Could subsidiaries in separate federal consolidated groups file one South Carolina consolidated corporate return?

Plain-English summary

The South Carolina Department of Revenue ruled that subsidiaries belonging to two separate federal consolidated groups could file one South Carolina consolidated corporate return.

A foreign parent ultimately owned both subsidiary groups through chains of federally disregarded foreign entities. The foreign parent could not join a federal consolidated return, so the two U.S. groups filed separately for federal purposes. That federal separation did not control the South Carolina result.

For South Carolina, the decisive facts were that the same parent ultimately controlled at least 80% of the combined voting power and that the corporations included in the state return had South Carolina nexus and were subject to South Carolina corporate income tax.

State control test versus federal filing groups

Section 12-6-5020 allowed a consolidated return for a parent and substantially controlled subsidiaries or for two or more corporations under substantially the entire control of the same interest.

The statute defined the required control as ownership of at least 80% of the total combined voting power of every corporation joining the return. The ruling said the common control entity did not itself have to be included in the South Carolina group.

That allowed the foreign parent to supply the common ownership even though it had no South Carolina nexus, was not subject to federal or South Carolina corporate tax, and could not serve as the parent of a federal consolidated return.

Treatment of disregarded entities

South Carolina followed federal entity classification under the authority cited in the ruling. The foreign entities in the ownership chain were disregarded federally and therefore disregarded for this South Carolina analysis.

Looking through those entities, the foreign parent was treated as the 100% owner of both principal subsidiaries. That satisfied the common-control requirement for the two state-taxable groups.

Which subsidiaries could join

The principal subsidiaries and a wholly owned subsidiary with South Carolina nexus could join the consolidated return. Other corporate subsidiaries could join only if they:

• had South Carolina nexus and were subject to tax under § 12-6-530;
• met the 80% voting-control test; and
• used the same accounting year as the other members.

A subsidiary without South Carolina nexus was excluded in the ruling's chart. Partnerships could not be members of the corporate consolidated group. The statute also barred a corporation taxed under Subchapter S from joining.

Alternative reporting method

The ruling warned that if the consolidated method did not fairly represent the group's South Carolina business, the taxpayer could petition for, or the Department could require, another reporting method under § 12-6-2320, including combined unitary reporting.

The PLR therefore approved eligibility to file the stated consolidated return; it did not guarantee that the method could never be adjusted if it distorted South Carolina income.

Common questions

Q: Must corporations be in the same federal consolidated group to file together in South Carolina?

A: No. The ruling applied South Carolina's own control, nexus, and taxability requirements.

Q: Must the ultimate parent join the South Carolina return?

A: No. The common control entity could remain outside the filing group.

Q: Can a no-nexus subsidiary join?

A: Not under the ruling. Each included corporation had to be subject to South Carolina corporate tax.

Q: Can another corporate group rely on this PLR?

A: No. It binds agency personnel only for the requesting taxpayer and exact facts presented.

Citations and references

• S.C. Code Ann. § 12-6-5020 — consolidated-return membership, 80% voting control, taxability, and common-year requirements
• S.C. Code Ann. § 12-2-25(B)(1) — state conformity to federal entity classification
• S.C. Code Ann. § 12-6-530 — corporations subject to South Carolina corporate income tax
• S.C. Code Ann. § 12-6-2320 — alternative methods when ordinary reporting does not fairly represent South Carolina business
• SC Information Letter #96-25 — entity-classification guidance cited by the ruling

Subject

Corporations Permitted to File a Consolidated Return

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR12-4.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P. O. Box 12265, Columbia, South Carolina 29211
Website Address: http://www.sctax.org

SC PRIVATE LETTER RULING #12-4

SUBJECT:

Corporations Permitted to File a Consolidated Return
(Income Tax)

REFERENCES:

S.C. Code Ann. Section 12-6-5020 (Supp. 2010)
S.C. Code Ann. Section 12-2-25(B)(1) (Supp. 2010)
S.C. Code Ann. Section 12-6-2320 (2000)

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (2000)
S. C. Code Ann. Section 1-23-10(4) (2008)
SC Revenue Procedure #09-3

SCOPE:

A Private Letter Ruling is an advisory opinion issued to a specific
taxpayer by the Department to apply principles of law to a specific set of
facts or a particular tax situation. It is the Department’s opinion limited to
the specific facts set forth, and is binding on agency personnel only with
respect to the person to whom it was issued and only until superseded or
modified by a change in statute, regulation, court decision, or another
Departmental advisory opinion, providing the representations made in the
request reflect an accurate statement of the material facts and the
transaction was carried out as proposed.

Question:
May a group of subsidiary corporations of parent PARENT, as described in the facts, file a South
Carolina consolidated return when they are included in separate federal consolidated groups
and/or file as single entities for federal income taxes?
Conclusion:
A group of subsidiary corporations of parent PARENT, as described in the facts, may file a
South Carolina consolidated return even though they are included in separate federal
consolidated groups and/or file as single entities for federal income taxes. Since SUB1 and
SUB2 are under substantially the entire control of PARENT as required by Code Section 12-65020(A)(2) and have nexus with South Carolina, the SUB1 group and the SUB2 group may file a
South Carolina consolidated return. The consolidated return can also include SUB2-A, which is
100% owned by SUB2 and has nexus with South Carolina. Other corporate subsidiaries of SUB1
and SUB2 may be included in the South Carolina consolidated return based on whether the
subsidiaries have nexus with South Carolina and meet the 80% control test of Code Section 126-5020(A)(2).

1

Facts:
PARENT is the parent of a controlled group of entities engaged in the manufacture and sale of
automotive components. PARENT is organized outside of the United States and is not subject to
federal or South Carolina corporate income tax.
PARENT owns 100% of the foreign disregarded entity DISREGARDED 1. PARENT also owns
a 49% interest in the foreign disregarded entity DISREGARDED 2, DISREGARDED 1 owns a
51% interest in DISREGARDED 2. DISREGARDED 2 then owns a 100% interest in the foreign
disregarded entity DISREGARDED 3. DISREGARDED 3 owns 100% of the foreign
disregarded entity DISREGARDED 4. DISREGARDED 4 owns 100% of two foreign
disregarded entities, DISREGARDED 5 and DISREGARDED 6. Each of these disregarded
entities is disregarded for federal income tax purposes.
DISREGARDED 5 owns 100% of the stock of SUB1. SUB1 serves as a holding company for
various subsidiaries, including SUB1-A, SUB1-B, SUB1-C, and other corporations and
partnerships. These subsidiaries are engaged in the manufacture and sale of automotive
components.
DISREGARDED 6 owns 100% of the interest in SUB2. SUB2 has elected under Treasury
Regulations §301.7701-3 to be taxed as a corporation for federal income tax purposes. SUB2
owns 100% of the stock of SUB2-A. SUB2-A is engaged in the manufacture of tires. SUB2-A
holds varying interest in other corporations and partnerships, both domestic and foreign. 1
For federal income tax purposes, SUB1 files a consolidated Form 1120 that includes SUB1,
SUB1-B, SUB1-C, and other subsidiary corporations for which the federal consolidated return
ownership and control requirements are met SUB1 Group. SUB2 files a consolidated Form 1120
that includes SUB2, SUB2-A, and other subsidiary corporations for which the federal
consolidated return ownership and control requirements are met SUB2 Group.
Because PARENT is a foreign corporation, it is not an includible corporation as defined in §
1504(b) of the Internal Revenue Code. As such, PARENT is ineligible to file a consolidated
federal income tax return with the SUB1 and SUB2 Groups. Additionally, the SUB1 Group and
SUB2 Group cannot file a single federal consolidated return because the common parent
corporation must be included in the federal consolidated return.
SUB1 and SUB2 engage in a multistate business, conduct business within South Carolina, and
have an income tax filing requirement with the State. Additionally, several of their subsidiaries
engage in activities within South Carolina which subject them to the South Carolina corporate
income tax and license fee; however, not every company in the SUB1 Group and SUB2 Group
has nexus with South Carolina.

1

SUB1-B, SUB1-C, and SUB2-A all have nexus with South Carolina. SUB1-A does not have nexus with South
Carolina. See Charts A and B for nexus information.

2

All companies in the SUB1 and SUB2 Groups use the same accounting year.
Attached are two organization charts: Chart A includes disregarded entities and Chart B
eliminates the disregarded entities.
Note: The partnerships mentioned in the facts are not included in the charts since partnerships
cannot file returns as members of the consolidated group.
Discussion:
Code Section 12-6-5020 authorizes the filing of a consolidated corporate income tax return in
South Carolina and provides the criteria for filing a consolidated return. In connection with what
corporations can file a consolidated return, the section provides:
(A) A consolidated return may be filed for the following corporations:
(1) a parent and substantially controlled subsidiary or subsidiaries;
(2) two or more corporations under substantially the entire control of the
same interest.
However, a corporation that has elected to be taxed under Subchapter S of the
Internal Revenue Code may not join in the filing of a consolidated income tax
return under this section.
The terms “substantially controlled” and “substantially the entire control”
mean the ownership of at least eighty percent of the total combined voting
power of all classes of stock of all corporations that are a party to a
consolidated return.
(B) All corporations included in a consolidated return must be subject to tax under
Section 12-6-530.
(C) A corporation doing business entirely within this State may consolidate with a
corporation doing a multistate business. Two or more corporations doing a
multistate business may file a consolidated return.

(E) All corporations included in a consolidated return or a combined return must
use the same accounting year.
South Carolina follows the federal income tax regulations concerning entity classifications. SC
Information Letter #96-25. Each of the entities in the facts is a disregarded entity for federal
income tax purposes. As a result, they are also disregarded entities for South Carolina income
tax purposes.
Under the facts presented, qualifying members of the SUB1 group and qualifying members of
the SUB2 group may file as part of the same South Carolina consolidated return. At least eighty
percent of the total combined voting power of all classes of stock of all corporations that are a
party to a consolidated return must be under the control of the same entity, but that control entity
does not have to be part of the consolidated group.

3

In this case, DISREGARDED 5 and DISREGARDED 6 are disregarded entities which are
owned by a series of disregarded entities until final ownership by corporation PARENT. Code
Section 12-2-25(B)(1). As a result, PARENT is the 100% owner of SUB1 and SUB2 with total
control over the voting power of all classes of stock of SUB1 and SUB2. Since PARENT is a
common owner with total control of at least 80% of the total combined voting power of all
classes of stock, SUB1 and SUB2 can be part of the same South Carolina consolidated return.
Whether other corporate subsidiaries of SUB1 and SUB2 are part of the consolidated group will
be based on whether they have nexus with South Carolina and whether they meet the 80%
control test.
Note: If the filing of a consolidated return in the manner described above does not fairly
represent the extent of the taxpayers’ business in this State, under Code Section 12-6-2320, the
taxpayer may petition or the department may require another method of reporting, including
combined unitary reporting.
SOUTH CAROLINA DEPARTMENT OF REVENUE

s/James F. Etter
James F. Etter, Director
August 27
, 2012
Columbia, South Carolina

CAVEAT: This advisory opinion is issued to the taxpayer requesting it on the assumption that
the taxpayer’s facts and circumstances, as stated, are correct. If the facts and circumstances
given are not correct, or if they change, then the taxpayer requesting the advisory opinion may
not rely on it. If the taxpayer relies on this advisory opinion, and the Department discovers, upon
examination, that the facts and circumstances are different in any material respect from the facts
and circumstances given in this advisory opinion, then the advisory opinion will not afford the
taxpayer any protection. It should be noted that subsequent to the publication of this advisory
opinion, changes in a statute, a regulation, or case law could void the advisory opinion.

4

Chart A
Chart A
Organizational Chart

PARENT
100%
Foreign
Corporation
No SC Nexus

100%
49%

DISREGARDED 1
Foreign
Disregarded
No SC Nexus

51%

DISREGARDED 2
Foreign
Disregarded
No SC Nexus

100%
DISREGARDED 3
Foreign
Disregarded
No SC Nexus

100%
DISREGARDED 4
Foreign
Disregarded
No SC Nexus

100%

DISREGARDED 6
Foreign
Disregarded
No SC Nexus

DISREGARDED 5
Foreign
Disregarded
No SC Nexus

100%

100%

SUB2
SC Nexus

SUB1
SC Nexus

100%
SUB2-A
SC Nexus

Various
SUB1-A
No SC
Nexus

SUB1-B
SC Nexus

SUB1-C
SC Nexus

100%

Other
Corporations

Various
Other
Corporations

Included in the Consolidated Group

Not included in the Consolidated Group

Included in the Consolidated Group if the corporation has SC nexus and the ownership requirements are met

Chart B - Organizational Chart without Disregarded Entities

PARENT
Foreign
Corporation
No SC Nexus

100%

100%
SUB1
SC Nexus

SUB2
SC Nexus

100%

Various

SUB1-A
No SC
Nexus

SUB1-B
SC Nexus

SUB1-C
SC Nexus

Other
Corporations

SUB2-A
SC Nexus

Various
Other
Corporations

Included in the Consolidated Group
Included in the Consolidated Group if the corporation has SC nexus and the ownership requirements are met
Not included in the Consolidated Group