Did shared individual ownership and a management agreement make medical-service companies one affiliated group for the BPOL receipts exemption?

Subject

Beneficial ownership did not create BPOL affiliated group

Plain-English summary

Virginia upheld BPOL tax because the support companies and medical-services group did not form a statutory affiliated group. One individual owned 23% of Taxpayer A and 100% of the medical group; Taxpayer A owned Taxpayer B. The taxpayers provided management and administrative services to the medical group and received most of their revenue from it.

The BPOL exemption required a qualifying direct stock-ownership chain among entities. No taxpayer directly owned the medical group, and the common owner was an individual, not an “entity” under the cited definition. Filing a consolidated federal return was evidence of affiliation but not conclusive.

The taxpayers also argued that a management agreement made Taxpayer A the medical group's beneficial owner. The Commissioner found no statute recognizing beneficial ownership as a substitute for the required legal ownership relationship. The taxpayers therefore could not exclude the intercompany receipts.

What this means for you

• Shared individual ownership does not necessarily create a BPOL affiliated group.
• The exemption analyzed here required direct entity stock ownership meeting statutory thresholds.
• A federal consolidated return was presumptive evidence, not automatic qualification.
• Management control or “beneficial ownership” did not replace the legal ownership test.
• The taxpayer retained the burden of disproving the local assessment.

Common questions

Were Taxpayer A and Taxpayer B affiliated with each other?

Taxpayer A wholly owned Taxpayer B, but neither had the required direct ownership relationship with the separate medical group generating the receipts.

Did the common individual owner count as an entity?

No. The ruling says individuals were not entities for this BPOL exemption.

Did the management agreement establish beneficial affiliation?

No. The Commissioner found no statutory basis for that theory.

Were the county assessments upheld?

Yes.

Citations and references

• Va. Code §§ 58.1-3700.1, 58.1-3703(C)(10), and 58.1-3703.1(A)(5), (6).
• 2000 BPOL Guidelines, Appendix A.
• P.D. 99-176 (June 30, 1999).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-176

Original ruling text

November 14, 2007

Re: Appeal of Final Local Determination

Locality: *

Taxpayer: *

Business, Professional and Occupational License Tax

Dear *:

This final state determination is issued upon the application for correction filed by you on behalf of * ("Taxpayer A") and ("Taxpayer B") with the Department of Taxation. You appeal an assessment of Business, Professional and Occupational License (BPOL) taxes made on the Taxpayers by the ** (the "County") for tax years 2000 through 2004.

The BPOL tax is imposed and administered by local officials. Virginia Code § 58.1-3703.1 A 6 authorizes the Department to issue determinations on taxpayer appeals of BPOL tax assessments. On appeal, a BPOL tax assessment is deemed prima facie correct. That is, the local assessment will stand unless the taxpayer proves that it is incorrect.

The following determination is based on the facts presented to the Department summarized below. The Code of Virginia sections, regulations and public documents cited are available on-line in the Tax Policy Library section of the Department's web site, located at www.tax.virginia.gov.

FACTS

Taxpayer A and Taxpayer B (the "Taxpayers") are part of a group of entities engaged in the managerial and staffing support of medical services to the residents of the County. * (the "Individual") owns 23% of the stock of Taxpayer A, which in t urn owns 100% of Taxpayer B. The Individual also owns 100% of a group of corporations (the "Group"). The Taxpayers provide managerial support and administrative services to the Group. The Group provides the actual medical services to residents of the County. The Group is the primary source of revenue for both Taxpayer A and Taxpayer B.

The Taxpayers contend that they qualify for the exclusion from the BPOL tax for receipts from members of the same affiliated group. They assert that: (1) the burden of proof in affirming the assessment is upon the local commissioner of the revenue, and (2) they enjoy a "beneficial ownership" with the Group, and as such are part of an affiliated group whose intracompany transactions are not subject to BPOL taxation.

ANALYSIS

Burden of Proof

For federal income tax purposes, Taxpayer A, Taxpayer B and the Group file a consolidated income tax return. Appendix A of the 2000 BPOL Guidelines notes that while the filing of a consolidated income tax return is presumptive of an affiliated group, it is not conclusive. The Taxpayers contend that Appendix A shifts the burden of proof to the tax assessor to demonstrate they are not affiliated with the Group.

I disagree. Virginia Code § 58.1-3703.1 A 5 emphasizes that ultimately, the local assessment "shall be deemed prima facie correct." In other words, the burden of proof is upon the taxpayer to prove that the assessment is wrong. In the present case, the burden rests with the Taxpayers to prove that they are members of an affiliated group that would qualify for the BPOL tax exemption in Va. Code § 58.1-3703 C 10.

Affiliated Group

Under the provisions of Va. Code § 58.1-3703 C 10, receipts or purchases made by members of an affiliated group of entities from other members of the same affiliated group are exempt from the BPOL tax. Pursuant to the provisions of the 2000 BPOL Guidelines , Appendix A and Va. Code § 58.1-3700.1, taxpayers may be considered as members of an affiliated group if:

1. The common parent entity directly owns stock possessing at least 80% percent of the voting power of all classes of stock and at least 80% percent of each class of the nonvoting stock of at least one of the other entities subject to inclusion, except the common parent entity, is owned directly by one or more of the other entities subject to inclusion; and

2. The common parent entity directly owns stock possessing at least 80% of the voting power of all classes of stock and at least 80% of each class of nonvoting stock of at least one of the other entities subject to inclusion.

This definition applies to a parent-subsidiary control group, which is the relationship the Taxpayers are claiming to have.

The question is, does the relationship between the Individual, the Group and the Taxpayers meet the definition of an affiliated group for purposes of the BPOL tax exemption? In the present case, none of the conditions are met. While Taxpayer A wholly owns Taxpayer B, there is no direct stock ownership relationship between the Taxpayers and the Group. The only connection between the Taxpayers and the Group is through the Individual, who owns 23% of the Taxpayer A and 100% of the Group.

Further, Va. Code § 58.1-3700.1 defines "entity" as a "business organization, other than a sole proprietorship, that is a corporation, limited liability company, limited partnership, or limited liability partnership duly organized under the laws of the Commonwealth or another state." [Emphasis added.] Public Document (P.D.) 99-176 (6/30/1999) specifically addresses the question of whether an individual can be considered a member of an affiliated group. In that document, the Tax Commissioner found that individuals are not entities for purposes of the BPOL tax exemption provided in Va. Code § 58.1-3703 C 10.

Beneficial Ownership

The Taxpayers contend that even if they do not share a legal relationship with the Group, Taxpayer A is effectively the beneficial owner of the Group. They assert that while the Individual enjoys 100% legal ownership of the Group, it is Taxpayer A's beneficial ownership of the Group that must be considered when examining the nature of the relationship between the Taxpayers and the Group to determine whether they qualify for the affiliated group exemption for purposes of the BPOL tax.

A copy of a management agreement between Taxpayer A and the Group has been provided to show the beneficial relationship. I do not, however, find any language in Chapter 37 of Title 58.1 of the Code of Virginia affirming or implying that affiliation can be attained through beneficial ownership. As such, beneficial ownership is not a relationship that constitutes an affiliated group under Va. Code § 58.1-3700.1.

DETERMINATION

In summary, based on the facts presented I find that the local determination is correct. The Taxpayers are not considered to be a part of an affiliated group for purposes of the BPOL tax exemption provided in Va. Code § 58.1-3703 C 10.

If you have any questions regarding this determination, you may call * in the Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

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