Did a corporation need Virginia permission to switch from a consolidated return after all affiliates became disregarded single-member LLCs?

Plain-English summary

The parent corporation had to file separately and did not need permission to change status. It and four affiliates had filed a consolidated Virginia return for 2009.

On January 1, 2010, the affiliates converted to wholly owned single-member LLCs, transferred all assets and liabilities to the parent, and ceased having operations. If treated as disregarded entities, they became divisions of the parent for federal and Virginia income-tax purposes.

Disregarded divisions were not separate affiliated corporations eligible to join a consolidated or combined return. The parent was therefore the only Virginia taxable corporation in the group and was required to file a separate 2010 return.

Common questions

Q: Could the disregarded LLCs remain members of the consolidated group?
A: No. They were treated as divisions rather than separate affiliated corporations.

Q: Did Virginia need to approve the status change?
A: No. Separate filing followed automatically once the corporation was no longer in an affiliated group.

Citations and references

• Va. Code §§ 58.1-302, 58.1-441, and 58.1-442.
• 23 VAC 10-120-320.
• Treas. Reg. § 301.7701-1 et seq.
• Virginia Public Documents 97-343 (August 28, 1997) and 99-34 (March 24, 1999).

Subject

Taxpayer requests permission to change to a separate filing status.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-91

Original ruling text

June 5, 2012

Re: Ruling Request: Corporate Income Tax

Dear *:

This will respond to your letter in which you request permission for * (the "Taxpayer") to change from consolidated filing status to separate filing for the taxable year ended December 31, 2010. I apologize for the delay in responding to your letter.

FACTS

For the 2009 taxable year, the Taxpayer and its four affiliates filed a consolidated Virginia corporate income tax return. On January 1, 2010, all four affiliates were converted from corporations to single member limited liability companies (SMLLCs) wholly owned by the Taxpayer. Subsequent to the conversion, the four affiliates transferred all their assets and liabilities to the Taxpayer. Since the reorganization, the four affiliates have had no assets or operations and all operations have been conducted through the Taxpayer. The Taxpayer requests permission to change to a separate filing status.

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. When corporation ceases to be member of an affiliated group, however, it may no longer elect a filing status and is required to file a separate Virginia corporate income tax return pursuant to Va. Code § 58.1-441.

Treas. Reg. § 301.7701-1 et seq. , otherwise known as the "check the box" regulations, allow business entities to choose a federal classification or be classified under the regulation's default provisions. The default election for SMLLC is treatment as a disregarded entity. A disregarded entity whose single member is a corporation would be treated as a division of such corporation for federal and Virginia income tax purposes. See Public Document (P.D.) 97-343 (8/28/1997).

Because they are treated as divisions, disregarded entities are not affiliated as defined under Va. Code § 58.1-302. As such, they are not treated as members of an affiliated group for purposes of electing a corporate income tax filing status under Va. Code § 58.1-442. A corporation, with its only related entities being SMLLCs that are disregarded entities, is treated as a single corporation with no election and must file a separate Virginia income tax return.

In addition, the Department has ruled that a corporation registered to do business in Virginia but not conducting any business in Virginia is not subject to tax in Virginia and is not eligible to be included in a consolidated or combined Virginia return, even though it may be required to file a Virginia return. See P.D. 99-34 (3/24/1999). Such corporations, therefore, are not eligible to be included in an affiliated group under Va. Code § 58.1-442. A corporation, with its only related entities being corporations that have no operations in or nexus with Virginia, is treated as a single corporation with no election and must file a separate Virginia income tax return.

As such, if the four affiliates elected to be treated as disregarded entities, the Taxpayer would be considered to be the only entity subject to Virginia income tax for purposes of Va. Code § 58.1-442 and would no longer be a member of an affiliated group.

Based on the facts presented, the Taxpayer was no longer a member of an affiliated group in 2010 and must file on a separate Virginia income tax return for the 2010 taxable year. Because it was required to file separately, no permission to change is required from the Department.

The Code of Virginia sections, regulation 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. If you have any questions regarding this response, please contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4892367818.E