Could affiliated corporations elect a South Carolina consolidated return, defer gain on an intercompany asset sale, and use one group apportionment formula?

Plain-English summary

South Carolina Private Letter Ruling 88-17 answered several consolidated-return questions arising from a sequence of mergers and an asset sale:

• Filing a South Carolina consolidated return was elective, not mandatory.
• Companies A, B, and C could elect a consolidated return for 1988 if they made the proper election and met the control requirement.
• Gain on Company B's taxable asset sale to Company C was recognized, because South Carolina had not adopted the federal section 1502 intercompany-deferral rules.
• Once made, the consolidated election had to continue in later years unless the Tax Commission permitted separate returns.
• Each corporation computed its net income and apportionment factor separately; the results were then combined for South Carolina consolidated net income.

The restructuring timeline

XYZ Newspapers had done business in South Carolina for several years and began restructuring in 1987.

The ruling described this sequence:

• December 30, 1987: XYZ merged into Company A.
• March 29, 1988: Company A would merge into Company B.
• April 2, 1988: Company B would sell substantially all its assets to Company C in a taxable transaction.

XYZ and Companies A, B, and C were active calendar-year corporations in an affiliated group that filed a federal consolidated income-tax return.

XYZ held South Carolina assets for 364 days in 1987, while Company A held them for one day. In 1988, Company A would hold South Carolina assets for 89 days, Company B for three days, and Company C for 273 days.

Each company used the three-factor apportionment method.

Consolidated filing was optional

Section 12-7-1570 permitted consolidated filing where a taxpayer directly or indirectly exercised substantially all control over another taxpayer.

Regulation 117-77 defined the required control as ownership of at least 80% of the combined voting power of all stock classes of the corporations included in the consolidated return.

The regulation required the election on an original, timely filed return and did not allow the election to be changed after filing.

The Commission concluded that the statutory and regulatory language made consolidated filing optional. XYZ and Company A therefore were not required to file a consolidated South Carolina return for 1987.

How the 1987 companies apportioned separately

XYZ's final return used the normal three-factor formula under sections 12-7-1150, 12-7-1160, and 12-7-1170.

Company A's initial South Carolina return used the normal sales and payroll factors. Because Company A held property for only one day, its property factor could be based on average daily or monthly property values under section 12-7-1150.

The 1988 consolidated election

The Commission concluded that Companies A, B, and C could elect a consolidated South Carolina income-tax return for calendar year 1988 under section 12-7-1570 and Regulation 117-77.

If the group made that election, it had to keep filing consolidated returns in subsequent years unless the Tax Commission granted permission to return to separate filing.

Why the asset-sale gain was recognized

Company B planned to sell substantially all its assets to Company C in a taxable transaction.

The ruling said South Carolina had specifically not adopted Internal Revenue Code section 1502 and federal Regulation 1.1502. Section 12-7-1570 and Regulation 117-77 also did not provide federal-style deferral for intercompany transactions.

The gain on the sale therefore was recognized for South Carolina purposes despite the companies' affiliated status and potential consolidated election.

How consolidated income and factors were computed

The net income of each corporation had to be computed separately and then combined to determine South Carolina consolidated net income.

Property, payroll, and sales everywhere also were computed for each company to determine that company's apportionment factor. The ruling cited South Carolina Technical Advice Memorandum 88-8 for this method.

The answer therefore was not a single undifferentiated group calculation using one aggregate denominator without separate company computations.

What this means for you

Affiliated corporate groups

PLR 88-17 separated federal consolidated filing from South Carolina filing. Filing a federal consolidated return did not itself make a South Carolina consolidated return mandatory.

Merger and acquisition teams

An intragroup asset sale could produce recognized South Carolina gain even when the companies filed together, because the ruling found no adopted section 1502 deferral.

Corporate tax departments

The election had procedural consequences: it belonged on the original timely return, could not be changed after filing, and continued until the Commission approved separate returns.

Apportionment teams

Short ownership periods affected the property factor. The ruling allowed daily or monthly averaging for Company A's one day of property ownership.

Readers applying the ruling today

PLR 88-17 applied 1988 consolidated-return and three-factor rules to a specific merger sequence. Current group definitions, ownership thresholds, election procedures, combined or consolidated reporting, intercompany eliminations, gain rules, and apportionment methods must be checked independently.

Common questions

Q: Did XYZ and Company A have to file consolidated for 1987?

A: No. The Commission held that consolidated filing was elective.

Q: Could Companies A, B, and C elect consolidated filing for 1988?

A: Yes, if they made the proper election under section 12-7-1570 and Regulation 117-77.

Q: Was Company B's gain on the sale to Company C deferred?

A: No. South Carolina had not adopted the federal section 1502 intercompany-deferral rules described in the ruling.

Q: Could the group switch back to separate returns the next year?

A: Not without Tax Commission permission. The election had to be followed consistently in subsequent years.

Q: Did the group use one aggregate apportionment factor?

A: The ruling required separate net-income and factor computations for each corporation before combination.

Q: How was Company A's one day of 1987 property handled?

A: The property factor could be determined by averaging daily or monthly property values.

Q: Can another affiliated group rely on PLR 88-17?

A: No. The ruling states that it applied only to XYZ's specific facts, had no precedential value, and was not intended for general distribution.

Citations and references

• S.C. Code section 12-7-1570 (1976) — consolidated corporate returns
• S.C. Regulation 117-77 — 80% control, election timing, and consistent filing
• S.C. Code sections 12-7-1150, 12-7-1160, and 12-7-1170 — historical three-factor apportionment
• S.C. Code section 12-7-10 (Supp. 1987) — nonadoption of Internal Revenue Code section 1502 described in the ruling
• Federal Regulation 1.1502 — intercompany deferral provision not adopted by South Carolina in the ruling
• S.C. Technical Advice Memorandum 88-8 — separate company income and factor computations
• S.C. Code section 12-3-170 (1976) and SC Revenue Procedure 87-3 — private-letter-ruling authority

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR88-17.pdf

Original ruling text

SC PRIVATE LETTER RULING #88-17

TO:

XYZ Newspapers, Inc.

SUBJECT:

Income Tax/Election to File Consolidated Return

REFERENCE:

S.C. Code Ann. Section 12-7-1570 (1976)
S.C. Regulation 117-77

AUTHORITY:

S.C. Code Ann. Section 12-3-170 (1976)
SC Revenue Procedure #87-3

SCOPE:

A Private Letter Ruling is a temporary document issued to a taxpayer,
upon request, and it applies only to the specific facts or circumstances
related in the request. Private Letter Rulings have no precedential value
and are not intended for general distribution.

Question:
1.

For the calendar year 1987, does XYZ and Company A have an obligation to file a South
Carolina consolidated return? How should the income for XYZ and Company A be
apportioned?

2.

For the calendar year 1988, can companies A, B, & C elect to file a South Carolina
consolidated income tax return?
a. If a consolidated return can be elected, will the gain realized by the sale of asset be
deferred as described by federal regulation 1.1502?
b. If an election is made in 1988, is a consolidated return required to be filed in all
subsequent years?
c. Can the business income of the consolidated group return be apportioned in South
Carolina on the basis of the normal three factor formula with the denominator being
total property, payroll, and sales everywhere?

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Facts:
XYZ Newspapers, Inc. (XYZ) has conducted business in South Carolina for a number of years.
In 1987, XYZ began a restructuring of its operations the completion of which will occur in late
1988 or early 1989. On December 30, 1987, XYZ merged into Company A. On March 29,
1988, Company A will merge into Company B. On April 2, 1988, Company B will sell
substantially all of its assets to Company C in a taxable transaction. XYZ and Companies A, B,
and C are active companies which report income on a calendar year basis; and are part of an
affiliated group which files a federal consolidated income tax return. XYZ and Company A
owned assets in the State of South Carolina during calendar year 1987. XYZ owned assets for
364 days and Company A owned assets for 1 day. Company A, Company B, and Company C
will own assets in South Carolina during 1988. Company A will own assets for 89 days,
Company B will own assets for three days, and Company C will own assets for 273 days. Each
of these companies uses the three factor formula method of apportionment.
Discussion:
1.

Pursuant to S.C. Code Ann. Section 12-7-1570, consolidated returns are permitted for
…any taxpayer capable of exercising, directly or in-directly, substantially the entire
control of the business of another taxpayer, either by ownership or control of
substantially the entire capital stock of such other taxpayer.
The terms "substantially controlled" and "substantially the entire control" are defined in
Regulation 117-77 to mean:
...the ownership of at least 80% of the total combined voting power of all classes of
stock of all corporations that are part of a consolidated return...
The regulation further states that an election to file a consolidated return should be made
on an original and timely filed return and may not be changed after the return is filed.
The language of the statute and the regulation indicate that the filing of a consolidated
return is not mandatory, but rather, is done at the election of the taxpayer.
The final return of XYZ should reflect business income which is apportioned to South
Carolina pursuant to the normal three factor formula found in 12-7-1150, 12-7-1160, and
12-7-1170.
Company A's initial South Carolina return should reflect business income apportioned to
South Carolina through the normal sales and payroll factors. Pursuant to 12-7-1150, the
property factor can be determined by averaging daily or monthly values of property.

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2.

The provisions of S.C. Code Ann. Section 12-7-1570 and Regulation 117-77 as stated
above indicate that Companies A, B, and C can elect to file a consolidated income tax
return for calendar year 1988.
a. Any gain realized on the sale of assets by company B to Company C would be
recognized. South Carolina has specifically not adopted IRC Section 1502 and
Regulation 1.1502. Statutory provision for this can be found in S.C. Code Ann.
Section 12-7-10 (Supp. 1987). S.C. Code Section 12-7-1570 and Regulation 117-77
do not provide for the deferred intercompany transactions found in Regulation
1.1502.
b. If the companies make the election to file a consolidated return as outlined above,
they would be required to file consistently in subsequent years unless the Tax
Commission grants permission to file separate returns. Regulation 117-77 (VIII)
provides:
Once an election is made to file a consolidated return, such election must be adhered
to until permission is granted by the Tax Commission to file separate returns.
c. The net income of those companies in the consolidated group should be computed
separately and then combined to determine South Carolina consolidated net income.
The property, pay-roll, and sales everywhere for each company should be computed
in order to arrive at the appropriate apportionment factors. Authority for computation
in this manner is found in S.C. Technical Advice Memorandum #88-8.

Conclusion:
1.

The language of 12-7-1570 and Regulation 117-77 indicates that the filing of a
consolidated return is not mandatory but is done at the election of the taxpayers. XYZ
will apportion its business income pursuant to the 3 factor formula outlined in 12-7-1150,
12-7-1160, and 12-7-1170. Company A will apportion its business income pursuant to
the normal sales and payroll factors however property will be averaged based on daily or
monthly values pursuant to 12-7-1150.

2.

Pursuant to 12-7-1570, Companies A, B, and C may file a consolidated return for
calendar year 1988 if the appropriate election is made.
a. The gain realized by the sale will be recognized because South Carolina has not
adopted IRC 1502.
b. If an election to file a consolidated return is made in 1988, subsequent returns must
also be filed on a consolidated basis unless the South Carolina Tax Commission
grants permission to file separately.

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c. The net income of each corporation must be computed separately and then combined
to determine South Carolina consolidated net income. An apportionment factor
should be computed for each company.

SOUTH CAROLINA TAX COMMISSION

s/S. Hunter Howard, Jr.
S. Hunter Howard, Jr., Chairman

s/John M. Rucker
John M. Rucker, Commissioner

s/A. Crawford Clarkson, Jr.
A. Crawford Clarkson, Jr., Commissioner

Columbia, South Carolina
, 1988
June 30

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