Tax Type
Corporation Income Tax
Description
Returns of affiliated corporations; Change in method of filing
Topic
Returns and Payments
Date Issued
06-08-1994
June 8, 1994
RE: Ruling Request: Corporation Income Tax
Dear**************
This will reply to your letter of June 25, 1993 in which you request that the department reconsider its ruling dated March 18, 1993. See Public Document (PD) 93-67 (3/18/93), copy attached. In this ruling, the department denied permission for the retroactive filing of combined returns for the 1987, 1988 and 1989 taxable years by ************** (the "Taxpayer). Permission was granted for a combined filing for taxable year 1990 and thereafter.
DETERMINATION
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. The Taxpayer, a member of an affiliated group, had elected to file separate returns. In fact, separate returns had already been filed for the years in question.
The years in question are not an initial election year for the Taxpayer, nor is this in dispute. What is in dispute is the Taxpayer's ability to file amended returns on a combined basis; in effect a retroactive election.
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. This is especially true in the case of amended returns. With an amended return, the department must verify each element of each component of the return. Each separate account (for each affiliate) must be adjusted to transfer payments and credits between accounts.
A review of the amended returns submitted by the Taxpayer indicates that significant administrative problems would be created by the Taxpayer's amended combined returns. No less than 11 separate affiliated corporations are involved for each year, and at least 1 or more of the corporations reported a federal net operating loss in each year.
Where net operating losses are present, the department's administrative problems increase dramatically. Virginia requires a determination of federal taxable income "for Virginia purposes" where federal and Virginia filings differ. Therefore, a federal net operating loss for Virginia purposes may or may not be reflected on the actual federal return. The federal net operating loss which is separately determined for Virginia purposes may be carried back or forward; such treatment may be independent of federal treatment.
When a separate Virginia return is filed reflecting a net operating loss, this net operating loss may be carried forward or back. On a combined return, this same loss may be absorbed by other members of the combined group. Therefore, filing a "retroactive" combined return where net operating losses are present would require the department to research the filing history of each loss affiliate for carryback claims and amended returns in each of the three preceding years. In addition, given the potential for delay in filing or processing a carryback claim, the department would also need to research its inventory of unprocessed amended returns in addition to the actual filing history. Given that any amended return filed may or may not be attributable to a net operating loss, the department would need to examine every amended return on file for the loss affiliate.
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 absent a showing of unusual circumstances. You aver that because the Taxpayer acquired new affiliates and underwent personnel changes, its circumstances are in fact unusual. However, corporate acquisitions and employee turnover are normal business transactions, generally within the Taxpayer's control, and a consequence of the Taxpayer's actions. The department finds that the circumstances cited are not unusual, but in fact reflect common business transactions.
In comparing the equities of the significant administrative issues and the potential impact on the Taxpayer, the department finds that the primary difference in granting or denying retroactive combination for the Taxpayer is the timing of loss utilization for Virginia purposes. The Taxpayer has not demonstrated that the overall Virginia tax liability of the group is likely to be significantly different under prospective combined filing. The transactions cited by the Taxpayer would affect their tax liability under either filing method.
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. The filing of amended returns and the statements made in your letter indicate that combined filing was only considered after year end, in consideration of the potential tax savings.
After reconsidering all of the factors, retroactive permission to file combined returns is denied. We find that our March 18,1993 ruling is appropriate, and is therefore upheld.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/7133L
Rulings of the Tax Commissioner