Tax Type
Corporation Income Tax
Description
Returns of affiliated corporations; De facto dissolution
Topic
Returns and Payments
Date Issued
10-28-1996
October 28, 1996
Re: § 58.1-1821 Application: Corporate Income Taxes
Dear*************
This will reply to your letter in which you seek correction of an assessment of additional corporate income tax to******* (the "Taxpayer") for the taxable year ended June 30, 1992 (the "1991 taxable year"). I apologize for the delay in responding to your request.
FACTS
The Taxpayer was field audited, and an adjustment was made to remove two subsidiaries from the Taxpayer's consolidated Virginia corporation income tax return due to a lack of Virginia nexus. The Taxpayer agreed with the removal of one of the subsidiaries. The other subsidiary ("S"), the Taxpayer contended, was liquidated prior to the beginning of the 1991 taxable year in a "de facto liquidation", and therefore could not be viewed on a separate company basis for Virginia income tax purposes since it had no separate corporate existence.
On October 29, 1990, the Taxpayer declared its intent to discontinue the operations of S. Within a month, all assets and liabilities of S had been assumed by the Taxpayer. S gradually diminished its operations, and, by April 18, 1991, all operations had ceased. During this period, all employees of S were terminated. Business activities and decisions pertaining to S during the winding-up period were reviewed and approved by the Taxpayer's employees.
By June 20, 1991, all operational assets which had previously been owned by S were disposed by the Taxpayer. The only remaining assets were land and a vacant building. The day after the disposition of all operational assets had been completed, the Taxpayer acquired the assets of another corporation (the "Target") in exchange for the Taxpayer's common stock. The Target, a corporation with Virginia nexus, then distributed the common stock to its shareholders and terminated its existence. The Taxpayer subsequently moved its headquarters to Virginia.
In the 1991 taxable year, the Taxpayer sold the land and building once owned by S. The land sale was contingent upon environmental remediation, for which the Taxpayer assumed contractual liability.
The Taxpayer reported the capital gain income from these sales as being attributable to S on the Taxpayer's 1991 consolidated federal return. Deductions, including a net operating loss deduction, were also attributed to S. S was listed as an inactive subsidiary on the affiliations schedule, with its own employer identification number. There was never any indication that the common stock of S held by the Taxpayer was canceled, nor were there any statements attached to the federal return indicating that S had been dissolved, liquidated, or was no longer in existence.
The department's auditor interpreted this presentation of S as a separate entity on the consolidated federal return as sufficient evidence that S was a separate corporation which could be viewed on a separate company basis for Virginia income tax purposes. The Taxpayer responded that S was reported as a separate company because there was no effect on federal taxable income.
Subsequent to the department's field audit, the Taxpayer filed amended 1991 Federal and Virginia income tax returns. The Federal return was amended to report S as a division of the Taxpayer rather than a subsidiary. S was consequently deleted from the affiliations schedule. No other forms, schedules, or supporting statements were amended. The amended Virginia return incorporated uncontested audit adjustments and the treatment of S as a division of the Taxpayer.
DETERMINATION
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- § 3.B.2 of Virginia Regulation (VR) 630-3442 states in pertinent part:
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- A consolidated return may not include corporations which are . . . not subject to Virginia income tax if separate returns were to be filed.
Pursuant to this regulation, eligibility to join a consolidated return must be determined by ascertaining if an entity would be subject to Virginia income tax if it filed a separate return, ignoring other members of the affiliated group. The Taxpayer does not dispute that S, when viewed as a separate corporate entity, is not subject to Virginia income tax. The Taxpayer contends, however, that S cannot be viewed as a separate corporate entity because S was de facto dissolved.
The controlling question in this case, therefore, is twofold: whether S ceased to exist, as a separate company for Virginia income tax purposes, because of a de facto dissolution; and, if so, whether in fact S was dissolved. Since Virginia is a federal conformity state, a corporation that is not in existence for federal income tax purposes will also not be in existence for Virginia purposes. It is then logical to conclude that a corporation not in existence for Virginia purposes cannot be viewed on a separate company basis.
Treasury Regulation §1.6012-2(a)(2) states that "a corporation is not in existence after it ceases business and dissolves, retaining no assets, whether or not under State law it may thereafter be treated as continuing as a corporation for certain limited purposes connected with winding up its affairs, such as for the purpose of suing and being sued." The evidence presented by the Taxpayer indicated that S had ceased business prior to the commencement of the 1991 taxable year, and that S had no assets. Whether S was not in existence during any part of the 1991 taxable year then is determined by whether or not S was dissolved.
Revenue Ruling 61-191 defines a de facto dissolution as occurring "when a corporation has disposed of all or most of its operating assets, terminated its business activities, and become a mere shell, a corporation in name and semblance only, without real corporate substance, serving no real corporate purpose, and having no valid or compelling reason for continuing its existence, even though not formally dissolved." The evidence presented indicated that S was a "mere shell" at the beginning of the 1991 taxable year. As noted previously, S had no assets and ceased all operations. The fact that S still maintained its employer identification number and was reported on the federal consolidated income tax return as if it were a fully operating subsidiary is not sufficient to outweigh the fact that S possessed no economic substance at any time during the 1991 taxable year.
While the department has not previously ruled on the issue of de facto dissolution, it has ruled that a taxpayer could properly utilize a loss in determining federal taxable income for Virginia purposes upon furnishing satisfactory evidence that the loss was improperly treated in a federal consolidated filing. See Public Document (P.D.) 86-5 (12/19/85), copy enclosed. The evidence provided by the Taxpayer during the audit indicated that S was not in existence at any time during the 1991 taxable year and therefore, pursuant to Treasury Regulation § 1.6012-2(a)(2) was not required to file a return. The portrayal of S as a separate company on the original federal consolidated return, therefore, was improper.
Based on the information presented and the determination herein, there is sufficient basis to reverse the auditor's adjustment. Please remit the balance due as reflected on the enclosed schedule within sixty days to prevent the further accrual of interest. Please send your payment to in the Office of Tax Policy, P.O. Box 1880, Richmond, Virginia 23218-1880. If you have any questions regarding this determination, you may call ********at*************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8526G
Rulings of the Tax Commissioner