Did corporations filing a South Carolina consolidated return have to compute each company's South Carolina net income separately?

Plain-English summary

South Carolina Revenue Ruling 88-10 addressed how corporations filing a consolidated South Carolina income tax return must compute their South Carolina net income. Section 12-7-1570 permits a consolidated return but requires the information needed to compute "the net income properly attributable to the state." Under Regulation 117-77 as it stood before amendment, corporations using the same apportionment method could combine their net incomes and apply a single, combined apportionment ratio.

The South Carolina Supreme Court's decision in Emerson Electric Co. v. Wasson changed the analysis. Reversing the Court of Appeals, the Supreme Court read the statute's use of the plural "taxpayers" to mean that corporations filing a consolidated return are not treated as a single entity, and that each must pay tax based on the proportion of business it conducts in the state. In the facts before the Commission, a taxpayer audited for 1983 and 1984 was reassessed using separate-company computations, producing about $113,610 in additional tax plus roughly $31,734 in interest, with related entities lacking nexus removed from the return.

Based on Emerson, the Commission found the old single-ratio method inconsistent with Section 12-7-1570 and noted that Regulation 117-77 had been amended to eliminate it. The Commission concluded that corporations filing consolidated returns must compute each corporation's South Carolina net income separately — each with its own apportionment ratio — and add the results. It applied the Emerson rationale and the amended regulation prospectively, for tax periods beginning on or after January 1, 1988, rather than retroactively.

Common questions

Q: Could members of a consolidated return combine their income and use one ratio? Not after this ruling. Each corporation had to be computed separately.

Q: What is the required method? Compute each corporation's South Carolina net income with its own apportionment ratio, then add those separate results.

Q: Why did the method change? The Supreme Court's Emerson Electric decision read the statute's plural "taxpayers" to require separate treatment of each corporation.

Q: Was the change retroactive? No. The Department applied it prospectively, for tax periods beginning on or after January 1, 1988.

Citations and references

• S.C. Code Ann. § 12-7-1570 (consolidated returns)
• S.C. Regulation 117-77, as amended (consolidated-return computation)
• Emerson Electric Co. v. Wasson, 287 S.C. 394, 339 S.E.2d 118 (1986)

Subject

Computation of South Carolina Net Income on Consolidated Returns

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR88-10.pdf

Original ruling text

SC REVENUE RULING #88-10

SUBJECT:

Computation of South Carolina Net Income on Consolidated
Returns
(Income Tax)

EFFECTIVE DATE:

Tax Periods Beginning on or after January 1, 1988

SUPERSEDES:

All previous documents and any oral directives in conflict
herewith.

REFERENCE:

S.C. Code Ann. Section 12-7-1570 (1976)
S.C. Regulation 117-77
S.C. Regulation 117-77 as Amended

AUTHORITY:

S.C. Code Ann. Section 12-3-170 (1976)
SC Revenue Procedure #87-3

SCOPE:

A Revenue Ruling is the Commission's official interpretation of
how tax law is to be applied to a specific set of facts. A Revenue
Ruling is public information and remains a permanent document
until superseded by a Regulation or is rescinded by a subsequent
Revenue Ruling.

Question:
Can corporations that file consolidated returns be required to compute South Carolina net income
separately and combine to determine South Carolina consolidated net income? Can this method
be applied retroactively to all years in the statute?
Facts:
The taxpayer filed consolidated corporate income tax returns with this State pursuant to South
Carolina Code Section 12-7-1570 and Regulation 117-77. The corporations includable in the
consolidated return were all subject to the same method of apportionment (three factor formula).
The taxpayer was audited for the years December 31, 1983; November 1, 1984 (short period);
and December 31, 1984. Audit adjustments were made to require the taxpayer to determine its
South Carolina consolidated income by computing the South Carolina net income for each
corporation separately. Under this method each corporation's South Carolina apportionment ratio
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is computed separately and applied to each corporation's apportionable income to arrive at South
Carolina net income. Additional income tax for the three years was assessed in the amount of
$113,610.00 plus interest of $31,734.00 totaling $145,344.00. Some other minor adjustments
were made to income, and certain corporations were eliminated from the return because no nexus
existed. Substantially all of the tax deficiency is a result of the change in method of
consolidation.
Discussion:
Section 12-7-1570 of the South Carolina Code provides:
Any taxpayer capable of exercising, directly or indirectly, substantially the entire control
of the business of another taxpayer, either by ownership or control of substantially the
entire capital stock (if a corporation) of such taxpayer or otherwise, may, under
regulations prescribed by the Commission, be permitted to make a consolidated return,
showing the consolidated net income and such other information as the Commission may
require in order to compute the net income properly attributable to the state and to impose
the tax upon the taxpayers concerned.
Regulation 117-77 prior to amendment, allowed corporations two methods of filing a South
Carolina consolidated return. When all the corporations included in the consolidated return are
subject to the same method of apportionment, the net income of each corporation is added and a
single ratio including all payroll, property, and sales is computed. Then this total net income is
multiplied by the single ratio to determine South Carolina consolidated net income. If the
corporations included in the consolidated return are subject to different methods of
apportionment, the net income of each corporation is multiplied by the ratio of that corporation,
then the South Carolina net incomes separately computed are added together to arrive at South
Carolina consolidated net income.
The Supreme Court in the case of Emerson Electric Co. v. Wasson 287 S.C. 394, 339 S.E.2d 118
(1986), while not ruling on the validity of Regulation 117-77, reversed a decision of the Court of
Appeals, 283 S.C. 257, 322 S.E.2d 671 (S.C. App. 1984). The Cort of Appeals had ruled that
South Carolina could tax Emerson only on a pro rata share of its "homogenized" net income
utilizing a single ratio and that sales attributable to South Carolina under the "throwback rule"
are sales in those states where neither of the consolidated entities is taxable. The Supreme
Court's reversal of the Court of Appeals was based on an analysis of several code sections
relating to multistate taxpayers and consolidation.
The Supreme Court stated that:
Section 12-7-250 also provides that if a taxpayer is transacting or conducting business
partly within and partly without South Carolina, the income tax "...shall be imposed upon
a base which reasonably represents the proportion of the trade or business carried in
within this state." This section clearly indicates the intent of the legislature that each
taxpayer shall pay taxes based on the proportion of business they conduct in this state.
Regarding Section 12-7-1570, the statute allowing consolidated returns, the Supreme
Court stated:
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The language of the statute clearly allows two corporations to make a consolidated return
showing net income, but it also requires that the return contain such other information
necessary to compute the net income of each taxpayer properly attributable to the state so
that South Carolina can impose a tax on the taxpayers concerned. The legislature's use of
the plural "taxpayers" instead of "taxpayer" indicates that corporations filing consolidated
returns are not to be considered a single entity.
Based on the rationale of Emerson, some provisions of Regulation 117-77, prior to amendment,
appear to be at odds with the requirements of Section 12-7-1570. In a finding issued September
2, 1987, the Commission ruled that a consolidated return should be filed in a manner consistent
with a separate determination of each corporation's South Carolina net income or loss.
Accordingly, Regulation 117-77 has been amended to eliminate the method which allows the
apportionment of one net income using one ratio. The Commission will apply the rationale of
the Emerson case and the amendments to Regulation 117.77 on a prospective basis to all tax
periods beginning on or after January 1, 1988.
Conclusion:
Corporations that file consolidated returns are required to compute South Carolina net income
separately and add the results to determine South Carolina consolidated net income. The
rationale of the Emerson case and the amendments to Regulation 117.77 shall be applied
prospectively for tax periods beginning on or after January 1, 1988.

SOUTH CAROLINA TAX COMMISSION

s/S. Hunter Howard Jr.
S. Hunter Howard, Jr., Chairman

s/John M. Rucker
John M. Rucker, Commissioner

s/A. Crawford Clarkson Jr.
A. Crawford Clarkson, Jr., Commissioner

Columbia, South Carolina
June 30
, 1988

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