Could a corporate group created by a merger of equals elect a new Virginia filing status for the 2008 tax year?

Subject

Charge of Corporate Filing Status

Plain-English summary

A corporate group formed in a qualifying merger of equals could make a new Virginia filing-status choice for 2008. Before the merger, the acquiring taxpayer's group filed combined Virginia returns and the target group filed consolidated Virginia returns. Although the taxpayer was formally designated as the acquirer, the target held about 54% of the combined corporate value after the transaction.

Virginia generally requires an affiliated group to keep the filing method selected in its first year and rarely permits a change to consolidated filing without extraordinary circumstances. Public Document 07-155 created a merger-of-equals policy for two previously independent affiliated groups when the target's assets or net value were nearly equal to or greater than the acquirer's. The Department treated the groups as nearly equal when the target exceeded 45% of their combined value.

The target here exceeded that threshold, and the two groups had not previously owned a substantial interest in each other. The Department therefore allowed the new group to choose a consolidated Virginia return or separate returns for the year ended December 31, 2008.

The ruling preserved important limits. Federal carryover restrictions, including the separate-return-limitation-year rules for target-group net operating losses, still applied. The election began a new 20-year Virginia filing-status period, and affiliates that later became subject to Virginia tax had to conform to the chosen status.

What this means for you

• Formal designation as the acquiring corporation did not control the merger-of-equals analysis.
• A target above 45% of combined assets or net value could satisfy the Department's near-equality threshold under the cited policy.
• Permission to choose a filing status did not remove federal limits on inherited losses or other carryovers.
• The chosen status governed later affiliates and started a new 20-year period under the ruling's application of Virginia law.

Common questions

Why did the merger qualify?

The groups had no prior substantial ownership interest in each other, and the target's value exceeded the Department's 45% threshold.

What filing choices did the ruling expressly allow?

It allowed the new group to file a consolidated return or separate returns for 2008.

Could the group freely use all target-company net operating losses?

No. Federal carryover limitations, including the SRLY rules, continued to apply.

Citations and references

• Va. Code § 58.1-442.
• 23 VAC 10-120-320.
• Treas. Reg. § 1.1502-21(c).
• Virginia Public Document 07-155 (October 4, 2007).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-219

Original ruling text

September 16, 2010

Re: Request for Ruling: Charge of Corporate Filing Status

Dear *:

This will respond to your letter submitted on behalf of * (the "Taxpayer"), in which you request a ruling as to whether it may be allowed to elect to file a consolidated Virginia corporate income tax return with its affiliates effective for the taxable year ended December 31, 2008.

FACTS

The Taxpayer and its subsidiaries merged with * (the "Target"), and its subsidiaries in 2008. Under the merger agreement, the Taxpayer was designated as the acquiring entity even though the Target held approximately 54% of the combined market value of the combined corporate assets after the merger.

For the taxable years prior to the merger, the Taxpayer filed combined Virginia income tax returns, and the Target filed consolidated Virginia income tax returns. The Taxpayer requests a ruling that it meets the merger of equals standard for eligibility to make a corporate filing status election pursuant to the Department's policy established in Public Document (P.D.) 07-155 (10/4/2007).

RULING

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 year, two or more members of an affiliated group of corporations 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 will generally not grant permission to change to a consolidated filing status absent extraordinary circumstances.

In P.D. 07-155 (10/412007), the Department ruled that pending the promulgation of regulations in this area, when a merger or acquisition occurs between two affiliated groups of corporations (1) neither of which owned any substantial interest in the other prior to the merger and (2) where the total assets or net value of the target group is almost equal to or greater than that of the acquiring group on the date of the transaction, the resulting new affiliated group may choose to file Virginia income tax returns using the filing method previously elected by the acquiring group or the target group.

Further, for purposes of the test in number 2 above, the affiliated groups involved in the merger or acquisition would be considered to be almost equal if the target group's assets or net value immediately prior to the merger or acquisition transaction is greater than 45% of the combined value of the acquiring group and target group. In the case at hand, the target group's net value exceeded the value of the purchasing group.

Based on the information provided, the Taxpayer and its affiliates meet the conditions set forth above. Accordingly, the Taxpayer may choose to file a consolidated return with its affiliated entities or file separate returns for each affiliate subject to Virginia income tax for the taxable year ended December 31, 2008.

No matter what Virginia filing status is selected, the new Virginia affiliated group would still be subject to federal carryover limitations from the target group when computing federal taxable income for Virginia purposes. For example, if the target group is carrying forward net operating loss deductions (NOLDs), the use of such NOLDs would be subject to the separate return limitation year (SRLY) rules under Treas. Reg. § 1.1502-21(c). Further, with regard to Va. Code § 58.1-442 C, the choice to use the target's filing status under this policy will constitute the start of a new 20-year period.

Any new affiliates becoming subject to Virginia corporate income tax in subsequent years must conform to the elected filing status. A copy of this letter should be attached to the Taxpayer's next Virginia corporate income tax return.

This ruling is based on the facts presented by the Taxpayer as summarized in this letter. Any change in the facts or the introduction of new facts may lead to a change in the Department's ruling.

The Code of Virginia and public document cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this letter, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Acting Tax Commissioner

AR/1-4204382527.E