Tax Type
Corporation Income Tax
Description
Returns of affiliated corporations; Method of filing
Topic
Returns and Payments
Date Issued
09-16-1994
September 16, 1994
Re: Ruling Request: Corporate Income Taxes
Dear*********
This will reply to your letter dated June 8, 1994 in which you request permission for********** (the "Taxpayer") and a related organization (the "Building Corporation") to file a Virginia consolidated or combined return retroactive to the taxable year ended September 30, 1991 and for all periods thereafter.
FACTS
The Taxpayer is a tax exempt trade association pursuant to Internal Revenue Code ("I.R.C.") § 501(c)(6). The Building Corporation is an exempt title holding company pursuant to I.R.C. § 501(c)(2). Both the Taxpayer and the Building Corporation are nonstock corporations. They are considered "related" under federal law because the Building Corporation is an exempt holding company that pays over all profits to the Taxpayer.
The Taxpayer and Building Corporation elected in 1990 to file a consolidated federal return. Believing the federal election was binding for Virginia purposes, consolidated Virginia returns were filed for 1990 and 1991 without first requesting and receiving permission from the Tax Commissioner. Prior to 1990, both the Taxpayer and the Building Corporation had filed their Virginia returns on a separate basis. The Building Corporation has been assessed penalties for failing to file returns for taxable years 1990 and 1991.
You now request permission to file either a consolidated or combined return on a retroactive basis and that relief from the failure to file assessments be granted.
RULING
A group of corporations may not file a Virginia consolidated or combined return unless they are "affiliated" as definition in Va. Code § 58.1-302. The stock ownership requirement of Va. Code §58.1-302 is analogous to that contain in federal law. Due to their very nature, it is evident nonstock corporations cannot be affiliated by Virginia law if only the conventional definition is considered.
The department has previously ruled concerning the applicability of the ownership test to nonstock corporations. (See enclosed Public Document 91-63, 3/29/91.) In this ruling, the department held that the fact that nonstock corporations that are related for purposes of filing a consolidated federal return is strong evidence that the ownership requirement of Va. Code §58.1-302 is satisfied.
In the instant case, the Taxpayer and the Building Corporation are related in the context of Treasury Regulation § 1.514(b)-1(c)(2)(ii)(a). Accordingly, we find the Taxpayer and Building Corporation are an affiliated group for the purposes of filing a Virginia consolidated or combined return.
Va. Code § 58.1-442 allows corporations to elect to file returns on the basis of one of three filing statuses (separate, combined, or consolidated) regardless of how the corporations filed their federal income tax return.
It is well established that permission to change to or from the consolidated filing method is generally not granted by the department, as the change can affect the allocation and apportionment factors and possibly distorts business done in Virginia and income arising from activity in Virginia. (See Virginia Regulation (VR) 630-3-442 (5)(A)(1), copy enclosed). Absent extraordinary circumstances, there is no reasonable basis to allow a change to a consolidated filing.
VR 630-3-442 (1)(B) provides that in the first year two or more members of an affiliated group of corporations are required to file Virginia returns, the group may elect to file separate returns, a consolidated return, or a combined return. returns for subsequent years must be filed on the same basis unless permission is granted by the department.
It is clear from the facts presented that the affiliated group elected to file using a separate return filing status, based upon the initial Virginia returns filed.
Based on the facts as presented, there are no extraordinary circumstances to warrant the granting of permission for the Taxpayer and the Building Corporation to change to filing on a consolidated basis. Accordingly, permission to change must be denied.
As an alternative to being granted permission to file on a consolidated basis, the Taxpayer and Building Corporation request that permission be granted for a retroactive combined filing. The department will generally grant permission to change to a combined filing. However, if granted, permission to change will generally be effective only for returns filed on or after the date the permission to change was filed. Permission to file a combined return on a retroactive basis is granted only in unusual circumstances.
In the instant case, granting the Taxpayer and the Building Corporation retroactive permission to file amended returns on a combined basis is unnecessary. Because neither organization has unrelated business income for 1990 and 1991, neither corporation has Virginia taxable income. Neither organization has made any payments or earned any credits, making the administrative burden on the department insignificant. Although the 1990 and 1991 returns were required to be filed, no Virginia tax is due by either entity. Consequently, filing amended combined returns would not affect the present or future tax liability of these organizations, and would only serve to require an additional tax compliance burden for the taxpayer and the department.
Therefore, as opposed to granting permission for retroactive combined filings, the department will accept the Taxpayer's returns for the taxable years ended September 30, 1991 through September 30, 1993 as filed, and grant the Taxpayer and the Building Corporation permission to file on a combined basis beginning with the taxable year ended September 30, 1994. In addition, the amounts assessed against the Building Corporation for failing to file will be abated in full and a refund will be issued for any amounts previously paid or applied to these assessments.
Sincerely,
Danny M. Payne
Tax Commissioner
Enclosures OTP/8146L
Rulings of the Tax Commissioner