If my corporation's subsidiaries all become disregarded entities and it's no longer part of an affiliated group, do I need Department permission to switch from consolidated to separate Virginia filing?

Plain-English summary

A corporation and its subsidiaries had previously filed a consolidated Virginia corporate income tax return. Effective January 1, 2021, all of the corporation's subsidiaries became disregarded entities for tax purposes, meaning the corporation would file a standalone federal return for 2021 that folded in all of the disregarded entities' financial data. The corporation wrote to the Department requesting permission to file a separate Virginia return going forward, along with the required $100 filing-status-change fee.

The Department explained that Virginia lets corporations elect to file separate, combined, or consolidated returns, but once a group of affiliated corporations picks a filing method, they generally must keep filing that same way in later years unless the Department grants permission to change. That permission requirement, though, presupposes there's still an affiliated group making an ongoing choice among the three filing methods. Here, because all of the subsidiaries became disregarded entities, the corporation was no longer part of an affiliated group at all for 2021 -- there was only one entity left subject to Virginia tax. With no group and no other filing option available, the corporation had no choice to make, and consequently no need for the Department's permission to "change" to separate filing. The Department confirmed a separate return was simply the only option available, and, since permission was never actually required, refunded the $100 fee the corporation had paid.

What this means for you

Corporate groups whose subsidiaries become disregarded entities

If a change in corporate structure eliminates your affiliated group entirely, leaving only one entity subject to Virginia tax, you likely don't need the Department's permission to file a separate return -- there's no group left to have elected a different method, so there's nothing to "change" from.

Anyone submitting a filing-status-change request with the $100 fee

Consider first whether your situation actually involves a genuine election among separate, combined, or consolidated filing for an existing affiliated group. If restructuring has left you with no affiliated group at all, permission, and the fee, may not be required, and the Department will refund the fee if it agrees.

Common questions

Q: Does a corporation need Virginia's permission to change from consolidated to separate filing?
A: Only if it remains part of an affiliated group with an actual choice among separate, combined, or consolidated filing. If restructuring eliminates the affiliated group entirely, there's no election to make and no permission required.

Q: What happens if all of a corporation's subsidiaries become disregarded entities?
A: The corporation is no longer part of an affiliated group for Virginia tax purposes, so it must file a separate return, and doesn't need the Department's permission to do so.

Q: Will the Department refund a filing-status-change fee if permission wasn't actually required?
A: Yes -- as in this ruling, the Department refunded the $100 fee once it determined the taxpayer never needed permission in the first place.

Citations and references

• Va. Code § 58.1-442 (corporations may elect separate, combined, or consolidated filing)
• Va. Code § 58.1-302 (definition of an affiliated group of corporations)
• 23 VAC 10-120-320 (filing method must be consistent in later years absent Department permission to change)

Subject

Filing Status: Change - Permission not required when only one entity subject to Virginia tax

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 23-5

Original ruling text

January 6, 2023

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 separate corporate income tax return for the taxable year ended December 31, 2021, and for all subsequent taxable years. The Taxpayer and its subsidiaries previously filed on a consolidated basis in Virginia. On January 1, 2021, all subsidiaries of the Taxpayer became disregarded entities. For the 2021 taxable year, the Taxpayer will file a standalone federal income tax return that includes all financial data from the disregarded entities.

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 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.

In this case, as a result of the change in corporate structure, the Taxpayer is no longer a member of an affiliated group for the 2021 taxable year. As such, the Taxpayer has no option other than to file a separate Virginia return. In this situation, no permission to change filing status is required.

Further, because the Taxpayer was not required to get permission to change its filing status, the $100 fee submitted with its request will be refunded.

The Code of Virginia sections cited are available online at www.tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/4368.X