Was a corporation formed under tribal law automatically exempt from Virginia corporate income tax and filing?

Plain-English summary

Virginia would not treat the tribally chartered corporation as automatically exempt from corporate income tax and required it to file while registered to do business with the State Corporation Commission. The tribe itself was generally federally exempt, but the corporation was a separate entity formed under tribal law.

The IRS had recognized in another taxpayer's private letter ruling that a tribal-law corporation could be exempt as an integral part of tribal government. But that ruling applied only to its recipient and did not establish this taxpayer's status. Until federal exemption was clarified, Virginia treated the entity as a corporation subject to income tax.

If the IRS ruled that the taxpayer had no federal return filing duty, it would have no federal taxable income and therefore no Virginia income tax under the ruling's analysis. Even then, it still had to file a Virginia return for each year it remained registered with the SCC. Its Virginia registration type was 'Corporation,' not 'Federal Government.'

What this means for you

• A tribe's exemption does not automatically establish a separately formed corporation's federal or Virginia tax status.
• Obtain entity-specific federal authority when relying on integral-part treatment.
• Virginia taxable income starts with federal taxable income, but filing duties can exist even when no tax is due.
• SCC registration can independently require annual Virginia corporate returns.
• Use the entity's actual legal classification when registering.

Common questions

Q: Did tribal chartering make the corporation a federal-government entity?
A: No. Virginia instructed it to register as a corporation.

Q: Could an IRS ruling change the tax result?
A: Yes. If the IRS found no federal return filing duty, the ruling said the corporation would have no federal taxable income and no Virginia income tax.

Q: Would that end Virginia filing duties?
A: No. Returns remained required for every year the foreign corporation was registered with the SCC.

Citations and references

• Va. Code §§ 58.1-400, 58.1-401, 58.1-301, and 58.1-441.
• 23 VAC 10-120-310 A 1.
• Revenue Ruling 67-284 and PLR 200409033, discussed as federal authorities with different precedential weight.

Subject

A federally recognized Indian tribe/ Exemptions Filing Requirements

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-155

Original ruling text

August 6, 2013

Re: Request for Ruling: Corporate Income Tax

Dear *:

This is in response to your letter in which you request a ruling concerning the application of Virginia's corporate income tax to * (the "Taxpayer"). I apologize for the delay in responding to your request.

FACTS

* (the "Tribe"), a federally recognized Indian tribe, is generally exempt from federal income taxation. See Rev. Rul. 67-284, 1967-2 CB 55. The Tribe formed the Taxpayer, a corporation, under its own laws, which it is able to do as a sovereign state.

The Taxpayer, based in * (State A), is doing business in Virginia. The Taxpayer requests a ruling to confirm that it is not subject to Virginia income tax or required to file a Virginia income tax return. The Taxpayer also seeks confirmation that it should use the "Federal Government" entity designation when registering with the Department.

RULING

Virginia Code § 58.1-400 imposes income tax "on the Virginia taxable income for each taxable year of every corporation organized under the laws of the Commonwealth and every foreign corporation having income from Virginia sources." Virginia Code § 58.1-401, however, provides an exemption from income tax to corporations that meet certain conditions.

Conformity

Virginia 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 Internal Revenue Code (IRC), unless a different meaning is clearly required. As such, Virginia's conformity to federal law is limited to the actual use of a specific term in a Virginia statute. Further, conformity does not extend to terms, concepts, or principles specifically provided for in Title 58.1 of the Code of Virginia . For corporate income tax purposes, Virginia generally "conforms" to federal law in that it starts the computation of Virginia taxable income with federal taxable income (FTI).

The Internal Revenue Service (IRS) has found, in at least one case, that a corporation organized under tribal law would be exempt from federal income tax because it was an "integral part" of the tribal government that formed it. See PLR 200409033 (2/27/2004). A private letter ruling, however, is directed only to the party specifically requesting it and has no precedential value over other parties. While the PLR may be an indication of federal income tax policy, it is unclear whether the Taxpayer is in fact exempt from federal income tax.

Virginia Corporate Income Tax Return

The Taxpayer also seeks to confirm that it is not required to file a corporate income tax return in Virginia. Virginia Code § 58.1-441 requires every corporation organized under Virginia law or having income from Virginia sources to file a return. In addition, Title 23 of the Virginia Administrative Code (VAC) 10-120-310 A 1 requires every foreign corporation registered to do business in Virginia with the State Corporation Commission (SCC) to file a return even if it has no income from Virginia sources and no income tax is due. It appears that, at a minimum, the Taxpayer has registered with the SCC for the privilege of doing business in Virginia. As such, the Taxpayer would be required to file Virginia returns for each year it is so registered even if it does not have income from Virginia sources.

Virginia Entity Classification

Finally, the Taxpayer asks the Department for written confirmation that it select the entity type "Federal Government" when registering with the Department. Because the Taxpayer does not appear to be a federally chartered but is rather a tribally chartered corporation, and in light of the above uncertainty whether the Taxpayer would be considered an integral part of the Tribe, it would be considered to be a "Corporation" for registration purposes. If the IRS were to rule that the Taxpayer is an integral part of the Tribe or it otherwise became clear by future developments in federal law, then the Taxpayer could change its designation as appropriate.

CONCLUSION

Because it is unclear whether the Taxpayer is subject to federal income tax, the Department cannot issue a ruling advising the Taxpayer that it is not subject to Virginia income tax. Accordingly, the Department considers the Taxpayer to be a corporation subject to Virginia income tax and must file returns as such.

If the Taxpayer receives a ruling from the IRS that it is not required to file federal income tax returns, it would not have FTI and would not be subject to Virginia income tax. Even if the Taxpayer is not liable for any Virginia income tax in a given taxable year, as a foreign corporation, it must still file a return for any year it is registered to do business in Virginia with the SCC. When registering with the Department, the Taxpayer should choose the entity type "Corporation."

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. In addition, this ruling only addresses the Taxpayer's liability, if any, for Virginia income tax. It does not address any other state or local taxes that may apply to the Taxpayer.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4886320884.M