Could an affiliated corporate group elect combined Virginia returns beginning with its first full taxable year in 2009?

Subject

Taxpayer and A1 were eligible to elect to file combined returns .

Plain-English summary

An affiliated corporate group could elect to file combined Virginia returns beginning with 2009, its first full taxable year subject to Virginia tax. The taxpayer acquired a Virginia corporation in 2005 and a Virginia-operating single-member LLC in May 2008. The taxpayer and affiliate filed separate short-year 2008 returns.

Virginia permitted an affiliated group to choose separate, combined, or consolidated filing in the first year when two or more members were required to file. The Department treated 2009—not the partial 2008 period—as the election year for this group.

The taxpayer and its original affiliate could therefore elect combined 2009 returns. A second corporate affiliate whose own single-member LLC began Virginia business during 2009 also had to be included in that combined return.

Once selected, combined filing governed subsequent returns unless the Tax Commissioner approved a change. New affiliates becoming subject to Virginia tax also had to conform.

What this means for you

• A short initial period may not be the filing-status election year when the next year is the group's first full taxable year.
• Disregarded single-member LLC activity can bring its corporate owner into the affiliated Virginia filing group.
• The elected filing method carries forward to later years.
• Newly taxable affiliates must follow the existing group method.

Common questions

Why was 2009 the election year rather than 2008?

It was the first full taxable year in which the affiliated group was subject to Virginia income tax.

Did the newer affiliate have to join the combined return?

Yes. Its single-member LLC began Virginia business during 2009.

Could the group change filing methods later?

Only with permission from the Tax Commissioner.

Citations and references

• Va. Code §§ 58.1-302 and 58.1-442.
• 23 VAC 10-120-320 and 23 VAC 10-120-324.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-185

Original ruling text

August 16, 2010

Re: Ruling Request: Corporate Income Tax

Dear *:

This will respond to your letter in which you request a ruling confirming that the taxable year January 1 through December 31, 2009 will be the election year for selecting a corporate income tax filing status for the * (the "Taxpayer") and its affiliates.

FACTS

The Taxpayer acquired * (A1), a Virginia-based corporation, in 2005. The Taxpayer did not operate in Virginia and A1 continued to file a separate return. In May 2008, the Taxpayer purchased all of the member interests of *** (D1), a limited liability company operating in Virginia. For the short taxable year ended December 31, 2008, the Taxpayer and A1 each filed a separate Virginia corporate income tax return.

In October 2009, * (D2) began doing business in Virginia. D2 was a single member limited liability company owned by *** (A2), a subsidiary of the Taxpayer.

The Taxpayer, A1, and A2 are affiliated within the meaning of Va. Code § 58.1-302 and file returns using the same taxable year. The Taxpayer requests a ruling that it was eligible to elect to file combined corporate returns effective with the taxable year ended December 31, 2009.

RULING

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.

Title 23 VAC 10-120-324 provides that changes between separate and combined filings will generally be allowed because allocation and apportionment among members of the affiliated group are unaffected by either filing method.

Based on the facts presented, the Taxpayer and A1 became an affiliated group in May 2008. The first full taxable year that the affiliated group was subject to Virginia income tax was the taxable year ended December 31, 2009. Therefore, the election year of the affiliated group is the 2009 taxable year. As such, the Taxpayer and A1 were eligible to elect to file combined returns beginning with the 2009 taxable year.

In addition, because it became subject to Virginia corporate income tax during the 2009 taxable year, A2 would be included the Taxpayer's affiliated group and must be included in the 2009 combined return.

All subsequent returns of the Taxpayer's affiliated group must be filed on the combined basis unless permission to change is granted by the Tax Commissioner. Further, any new affiliates becoming subject to Virginia corporate income tax in subsequent taxable years must conform to the elected filing status.

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 response, you may contact * in the Department's Office of Tax Policy„ Appeals and Rulings, at ***.

Sincerely,

Linda Foster

Deputy Tax Commissioner

AR/1-4415582158.E