Can a Virginia 501(c)(3) nonprofit foundation's BPOL tax exemption shield its wholly owned, for-profit subsidiary that handles administrative and marketing services?

Plain-English summary

A Roanoke foundation provides housing and medical facilities to elderly and disabled people. It is a 501(c)(3) charity exempt from federal income tax. It also owns 100% of the stock of a for-profit corporation that provides administrative, HR, financial, and marketing services to the foundation. The IRS treats the subsidiary as a regular taxable corporation, requiring it to file standard corporate returns rather than exempt-organization returns. The Roanoke County Commissioner of the Revenue asked whether the foundation's BPOL (business, professional, and occupational license) tax exemption carries through to the for-profit subsidiary.

Acting AG William Mims concluded that the exemption does not flow through. Section 58.1-3703(C)(18)(a) exempts BPOL taxation of "charitable nonprofit organization[s]" that are "described in [IRC] § 501(c)(3) and to which contributions are deductible by the contributor under [IRC] § 170." The foundation qualifies (assuming its contributions are deductible under § 170). The subsidiary does not, because it is operated for profit, files standard corporate returns, and by definition is not a § 501(c)(3) organization. Virginia courts apply strict construction against the taxpayer for exemptions and deductions, so the AG was not willing to read the exemption to cover the wholly owned subsidiary just because it is owned by the exempt parent.

The opinion also points the subsidiary at a different exemption that might apply: § 58.1-3703(C)(10) bars local governments from levying BPOL tax "[o]n or measured by receipts or purchases by an entity which is a member of an affiliated group of entities from other members of the same affiliated group." If the foundation and its subsidiary qualify as an "affiliated group" under § 58.1-3700.1 (and the operative regulation, 23 VAC § 10-500-50), then the subsidiary's receipts derived from the foundation (selling administrative and marketing services to its parent) would be exempt as intra-group receipts. But the affiliated-group exemption is not a blanket shield. If the subsidiary derives receipts from outside the affiliated group, those receipts are taxable absent another statutory exemption.

Currency note

This opinion was issued in 2009. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Background and statutory framework

The BPOL tax sits in Title 58.1, Chapter 37. Section 58.1-3703(A) authorizes a city, county, or town to levy a license tax on businesses, trades, professions, occupations, and callings carried on within the locality. The taxing authority is subject to a list of exemptions in § 58.1-3703(C). Two are central here.

§ 58.1-3703(C)(18)(a) exempts the "receipts" of a "charitable nonprofit organization," which the statute defines (more narrowly than the IRC) as an organization described in IRC § 501(c)(3) to which contributions are deductible by the contributor under IRC § 170. There's a carve-out: receipts from an unrelated trade or business taxable under IRC § 511 et seq. are not exempt. So a parent foundation's program receipts get the exemption; UBI does not.

§ 58.1-3703(C)(10) exempts BPOL on receipts or purchases by an entity that is a member of an "affiliated group" from other members of the same affiliated group. The definition of "affiliated group" sits in § 58.1-3700.1, with operative interpretive guidance in 23 VAC § 10-500-10 (effective October 6, 2008). The exemption is designed so that intra-corporate-family transactions don't generate phantom BPOL liability.

Tax exemptions in Virginia are strictly construed against the taxpayer. The AG cited Lynchburg v. English Construction Co., 277 Va. 574 (2009), for that principle. Strict construction is what kept the (C)(18)(a) exemption from extending to a for-profit subsidiary that doesn't meet the (C)(18) definitional terms in its own right.

Common questions

Why doesn't the BPOL exemption follow the corporate parent down to its subsidiary?

Because the exemption is defined by the entity's own characteristics, not by who owns it. The (C)(18)(a) exemption applies to entities described in IRC § 501(c)(3) with contributions deductible under § 170. A for-profit subsidiary, by definition, has earnings that inure to a private shareholder (the parent foundation), which would disqualify it under § 501(c)(3) even if it tried to claim that status. The IRS confirmed the point by requiring the subsidiary to file ordinary corporate returns.

Could the foundation reorganize the support functions back into itself to keep the exemption?

The opinion does not advise on that, and the answer would depend on tax and operational considerations beyond BPOL. If support functions were inside the foundation, they would generally fall under the (C)(18)(a) exemption (subject to the UBI carve-out for receipts from unrelated trades or businesses). The trade-off would be considerations like UBI exposure, segregation of legal liability, governance, and the IRS's "control" tests for related entities.

How does the affiliated-group exemption in (C)(10) actually work?

It removes from BPOL taxation any receipts the subsidiary derives from selling to, or purchases the subsidiary makes from, other members of the same affiliated group. So when the subsidiary bills the foundation for administrative services, those receipts are exempt under (C)(10) if the two are in the same affiliated group as defined in § 58.1-3700.1 and the corresponding regulation. The exemption does not cover receipts from third parties, and the subsidiary would owe BPOL on those.

Does the foundation also get the (C)(10) affiliated-group exemption?

The foundation's overall receipts get the (C)(18)(a) exemption (charity exemption), which already excludes its receipts from BPOL. The (C)(10) exemption would still be relevant for the foundation's UBI receipts, if any, that come from affiliated entities, but in most fact patterns the (C)(18)(a) exemption is the operative one for the parent charity.

What about state corporate income tax for the subsidiary?

The opinion is BPOL-specific. State corporate income tax is governed by a separate statutory scheme. The IRS's treatment of the subsidiary as a taxable corporation strongly signals the same status for Virginia corporate income tax, but the opinion does not analyze that.

Citations

• Va. Code Ann. § 58.1-3703(A) (BPOL tax authorization)
• Va. Code Ann. § 58.1-3703(C)(10) (affiliated-group exemption)
• Va. Code Ann. § 58.1-3703(C)(18)(a) (charitable nonprofit organization exemption)
• Va. Code Ann. § 58.1-3700.1 (definitions; affiliated group)
• 26 U.S.C. §§ 170(c)(2)(C), 501(c)(3) (federal exemption framework)
• 26 U.S.C. § 511 et seq. (UBI tax, carve-out from C(18)(a))
• 23 Va. Admin. Code §§ 10-500-10, 10-500-50 (affiliated-group definitions and exemptions)
• Lynchburg v. English Construction Co., 277 Va. 574, 675 S.E.2d 197 (2009) (strict construction of tax exemptions)

Source

• Landing page: https://www.oag.state.va.us/annual-reports-opinions/official-opinions
• Original PDF: https://www.oag.state.va.us/files/Opinions/2009/09-043-Horn.pdf

Original opinion text

COMMONWEALTH OF VIRGINIA
Office of the Attorney General
William C. Mims, Attorney General

August 24, 2009

The Honorable Nancy J. Horn
Roanoke County Commissioner of the Revenue
P.O. Box 20409
Roanoke, Virginia 24018-0513

Dear Ms. Horn:

I am responding to your request for an official advisory opinion in accordance with § 2.2-505 of the Code of Virginia.

Issue Presented

You ask whether a nonprofit charitable organization's exemption from the local business, professional, and occupational license ("BPOL") tax contained in Chapter 37 of Title 58.1, §§ 58.1-3700 through 58.1-3735, also applies to the nonprofit charitable organization's wholly owned, for-profit subsidiary.

Response

It is my opinion that the statutory exemption from the BPOL tax contained in § 58.1-3703(C)(18)(a) applies only to an entity that qualifies as a "nonprofit charitable organization" and would not extend to a wholly owned for-profit subsidiary that fails to meet the statutory definition of a "nonprofit charitable organization."

Background

You indicate that a foundation organized for the purpose of providing housing and medical facilities to those who are elderly or have handicaps in Roanoke, Virginia (the "Foundation"), is exempt from federal income taxation pursuant to § 501(c)(3) of the Internal Revenue Code ("IRC"). Further, you state that the Foundation owns 100% of the stock of a for-profit corporation that provides various support functions to the Foundation, including administrative, human resources, financial, and marketing services. Finally, you note that the Internal Revenue Service requires the for-profit corporation to file annual federal corporate income tax returns, rather than exempt organization returns.

Applicable Law and Discussion

Section 58.1-3703(A) authorizes a local governing body to "levy and provide for the assessment and collection of county, city or town license taxes on businesses, trades, professions, occupations and callings and upon the persons, firms and corporations engaged therein with the county, city or town." However, a local governing body's authority to impose such BPOL taxes is subject to certain statutory limitations.[1] Among these exemptions are provisions barring the imposition of local BPOL taxes on certain receipts of charitable nonprofit organizations[2] and on receipts or purchases from members of affiliated entities.[3]

Section 58.1-3703(C)(18)(a) exempts from BPOL taxation the receipts of "charitable nonprofit organization[s]," that are "described in [IRC] § 501(c)(3) and to which contributions are deductible by the contributor under [IRC] § 170."[4] Assuming that contributions to the Foundation are deductible by contributors pursuant to IRC § 170, this organization constitutes a "charitable nonprofit organization" for purposes of § 58.1-3703(C)(18)(a). Therefore, Roanoke County may not levy BPOL taxes on or measured by the Foundation's receipts, "except to the extent the organization has receipts from an unrelated trade or business the income of which is taxable under [IRC] § 511 et seq."[5]

I find no authority to support the proposition that a separate and taxable corporation that is wholly owned by a charitable nonprofit organization is entitled to the same treatment for purposes of BPOL taxes as is its parent organization. "'The manifest intention of the legislature, clearly disclosed by its language, must be applied.'"[6] Statutes that provide for tax exemptions and deductions are strictly construed against the taxpayer.[7] Pursuant to the clear language of § 58.1-3703(C)(18)(a), the exemption applies only to organizations meeting the federal criteria. Based on the facts you present, the subsidiary corporation would not fall within the description of exempt organizations in IRC § 170 or § 501(c)(3) since it is operated "for profit." This suggests that the Foundation's for-profit subsidiary would not meet the requirements of federal statutes which mandate that "no part of the net earnings of [the corporation] inures to the benefit of any private shareholder or individual."[8] You relate that the IRS treats the subsidiary corporation as a taxable corporation because the subsidiary is required to file annual income tax returns on forms applicable to taxable corporations and not those utilized by tax-exempt organizations. Therefore, I must conclude that the BPOL tax exemption applicable to a charitable nonprofit organization's receipts may not be imputed to a separately constituted organization that is not itself a charitable nonprofit organization as defined by § 58.1-3703(C)(18)(a).

Despite the inapplicability of the charitable nonprofit organization exemption to the Foundation's wholly owned subsidiary corporation, all or a portion of the subsidiary's receipts may be entitled to the exemption contained in § 58.1-3703(C)(10). Section 58.1-3703(C)(10) prohibits local governing bodies from levying BPOL taxes "[o]n or measured by receipts or purchases by an entity which is a member of an affiliated group of entities from other members of the same affiliated group." If the Foundation and its for-profit subsidiary are part of the same "affiliated group," as defined by § 58.1-3700.1,[9] the receipts derived by the subsidiary from its sales of various support services to the Foundation would be exempt from local BPOL taxation. Further, the receipts derived from other members of the affiliated group, if any, also would be exempt. However, § 58.1-3703(C)(10) does not necessarily afford the for-profit subsidiary a blanket exemption from all local BPOL taxes. Absent some other statutory exemption, the for-profit corporation would be subject to taxation on receipts or purchases from entities outside the affiliated group.[10]

Conclusion

Accordingly, it is my opinion that the statutory exemption from the BPOL tax contained in § 58.1-3703(C)(18)(a) applies only to an entity that qualifies as a "nonprofit charitable organization" and would not extend to a wholly owned for-profit subsidiary that fails to meet the statutory definition of a "nonprofit charitable organization."

Thank you for letting me be of service to you.

Sincerely,

William C. Mims

1. See VA. CODE ANN. § 58.1-3703(C) (Supp. 2008); § 58.1-3706(A) (Supp. 2008).
2. Section 58.1-3703(C)(18)(a).
3. Section 58.1-3703(C)(10).
4. I note that the definition of "charitable nonprofit organization" in § 58.1-3703(C)(18) is narrower than that of IRC § 501(c)(3) relating to classification of organizations that are exempt from federal income taxation with respect to certain educational organizations. Compare § 58.1-3703(C)(18) with 26 U.S.C.S. § 501(c)(3) (LexisNexis 2009). This limitation is not relevant to the organizations about which you inquire.
5. Section 58.1-3703(C)(18)(a).
6. Barr v. Town & Country Props., 240 Va. 292, 295, 396 S.E.2d 672, 674 (1990) (quoting Anderson v. Commonwealth, 182 Va. 560, 566, 29 S.E.2d 838, 841 (1944)), quoted in 2001 Op. Va. Att'y Gen. 179, 180.
7. See, e.g., Lynchburg v. English Constr. Co., 277 Va. 574, 582-83, 675 S.E.2d 197, 201 (2009); 2001 Op. Va. Att'y Gen., supra note 6 at 180.
8. 26 U.S.C.S. §§ 170(c)(2)(C), 501(c)(3) (LexisNexis 2009).
9. See also 23 VA. ADMIN. CODE § 10-500-10 (defining "affiliated group"), available at http://leg1.state.va.us/cgi-bin/legp504.exe?000+reg+23VAC10-500-10; 23 VA. ADMIN. CODE § 10-500-50 (defining and illustrating exemptions for affiliated groups), available at http://leg1.state.va.us/cgi-bin/legp504.exe?000+reg+23VAC10-500-50. The regulations became effective on October 6, 2008. See 24 Va. Reg. Regs. 3250, 3250.
10. See 23 VA. ADMIN. CODE § 10-500-50(B).