Did a Virginia affiliated group elect consolidated filing when its first return checked 'combined' but was computed and later filed consistently as consolidated?

Subject

Consolidated Virginia return election for an affiliated corporate group

Plain-English summary

Virginia concluded that the corporate group had elected consolidated filing. The group's first return checked the "combined" box, but the return was calculated using the consolidated method and the group continued to file consolidated returns in later years.

Virginia explained that checking the wrong box could not simply be ignored because corporate groups are expected to investigate the state's separate, combined, and consolidated methods. When the box and computation conflicted, however, the Department looked to the group's continuing conduct. Its consistent consolidated filing pattern showed a consolidated election.

That election controlled later years. All of the taxpayer's Virginia affiliates were required to file on a consolidated basis, and the group had to amend every taxable year still open under the statute of limitations. It also might need to recalculate taxable income back to 1993 so federal carryforwards and carrybacks used on the open-year Virginia returns were correct for the Virginia affiliated group.

What this means for you

• A Virginia filing-method election can turn on both the first return and the group's consistent later conduct.
• "Combined" and "consolidated" are different methods in Virginia; the return box and the actual computation should agree.
• Once made, the election generally continues unless the Department permits a change.
• A filing-status correction can affect open-year returns and older calculations supporting current net operating losses, capital losses, or charitable-contribution carryovers.

Common questions

Did checking the combined box automatically make the election combined?

Not on these facts. The first return was computed as consolidated, and the group's consistent later filings supported a consolidated election.

Could affiliates with Virginia nexus keep filing separate returns?

No. The ruling required the taxpayer's Virginia affiliates to follow the consolidated election for subsequent years.

How far back did the group have to amend?

It had to amend every year still open under the statute of limitations. Calculations reaching back to 1993 could also be necessary to establish correct carryforwards and carrybacks used in those open years.

Citations and references

• Va. Code §§ 58.1-301, 58.1-302, and 58.1-442.
• 23 VAC 10-120-320.
• IRC § 1502.
• P.D. 97-226, P.D. 96-312, and P.D. 94-154, as discussed in the ruling.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-193

Original ruling text

December 4, 2008

Re: Ruling Request: Corporate Income Tax

Dear *:

This will respond to your letter in which you request a ruling with respect to the filing status your client, * (the "Taxpayer"), for purposes of Virginia's corporate income tax.

FACTS

Prior to 1993, various subsidiaries of the Taxpayer filed separate Virginia returns. None of these subsidiaries conducted regular or lasting business in Virginia. Only one of these subsidiaries filed a corporate income tax return in 1990 and 1992 and none filed in 1991 and 1993.

In 1993, the Taxpayer acquired * and its affiliates (collectively, "VA Group 1"), which filed a short-year return for the 1993 taxable year. The "combined" box was checked on VA Group 1's 1993, 1994 and 1995 returns. The returns were calculated using the consolidated method. Neither the combined nor the consolidated box was checked on the 1996 return, but the consolidated box has been checked consistently on returns for all subsequent taxable years.

* and its affiliates (collectively, "VA Group 2") were acquired by the Taxpayer in 1997. VA Group 2 has been filing consolidated Virginia returns since the 1997 taxable year, except for 2006 when it inadvertently filed its return on a combined basis.

In addition, other subsidiaries of the Taxpayer filed separate Virginia returns since the 1996 taxable year. As with the taxable years prior to 1993, these subsidiaries did not regularly conduct business in Virginia.

According to the Taxpayer, all of the members of its corporate family that have operated in Virginia since the 1993 taxable year are affiliated within the meaning of Va. Code § 58.1-302 and file using the same taxable year. The Taxpayer requests a ruling that VA Group 1 made a valid election to file a consolidated Virginia income tax return and all affiliates with Virginia nexus be permitted to be included in a single consolidated Virginia return.

RULING

Election Year

Virginia Code § 58.1-442 allows corporations to elect to file returns as separate, combined, or consolidated entities regardless of how the corporations file their federal income tax returns. Title 23 of the Virginia Administrative Code ("VAC") 10-120-320 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 combined return, or a consolidated return. All returns for subsequent years must be filed on the same basis unless permission to change is granted by the Department.

In the instant case, the Taxpayer acquired VA Group 1 in a taxable transaction. During the two taxable years prior to the acquisition, the Taxpayer and its subsidiaries did not operate as an affiliated group in Virginia. When acquired by the Taxpayer, the affiliated entities of VA Group 1 became members of a newly formed affiliated group. The new group had made no prior election; therefore, it could elect to file corporate income tax returns using any of three methods allowable in Va. Code § 58.1-442. See P.D. 97-226 (5/16/97).

Making an Election

VA Group 1 marked the "combined" box on the initial return for the 1994 taxable year. You represent that there was some confusion between the meaning of "combined" and "consolidated" for Virginia purposes, when VA Group 1's initial return was filed, but the 1994 return was prepared following the consolidated filing method, as were all subsequent returns. The Taxpayer believes the computation of the returns under the consolidated method is the best indicator of VA Group 1's election.

The fact that the Virginia corporate income tax return lists both "consolidated" and "combined" filing choices, puts taxpayers on notice to investigate the difference, particularly when there are differing meanings assigned to these terms in other states. In a consolidated return in Virginia, federal taxable income of the group is computed with eliminations, and a single apportionment factor is used for the entire group's apportionable income. In a combined return, federal taxable income is the sum of each member's separate income without eliminations, and a separate apportionment factor is used for each member of the group. Virginia law, regulations and the instructions distributed with the return forms clearly indicate the difference. In particular, the 1994 instructions stated that a consolidated return was to be prepared in accordance with I.R.C. § 1502, while a combined return computes income, allocation, and apportionment separately for each member.

In P.D. 96-312 (10/31/96), the Department determined that an affiliated group of corporations claiming to have made an election to file consolidated returns, had, in fact, made an election to use the combined filing status by marking the "combined" filing status box on the initial return and computing its tax liability in all material respects on a combined basis in the election year. In this case, VA Group 1 checked the "combined" filing status box on the initial return, but calculated the return using the consolidated method in all material respects.

Because an affiliated group is put on notice to investigate Virginia's different filing methods, the Department cannot discount the checking of a box merely because the return is computed using a different filing status. As such, confusion about Virginia's filing methods will not be considered sufficient cause to permit a change to an election made by an affiliated group. In such cases, the election must be determined based on the continuing actions of the affiliated group.

The evidence shows that VA Group 1 consistently filed corporate income tax returns on a consolidated basis for each taxable subsequent to its initial return. Based on this consistent filing pattern, the Department concludes that VA Group 1 elected to file consolidated corporate income tax returns. Accordingly, all returns filed by the Taxpayer's Virginia affiliates for subsequent taxable years were required to be filed on a consolidated basis.

Carryforwards and Carrybacks

Based on the facts presented, the Taxpayer's Virginia affiliates have not been filing under the correct filing status since the 1996 taxable year. As such, amended returns for all taxable years not barred by the statute of limitations must be filed.

In addition, the Virginia affiliates may need to recalculate the Virginia taxable income for all taxable years back to 1993 to ensure the correct carryforwards and carrybacks ( i.e. , net operating loss deductions (NOLDS), capital losses, and charitable contributions) permitted under the Internal Revenue Code (IRC). See P.D. 94-154 (5/23/94).

Virginia income tax laws do not address the carryover deductions. Nonetheless, Va. Code § 58.1-301 provides, with certain exceptions, that terminology and references used in Title 58.1 of the Code of Virginia have the same meaning as provided in the IRC, unless a different meaning is clearly required. Because the starting point in computing Virginia taxable income is federal taxable income (FTI), Virginia allows a carryover to the extent that it is allowable in computing FTI. For the taxable years open under the statute of limitations, the amount of any federal carryovers used to determine FTI on the amended returns must conform to the IRC as it applies to the Virginia affiliated group.

Amended returns for all open taxable years as of the date of this letter, as well as future consolidated returns, should be filed under the name and Virginia identification number of the lead corporation in VA Group 1. The Taxpayer should submit its amended returns to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attn: *.

This ruling is based on the facts presented as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia and regulation sections cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this ruling, you may contact * at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2739931564.o