Did two affiliated real estate investment trusts need Virginia's permission to file a combined return in their first year of affiliation?

Plain-English summary

A parent REIT and its subsidiary REIT asked permission to file a combined Virginia corporate income tax return for 2017 and later years. The parent had filed before, but the subsidiary's first required Virginia return was for 2017.

No permission was needed: 2017 was the affiliated group's election year, so it could choose combined filing then.

Why 2017 was an election, not a change

Virginia lets affiliated corporations choose separate, combined, or consolidated returns in the first full taxable year when two or more group members must file Virginia returns.

The subsidiary did not become a required Virginia filer until 2017. Thus 2017 was the first year the parent and subsidiary were an affiliated Virginia filing group, even though the parent had filed separately in earlier years.

Effect of the election

The two REITs could file a combined 2017 return and use that method afterward. Under 23 VAC 10-120-324(C), the filing choice is made by the group as a whole. Changes in group membership do not restart the election, and a later-added corporation must follow the group's existing method.

What this means for you

• Identify the first year when at least two affiliated members must file in Virginia.
• That first affiliated filing year allows a choice among authorized methods.
• A true later change generally requires Department permission.
• New members ordinarily inherit the affiliated group's existing method.

Common questions

Q: Are REITs subject to Virginia corporate income-tax filing rules?

A: Yes, to the extent the REIT is taxed at entity level and has the required Virginia connection or income.

Q: Did the parent's earlier separate filing prevent a 2017 combined election?

A: No. The subsidiary first had to file for 2017, making that the group's election year.

Q: Can a new group member choose a different method later?

A: No. The ruling says a new member must follow the group's prior election.

Citations and references

• Va. Code §§ 58.1-442, 58.1-302 — filing choice and affiliation
• 23 VAC 10-120-100(B)(2) — REIT Virginia taxable income
• 23 VAC 10-120-320, 10-120-324(C) — election year and group method
• IRC §§ 856-857 — federal REIT treatment referenced by Virginia

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 19-44

Original ruling text

April 25, 2019

Re: Corporate Income Tax: Request for Filing Status Change

Dear *:

This will respond to your letter in which you request permission for * (the “Taxpayer”) to file a combined corporate income tax return with *** (the “Subsidiary”) for the taxable year ended December 31, 2017, and for all subsequent years.

FACTS

The Taxpayer, a real estate investment trust (REIT), wholly owns * (HLLC), a pass-through entity. HLLC wholly owns the Subsidiary, which is also a REIT. The Taxpayer, Subsidiary, and HLLC were spun off from *** (the “Parent”) in January 2017. The Taxpayer files a Federal Form 1120-REIT that includes the HLLC’s income, gains, losses, deductions and credits. The Subsidiary also files a separate Federal Form 1120-REIT. Both the Taxpayer and the Subsidiary file separate Virginia corporate income tax returns. All income tax returns are filed on a calendar year basis.

DETERMINATION

A REIT is an entity which, but for the exceptions of Internal Revenue Code (IRC) § 856 et seq ., would be taxed as a corporation. Virginia conforms to the federal income tax treatment of these entities, i.e., to the extent a REIT is treated as a pass through entity for federal income tax purposes, it is treated as a pass through entity for Virginia purposes.

To the extent a REIT is subject to tax at the entity level, it is subject to the Virginia corporate income tax. Pursuant to Title 23 of the Virginia Administrative Code (VAC) 10-120-100 B 2, the taxable income of a REIT for Virginia purposes is the sum of: (i) real estate investment trust income as defined in IRC § 857(b)(2); (ii) capital gains as defined in IRC § 857(b)(3); (iii) income from foreclosure property as defined in IRC § 857(b)(4) and income from prohibited transactions as defined in IRC §857(b)(6). Unlike the Internal Revenue Service (IRS), Virginia does not offer a specific income tax return form for REITs. Accordingly, REITs organized under the laws of Virginia or that have Virginia source income are required to file a Virginia corporate income tax return.

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 VAC 10-120-320 provides that in the first full taxable year two or more members of a group of corporations affiliated pursuant to Virginia 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.

The Department’s records indicate that the Taxpayer filed a separate Virginia corporate income tax return for years prior to 2017. The first year that the Subsidiary was required to file a Virginia corporate income tax return was for the 2017 taxable year. Thus, the first year that the Taxpayer and the Subsidiary became affiliated was the 2017 taxable year. As the election year, the Taxpayer and Subsidiary could file a combined return for the taxable year ended December 31, 2017 and all subsequent years. No permission to change a filing status is required.

Under Title 23 VAC 10-120-324 C, filing methods are deemed to be made by the affiliated group as a whole. Changes in the membership of an affiliated group do not affect the original election by the affiliated group. If a new corporation or entity electing to be treated as a corporation becomes a member of the affiliated group, the new entity must follow the filing method previously elected by the group.

The Code of Virginia sections and regulations 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 response, you may contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1878.B

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