Which corporations belong on a Virginia consolidated income-tax return, and could two eligible affiliates amend prior returns to remove ineligible entities?

Subject

Consolidated filing status

Plain-English summary

Virginia ruled that a consolidated corporate income-tax return may include only affiliated corporations that would be subject to Virginia income tax if they filed separately. A corporation generally needs Virginia-source income, and entities also are excluded if they are not Virginia affiliates, are exempt, are protected by P.L. 86-272, would not be taxable on a separate return, or use a different taxable year.

According to the taxpayer, only Corporation A had Virginia nexus and Virginia-source income before 2007. If so, the other entities were not eligible for a consolidated Virginia return during those earlier years, and Corporation A should have filed separately.

Corporation B first established Virginia nexus and Virginia-source income in 2007. Because A and B then filed consolidated returns together, Virginia treated them as having elected consolidated status when the Virginia affiliated group first existed. That election continued for later years unless the Department approved a change.

Virginia forwarded the group's amended 2012 and 2013 consolidated returns for examination because they removed affiliates claimed to be ineligible. Refunds would be issued only as warranted after that review. The Department expressly did not decide whether the taxpayer or any subsidiary actually had nexus.

Common questions

Does every member of a federal consolidated group belong on the Virginia consolidated return? No. A corporation that is not subject to Virginia income tax is not treated as a Virginia affiliate for this purpose, and only eligible members that would be taxable on separate Virginia returns are included.

When did the two eligible corporations make their Virginia filing-status election? Virginia treated their 2007 consolidated return as the election because that was the first year the facts indicated both corporations had Virginia nexus and Virginia-source income.

Did Virginia approve the requested refunds? Not immediately. It sent the amended returns for a fuller eligibility examination and said refunds would be issued only if warranted.

Citations and references

• Va. Code §§ 58.1-302, 58.1-401, and 58.1-442.
• 23 VAC 10-120-320 and 23 VAC 10-120-322.
• P.L. 86-272 and P.D. 11-199.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-28

Original ruling text

March 17, 2016

Re: Request for Ruling: Corporate Income Tax

Dear *:

This will reply to your letter in which you request a ruling as to the filing status of two affiliated corporations.

FACTS

* (the "Taxpayer"), and its subsidiaries have been filing a consolidated Virginia corporate income tax return since the 2003 taxable year. According to the Taxpayer, only one of the subsidiaries, (Corporation A), had nexus with Virginia prior to 2007. The Taxpayer states that another subsidiary, ** (Corporation B), established nexus with Virginia in 2007 and had income from Virginia sources. The Taxpayer requests rulings regarding (1) whether an entity must have income from Virginia sources to be included on a consolidated Virginia corporate income tax return; and (2) whether Corporation A and Corporation B are permitted to file amended consolidated returns for the 2012 and 2013 taxable years to exclude affiliates it claims did not have nexus with Virginia.

RULING

Eligibility

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 full taxable year, two or more members of a group of corporations affiliated pursuant to Va. Code § 58.1-302 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.

If the affiliated group of corporations elects to file a consolidated return, the return must include the net income and apportionment factors of all members of the affiliated group which would be subject to Virginia income tax if separate returns were to be filed. See Title 23 VAC 10-120-322 B 1. In order for a corporation to be subject to Virginia income tax, it must have income from Virginia sources. See Public Document (P.D.) 11-199 (12/9/2011). Generally, a corporation will have income from Virginia sources if there is sufficient business activity within Virginia to make any one or more of the applicable apportionment factors positive. For corporations using the three-factor formula, the existence of one positive Virginia apportionment factor clearly establishes income from Virginia sources.

Corporations may not be included on a consolidated Virginia income tax return, however, if they are not affiliated as defined under Va. Code § 58.1-302, exempt from Virginia income tax under Va. Code § 58.1-401, exempt from Virginia income tax under Public Law (P.L.) 86-272, not subject to Virginia income tax if separate returns were to be filed, or using different taxable years. See Title 23 VAC 10-120-322 B 2. According to the Taxpayer, only Corporation A had nexus and Virginia source income prior to 2007. If this was the case, the other entities were not eligible to be included in a consolidated return and Corporation A should have been filing separate Virginia returns.

Election

The election to use a certain filing status is determined by the affiliated group at the time such group meets the definition of affiliated under Va. Code § 58.1-302. A corporation included in a federal consolidated return but which is not subject to Virginia income tax is not an affiliate for Virginia purposes. See Title 23 VAC 10-120-320 C. The Taxpayer indicates that Corporation B established nexus in Virginia and had income from Virginia sources beginning in 2007. If no other entities were affiliated previously, an affiliated group did not exist until 2007.

Corporation A and Corporation B were a part of the consolidated returns for the 2007 through 2013 taxable years. Because the filing of a consolidated return is deemed to be consented to by all eligible corporations included therein pursuant to Title 23 VAC 10-120-322 D 1, the Department will consider Corporation A and Corporation B to have elected to file a consolidated return as of the first taxable year the affiliated group existed.

Corporation A and Corporation B have filed amended consolidated Virginia income tax returns for the 2012 and 2013 taxable years to exclude affiliates that were not eligible to participate in the original consolidated returns. The returns will be forwarded for review and processing so that a more complete examination of the eligible entities can be conducted. Once the examination is complete, the Department will process the amended returns and refunds will be issued as warranted. All subsequent returns must be filed using the consolidated filing status unless permission to change is granted by the Department.

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, the Department issues no opinion regarding nexus as to the Taxpayer or any of its subsidiaries.

The Code of Virginia sections, regulations and public document cited 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/1-6169931266.M