Did Virginia's processing of an unauthorized 2005 combined return permit the affiliated group to change from separate filing?

Plain-English summary

The affiliated group had to file separate 2005 returns because it never received permission to change to combined filing. Before the parent began Virginia operations, its Virginia subsidiaries had elected separate filing. The parent later submitted a 2005 combined return, and Department staff processed it, transferred payments, and changed registration records, but the Tax Commissioner had not authorized the filing-status change.

Virginia required an affiliated group to continue its original method unless the Department approved a change. A new parent entering Virginia did not create a new election, and the Department generally denied retroactive filing-status changes absent unusual circumstances. The taxpayer showed none.

Because corporations included in an unauthorized combined return were not considered to have filed their required returns, the affiliates had failed to file separate 2005 returns and could be assessed at any time under Va. Code § 58.1-312(A)(1).

The request was timely for 2006, however, so the Department granted combined filing for 2006 and later. The audit was returned for adjustments, revised assessments, and updated bills.

Common questions

Q: Did Department processing equal approval?
A: No. Formal permission from the Tax Commissioner was still required.

Q: What was required for 2005?
A: Separate returns for each corporation included in the unauthorized combined return, except the parent taxpayer itself.

Q: When was combined filing allowed?
A: Beginning with 2006, because the request for that year was timely.

Citations and references

• Va. Code §§ 58.1-312(A)(1) and 58.1-442.
• 23 VAC 10-120-320 and 10-120-324.

Subject

Taxpayer is required to file separate corporate income tax returns

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-194

Original ruling text

November 30, 2012

Re: § 58.1-1821 Application: Corporate Income Tax

Dear *:

This will reply to your letter in which you seek correction of the corporate income tax assessments issued to your client, * (the "Taxpayer"), for the taxable years ended December 31, 2006 through 2008.

FACTS

Prior to 2005, the Taxpayer's subsidiaries that were subject to Virginia income tax filed separate corporate income tax returns. The Taxpayer began operating in Virginia during 2005 and filed a combined Virginia corporate income tax return with its affiliates for the taxable year ended December 31, 2005. The Department processed the return and transferred payments made separately by the affiliated entities and changed their filing status.

The Department audited the Taxpayer and its subsidiaries for the taxable years at issue. One of the adjustments made was to separate the affiliated entities, resulting in assessments against six of the Taxpayer's Virginia affiliates. The auditor concluded that the Taxpayer had not been granted permission to change its filing status. The Taxpayer appeals the audit adjustments, contending the Department accepted the 2005 combined return and the Taxpayer had requested permission to change its filing status.

DETERMINATION

As a result of being contacted about corporate returns that had not been filer for the 2005 taxable year, the Taxpayer made a request to file a combined income tax return on January 16, 2007. The Department made the adjustments to the registration system and transferred estimated payments, but no permission was authorized by the Tax Commissioner for a change in filing status.

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. The Department has consistently held that a parent, even a new parent corporation, moving into Virginia does not constitute a new election for filing status purposes. See Public Document (P.D.) 92-75 (5/29/1992), P.D. 97-163 (4/10/1997), and P.D. 99-282 (10/15/1999).

Title 23 VAC 10-120-320 B requires all returns for subsequent taxable years to be filed on the same basis unless permission to change is granted by the Department. The Department has a long-standing policy denying retroactive permission to change a corporate filing status. See P.D. 91-271 (10/23/1991) and P.D. 93-153 (7/23/1993),

Under Title 23 VAC 10-120-324, changes between separate and combined filing status will generally be allowed if permission to change is requested on a timely basis because allocation and apportionment among members of the affiliated group are unaffected by either filing method. Permission to change will generally be effective only for returns filed on or after the date the permission to change was filed. Permission to file a combined return on a retroactive basis is granted only in unusual circumstances. The Taxpayer has shown no such circumstances.

The combined return for the taxable year ended December 31, 2005 was filed without the Taxpayer having received permission to change from separate to combined filing status. Therefore, the Taxpayer was required to file a separate income tax return for each of the members of the affiliated group for the 2005 taxable year.

In P.D. 96-360 (12/09/1996), the Department held that a corporation that was included in a combined return is not considered to have filed a Virginia income tax return. As such, all the Taxpayer's affiliates included in the 2005 combined return are considered to have failed to file Virginia income tax returns for the 2005 taxable year. When a taxpayer fails to file a required Virginia return, Va. Code § 58.1-312 A 1 permits the Department to assess the appropriate tax at any time.

While strongly recommending taxpayers file a request for filing status change well before the due date of the return for which such change is requested, the Department will consider a request to be timely filed if such request is attached to the return. See P.D. 93-64 (3/17/1993) and P.D. 96-373 (12/13/1996). Because the request to file on a combined basis was timely submitted for the taxable year ended December 31, 2006, permission is hereby granted to file a combined return for the 2006 taxable year and thereafter.

CONCLUSION

Based on this determination, the Taxpayer is required to file separate corporate income tax returns for each of the corporations included in the 2005 combined income tax return, with the exception of the Taxpayer. The Taxpayer should submit the returns along with payment of any additional liability within 30 days of the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attn: *.

In addition, the audit will be returned to the audit staff in order to make necessary adjustments in accordance with this determination. Once the adjustments are complete, the Taxpayer will receive a revised audit report and the audit assessments will be revised accordingly. Updated bills, if any, will be issued to the Taxpayer and reflect the revised tax plus interest accrued to date. No further interest will accrue provided the outstanding assessments are paid within 30 days from the date of the bill.

The Code of Virginia sections, regulations, and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions regarding this determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5152892093.o