Tax Type
Corporation Income Tax
Description
Affiliates with insufficient source income
Topic
Returns and Payments
Date Issued
08-03-1995
August 3, 1995
Re: § 58.1-1821 Application: Corporate Income Tax
Dear****************
This will reply to your letters in which you protest the removal of certain corporations from the Virginia consolidated income tax return of ********* (the "Holding Company"), formerly known as*************I apologize for the delay in responding.
FACTS
The Holding Company participated in a Virginia Consolidated return with numerous affiliates for the taxable years 1988 and 1989. As the result of a field audit, the Holding Company and four affiliated corporations were eliminated from the consolidated return, resulting in the assessment of additional tax. You maintain that all of the companies had nexus in Virginia, and were properly included in the consolidated return.
You are also protesting an audit adjustment made to the Virginia consolidated eliminations, and have amended your application for the removal of foreign source income of several companies remaining in the consolidated return.
DETERMINATION
The department has previously ruled that the Holding Company was not includable in the consolidated return. See P.D. 95-113 (5-11-95), copy attached. You have presented no new evidence in your correspondence that would change the previous determination. Therefore, the department cannot permit the Holding Company to be included in the Virginia consolidated return.
You assert that *******(formerly known as*******, should also be included in the Virginia consolidated return because the department has previously ruled that it was includable for an earlier taxable year. In P.D. 91-257 (10-8-91), copy attached, this affiliate's activities were found to exceed the protection provided by Public Law (P.L.) 86-272, 15 U.S.C.A. §§ 381-384. It is stated in your letter that the facts with respect to this affiliate have not changed. Accordingly, pursuant to P.D. 91-257, it will be included in the consolidated return for 1988 and 1989.
The other three affiliates,******************************do no business in Virginia. In order to be included in a Virginia consolidated return, a corporation must be subject to Virginia tax if a separate return was filed. There must be sufficient business activities within Virginia to make one or more of the apportionment factors positive. A positive factor establishes income from Virginia sources, but the lack thereof does not preclude a corporation from having income from Virginia sources. It prevents the Virginia source income from becoming subject to taxation in Virginia.
There is no evidence in this case that these affiliates had sufficient activities to generate income from Virginia sources or to create positive apportionment factors. Accordingly, the auditor's adjustment to exclude these affiliates from the consolidated return is correct.
We have reviewed your computations for the subtraction of foreign source income for ***********and ******************** . The net amounts of the foreign source income for these affiliates appear to be determined in accordance with department policy, and will be removed as part of the revised computation of Virginia taxable income. As to the disputed intercompany eliminations, they will be removed by reversing the adjustment made on the original 1989 return.
The income subject to Virginia tax has been recomputed as shown on the attached schedules. Since both the 1988 and 1989 revised taxable incomes are losses, the assessments will be abated. Should you have additional questions regarding this determination, please contact***************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/6250P
Rulings of the Tax Commissioner