Were management fees between an S corporation and tiered family partnerships exempt BPOL affiliated-group receipts?

Plain-English summary

Virginia concluded that management fees involving the tiered partnerships did not qualify for the BPOL affiliated-group exemption. The exemption applied only when the entities met either the parent-subsidiary or brother-sister ownership test, treating pass-through interests as if they were corporate stock.

The management S corporation controlled voting power as general partner, but neither the shareholders nor other trusts owned at least 80% of the first-tier partnerships' nonvoting interests. The parent-subsidiary test therefore failed, and the second tier could not qualify through that chain.

The commonly owned management S corporation and two other S corporations did meet the brother-sister test. The partnerships did not: the shareholder group lacked the required 80% total value ownership in the first tier, so the second tier failed as well. Fees between the management company and those partnerships remained subject to applicable BPOL tax.

Common questions

Q: Were any entities in the structure affiliated?
A: Yes. The three commonly owned S corporations met the brother-sister test.

Q: Why did the partnerships fail?
A: The ownership group did not satisfy the required nonvoting or total-value ownership thresholds.

Citations and references

• Va. Code §§ 58.1-3700.1, 58.1-3701, and 58.1-3703(C)(10).
• 23 VAC 10-500-10 and 23 VAC 10-500-50.

Subject

Taxpayer and the first tier limited partnerships does not meet the parent-subsidiary test; affiliated group

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-34

Original ruling text

March 26, 2012

Re: Request for Advisory Opinion

Business, Professional and Occupational License Tax

Dear *:

This is in response to your letter in which you request an advisory opinion regarding the interpretation of the affiliated group provisions of the Business, Professional and Occupational License (BPOL) tax as it applies to the * (the "Taxpayer"). I apologize for the delay in the Department's response.

The local license fee and tax are imposed and administered by local officials. Virginia Code § 58.1-3701 authorizes the Department to issue advisory opinions on local license tax issues. The following opinion has been made subject to the facts presented to the Department summarized below. Any change in these facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections, regulations and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site.

FACTS

The Taxpayer, an S corporation owned by three trusts and one individual (collectively, the "Shareholders"), has a definite place of business in the * (the "County"). The Taxpayer provides management and administrative services to a number of related entities in Virginia and *** (State A).

The Shareholders commonly own another S Corporation (VSC) in another Virginia locality and an S Corporation (ASC) in State A, which maintains the home office for the family of entities.

Most of the operating entities are second tier limited partnerships in which the Taxpayer holds a 1% or less general partnership interest. The limited partners are first tier limited partnerships owned by the Taxpayer (1% general partnership interest), the Shareholders (limited partners), and a number of other trusts (limited partners). VSC is the limited partner in one operating entity in which the Taxpayer is the 1% general partner.

The operating entities pay management fees to the Taxpayer. The County has asked for an advisory opinion as to whether the management fees would be considered exempt intercompany receipts between members of an affiliated group.

OPINION

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. There are two tests, the parent-subsidiary test and the brother-sister test, that a group of entities can satisfy in order to be considered an affiliated group. In applying the statutory definition of "affiliated" under Va. Code § 58.1-3700.1 to pass-through entities, the tests are applied "as if they were corporations and the ownership interests therein were stock."

Parent-Subsidiary Test

A group of related entities may meet the parent-subsidiary test if:

1. one or more corporations subject to inclusion, other than the common parent, directly owns stock or other ownership interest possessing at least 80% of the voting power of all classes of interests and at least 80% of each class of the nonvoting interests of each of the related entities, and

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

A "corporation subject to inclusion" includes a related entity that has gross receipts and gross income subject to BPOL tax. See Title 23 of the Virginia Administrative Code (VAC) 10-500-10 and 10-500-50.

As the general partner in all of the first tier limited partnerships, the Taxpayer possesses at least 80% of the voting power in all the classes of ownership. However, because neither the Shareholders nor the other trusts own at least 80% of the nonvoting first tier limited partnership interests, the relationship between the Taxpayer and the first tier limited partnerships does not meet the parent-subsidiary test. Further, because the first tier limited partnerships are not affiliated with the Taxpayer, none of the second tier limited partnerships would be considered to meet the parent-subsidiary test.

Brother-Sister Test

Two or more entities may meet the brother-sister test if five or fewer owners that are individuals, estates, or trusts (the "ownership group") hold stock or other ownership interests that meet both the total membership and common ownership prongs of the test. See Title 23 VAC 10-500-50.

1. Total ownership occurs when the ownership group owns at least 80% of the total voting power of all classes of ownership interests or the total value of all ownership interests, and

2. The common ownership prong is met when the ownership group holds more than 50% of the total voting power of all classes of ownership interests or the total value of all ownership interests to the extent that the ownership interests are identical for each entity.

In this case, the Shareholders would be considered to be an ownership group for purposes of meeting the brother-sister test. The information provided indicates that the Shareholders own at least 80% of the total voting power of all classes of stock in the Taxpayer, VSC and ASC. In addition, they hold more than 50% of the total voting power of all classes of stock to the extent that the ownership interests are identical for each entity. As such, the Taxpayer, VSC and ASC would be an affiliated group for purposes of the exemption under Va. Code § 58.1-3703 C 10.

The Shareholders are not general partners in the first tier limited partnerships and do not, collectively, own 80% of the total value of limited partnership interests. One of the Shareholders holds a 99% limited partnership interest in one of the first tier limited partnerships, but does not own 80% of the total value of the stock in the Taxpayer. Accordingly, the Taxpayer and the first tier limited partnerships do not meet the total ownership prong of the brother-sister test. Further, because the Taxpayer is not affiliated with the first tier limited partnerships, none of the second tier limited partnerships could meet the brother-sister test.

Based on the foregoing, it is my opinion that the intercompany transactions between the Taxpayer and the first tier and second tier limited partnerships are not eligible for the exemption under Va. Code § 58.1-3703 C 10 for receipts or purchases made by members of an affiliated group of entities from other members of the same affiliated group. Therefore, the intercompany transactions between the Taxpayer and the first tier and second tier limited partnerships would be subject to BPOL tax pursuant applicable Virginia statutes and County ordinances.

If you have any questions regarding this advisory opinion, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4500409500.B