Tax Type
Corporation Income Tax
Description
Affiliated group requests change from combined to consolidated filing
Topic
Returns/Payments/Records
Date Issued
04-15-1994
April 15, 1994
Re: §58.1-1821 Application: Corporate Income Tax
Dear********
This is in response to your letter of February 9, 1994, in which you are protesting the assessment of corporate income tax on behalf of**************your client, *****(the "Taxpayer") and Subsidiaries, for taxable years 1990 and 1991.
Facts
The Taxpayer acquired a 100% interest in a subsidiary (S1) in 1988 and as members of an affiliated group filed and calculated its tax liability on a combined basis for taxable year 1988. Previously, the Taxpayer and S1 were filing Virginia returns on a separate basis. During 1989, another subsidiary of the Taxpayer began doing business in Virginia and was included in the Virginia combined filing. The Taxpayer acquired another 100% subsidiary in 1991 with sufficient nexus with Virginia to require inclusion in the combined filing of the Taxpayer.
The Taxpayer asserts its intention was to file consolidated Virginia returns for taxable years 1988 to present. The Taxpayer states no formal election has been consented to by the Taxpayer or any member of the affiliated group to file a combined return. Based on the definition of "combined" in other taxing jurisdictions, the Taxpayer states that the combined box on the initial Virginia return was marked on the premise that this status constituted a consolidated tax computation.
The Taxpayer also made certain subtraction modifications for intercompany eliminations related to the gain on sales of equipment by the Taxpayer to one of the wholly owned subsidiaries under the assumption that they were necessary for a Virginia consolidated filing. Since the Taxpayer and subsidiaries file on a consolidated basis for federal income tax purposes, these gains were deferred.
For taxable years 1990 and 1991, the Taxpayer was audited and adjustments were made to disallow the subtraction modifications for the intercompany eliminations. The Taxpayer requests that the assessments for 1990 and 1991 be adjusted to reflect a consolidated filing or that the Department of Taxation (the "department") invoke Virginia Regulations (VR) §§630-3-445 or 630-3-446 to allow the subtractions for intercompany eliminations in order to prevent a distortion of income.
Determination
The first year two or more affiliated corporations are subject to Virginia tax, the group may elect to file either separate, consolidated, or combined returns. VR §630-3-442 provides that the election is made upon the filing of the first return for a 12 month taxable year beginning on or after the date of organization or acquisition of the corporations creating the affiliated group.
In this case, the Taxpayer and S1 marked the "combined" box on the initial return in 1988 and subsequent years. Also, the income from each affiliate was allocated and apportioned separately, consistent with a combined filing. By contrast, a consolidated filing requires that a single apportionment factor be applied to the total income of the affiliated group.
While the presence of intercompany eliminations may tend to support the contention by the Taxpayer that a consolidated filing was intended, proper procedures for reporting these eliminations in a consolidated filing were not followed. VR §630-3-442 (C)(3) provides;
-
- All supplementary and supporting schedules filed with a consolidated Virginia return should be prepared in columnar form, one column being provided for each corporation included in the consolidation, one column for a total of like items before adjustments are made, one column for intercompany eliminations and adjustments, and one column for a total of like items after giving effect to the eliminations and adjustments. (Emphasis added.)
Rather than providing the schedule required by regulation, the Taxpayer reported intercompany eliminations on the returns as an "other subtraction from federal taxable income".
The most significant differences between Virginia's consolidated and combined filings for the Taxpayer are that in a consolidated return, federal taxable income of the group is computed with eliminations, and a single apportionment factor is used for the entire group's apportionable income. In a combined return, federal taxable income is the sum of each member's separate income without eliminations, and a separate apportionment factor is used for each member of the group. Virginia law, regulations and the instructions distributed with the return forms all clearly indicated the difference. In particular, the 1988 instructions stated that a consolidated return was to be prepared in accordance with I.R.C. §1502, while a combined return computes income, allocation, and apportionment separately for each member. There are also other differences with respect to combined and consolidated returns, for example, federal net operating loss deductions and Virginia tax credits.
The fact that the return listed both "consolidated" and "combined" filing choices, puts taxpayers on notice to investigate the difference, particularly when aware of the differing meanings assigned to these terms among other states. The Taxpayer had filed returns for five taxable years, with opportunity to review these returns for accuracy prior to submission, before asserting it intended to file consolidated returns. It was not until an audit occurred that the Taxpayer contended that it had been its intention to file on a consolidated basis. The returns as filed were consistent with combined filing in that the federal taxable income was the sum of the separate incomes without eliminations, and a separate apportionment factor was used for each member. Although the Taxpayer reported the eliminations as an "other subtraction from federal taxable income," I do not find this persuasive as to an intent to elect consolidated filing.
Based on the facts presented, I find the Taxpayer and S1 made an election to file a combined return by marking the "combined" filing status on the initial return and computing its tax liability in all material respects on a combined basis in the election year and years subsequent.
Once an affiliated group has made an election, the group may not change its filing status unless permission is granted by the department. It is well established that permission to change to or from a consolidated return will generally not be granted, as the change affects the allocation and apportionment factors and possibly distorts business done in Virginia and income arising from activity in Virginia. See VR §630-3-442(E). Absent extraordinary circumstances, there is no reasonable basis to allow a change to a consolidated filing. Based upon the facts as presented, I find no extraordinary circumstances to warrant the granting of permission for the taxpayer and affiliate corporations to change to a consolidated filing for the years in question.
You also request to invoke VR §§630-3-445 or 630-3-446. If it is deemed necessary to prevent the distortion of business done in Virginia or income from Virginia activities, these regulations allow the department to consolidate the accounts of related entities in order to accurately reflect operating results or properly report the effect of intercorporate transactions when other methods to properly report these items are not possible.
In this instance, I find that your situation does not warrant the consolidation of accounts for the Taxpayer and its subsidiaries. The eliminations in question are a matter of a timing difference rather than a distortion of income. Therefore, your request to consolidate accounts under VR §§630-3-445 or 630-3-446 is denied.
Accordingly, the assessments are correct. Attached is a schedule indicating the tax liability plus interest accrued through the date of this letter. The assessments must be paid in full within 30 days to avoid accrual of additional interest. Please forward your payment to**********Office of Tax Policy, the Virginia Department of Taxation, P.O. Box 1880, Richmond, Virginia 23282.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP7683L
Rulings of the Tax Commissioner