. We have reviewed the schedule that you provided, and it appears that there are significant differences between the "revised" information and the return as filed. The information you have provided does not explain the changes, in particular an extremely large change to taxable income. However, because of the interplay between the income tax and the telecommunications company minimum tax, it does not appear that the net tax liability will change. The Taxpayer should, within the statute of limitations, submit an amended return prepared in accordance with the terms of this letter for further consideration by the department.
Although you requested a hearing, this letter has been issued without one. The law and regulations are clear in this matter and absent acceptance by the SCC of the Taxpayer's allocation method no changes can be made to the assessments. Accordingly, the assessment is correct and is now due and payable. You will shortly receive an updated bill with interest accrued to date which must be paid in full within 30 days to avoid additional interest and collection actions.
Sincerely,
W. H. Forst
Tax Commissioner
TPD/6613M
Rulings of the Tax Commissioner