Did a corporate general partner's voting control make three partnerships part of its BPOL affiliated group under the brother-sister test?

Subject

Department determined that six of eight Virginia entities were not part of an affiliated group with the Taxpayer because they failed to meet both prongs of the brother-sister test.

Plain-English summary

Virginia upheld the conclusion that three partnerships were not in the corporation's BPOL affiliated group. The corporation was the sole general partner and claimed all voting power in the partnerships, while its four shareholders also held limited partnership interests.

The brother-sister test, however, looks to an ownership group of individuals, estates, or trusts. The corporation's partnership interests could not be counted, and the shareholders' limited interests carried no voting power. Because the shareholder group did not own at least 80% of the partnerships' voting rights, the total-membership requirement failed.

Result: gross receipts from transactions between the corporation and the three partnerships were subject to BPOL tax for 2009 through 2012.

What this means for you

• Common economic control does not automatically satisfy BPOL affiliated-group tests.
• Map voting power and value to the specific qualifying owners before excluding intercompany receipts.
• A corporate general partner's voting rights may not be attributed to its individual shareholders for the brother-sister test.

Citations and references

• Va. Code §§ 58.1-3700.1 and 58.1-3703.1.
• 23 VAC 10-500-50.
• Public Document 13-163.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 14-20

Original ruling text

February 25, 2013

Re: Appeal of Final Local Determination

Locality: *

Taxpayer: *

Business, Professional and Occupational License Tax

Dear

This final state determination is issued upon the application for correction filed on behalf of * (the "Taxpayer") with the Department of Taxation. You seek a reconsideration of Public Document (P.D.) 13-163 (8/15/2013) concerning the Business, Professional and Occupational License (BPOL) assessments issued to the Taxpayer by the *** (the "County") for the 2009 through 2012 tax years.

The BPOL tax is imposed and administered by local officials. Virginia Code § 58.1-3703.1 authorizes the Department to issue determinations on taxpayer appeals of BPOL tax assessments. On appeal, a BPOL tax assessment is deemed prima facie correct, i.e. , the local assessment will stand unless the taxpayer proves that it is incorrect.

The following determination is based on the facts presented to the Department summarized below. The Code of Virginia sections, regulation and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site.

FACTS

In P.D. 13-163, the Department determined that six of eight Virginia entities, Including * (VALP1), (VALP2), and ** (VALP6) were not part of an affiliated group with the Taxpayer because they failed to meet both prongs of the brother-sister test. The Taxpayer seeks a reconsideration of the Department's determination, contending VALP1, VALP2, and VALP6 met the bother-sister test because the Taxpayer held 100% of the voting power for each of these three partnership entities.

ANALYSIS

Under Title 23 of the Virginia Administrative Code (VAC) 10-500-50, 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. Entities will meet both prongs of the test if:

1. 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 (total membership), and

2. 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 (common ownership).

The Taxpayer is owned by four shareholders. These shareholders also hold limited partnership interests in VALP1, VALP2 and VALP6. The Taxpayer contends that because it owned 100% of the voting power of VALP1, VALP2, and VALP6 as the sole general partner, its ownership interest would be attributed to the ownership group. Under this rationale, it asserts that both the total ownership and common ownership tests should be met with each of the three entities.

Virginia Code § 58.1-3700.1 does not require businesses to be corporations in order to be considered affiliated. Under Title 23 VAC 0-500-50 A, an affiliated group may be composed of two or more types of entities ( i.e. , corporation and partnership), so long as the entities satisfy the requirements to be an affiliated group as if they were corporations and the ownership interests therein were stock.

As the sole general partner in VALP1, VALP2, and VALP6, the Taxpayer asserts that it held all of the voting power of these entities. Further, the Taxpayer was wholly owned by four shareholders, who also own substantial limited interests in VALP1, VALP2, and VALP6. It argues that because the shareholders held all of the voting power in the Taxpayer and essentially owned all of the voting power of VALP1, VALP2, and VALP6 by virtue of their ownership in the Taxpayer, both prongs of the brother-sister test were met.

Under the brother-sister test, however, the owners must be individual persons, estates, or trusts. Because the Taxpayer is a corporation, its ownership in VALP1, VALP2, and VALP6 cannot be considered in whether the brother-sister test is met. Further, while the four shareholders own all of the voting stock in the Taxpayer, their limited interests in the partnerships held no voting power. Because the shareholder group did not own at least 80% of the voting rights of VALP1, VALP2 and VALP6, the total membership test was not met.

DETERMINATION

Based on evidence provided, I find that the determination in P.D. 13-163 is correct. Therefore, VALP1, VALP2 and VALP6 were not part of an affiliated group with the Taxpayer. As such, the gross receipts derived from intercompany transactions between the Taxpayer and VALP1, VALP2 and VALP6 were subject to the BPOL tax for the 2009 through 2012 tax years.

If you have any questions concerning this determination, you may contact * in the Office of Tax Policy, Appeal and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5531200298.B