Could an acquiring Virginia corporate group switch from separate returns to consolidated or combined filing after a merger?

Plain-English summary

Virginia denied the requested consolidated return but allowed the affiliated group to use a combined return instead of separate returns. Before the acquisition, the buyer's two Virginia subsidiaries filed separately, while the target's Virginia subsidiaries filed a consolidated return.

Virginia generally required an affiliated group to continue the filing method chosen when two or more members first became Virginia filers. A post-election change to consolidated filing ordinarily required Department permission and extraordinary circumstances.

The Department's merger-of-equals policy allowed a new group to choose either predecessor's filing method only when the target's assets or net value exceeded 45% of the combined value. Here, the target held less than 40% of combined asset value and slightly more than 35% of combined revenue, so the transaction failed that test. The fact that the merger involved two large industry participants did not make it extraordinary because mergers and acquisitions were normal transactions generally within taxpayer control.

The target subsidiaries therefore had to adopt the acquiring group's separate filing method. However, Virginia generally permitted changes between separate and combined filing because allocation and apportionment formulas were unaffected. Since the request was filed before the applicable due date or extended due date, the group could elect combined filing beginning with the year ended December 31, 2010 and attach the ruling to its return.

What this means for you

• A target below the Department's 45% value threshold did not qualify for the merger-of-equals choice.
• A major commercial merger was not, by itself, an extraordinary circumstance supporting consolidated filing.
• New group members generally adopted the purchaser's existing Virginia filing status.
• A timely separate-to-combined request received more flexible treatment than a change to consolidated filing.

Common questions

Q: Was consolidated filing approved?
A: No.

Q: Why did the merger-of-equals policy not apply?
A: The target's value was below 45% of the combined value.

Q: What filing method was allowed?
A: Combined filing for the year ended December 31, 2010, because the request was timely.

Citations and references

• Va. Code § 58.1-442.
• 23 VAC 10-120-320.
• Virginia Public Documents 07-155 (October 4, 2007), 94-170 (June 8, 1994), and 93-187 (August 26, 1993).

Subject

Permission to change between the separate and combined return filing methods

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-200

Original ruling text

December 6, 2012

Re: Request for Ruling: Change of Corporate Filing Status

Dear *:

This will respond to your letter submitted on behalf of * (Taxpayer A), in which you request a ruling permitting Taxpayer A's Virginia affiliates to file a consolidated Virginia corporate income tax return beginning with the taxable year ended December 31, 2010. I apologize for the delay in responding to your request.

FACTS

Taxpayer A, headquartered in * (State A), owns a number of subsidiaries. Two of Taxpayer A's subsidiaries (Group A) operated in Virginia. One subsidiary ran an operating facility in Virginia and another subsidiary had an administrative office in Virginia. The members of Group A filed separate Virginia income tax returns.

* (Taxpayer B), headquartered in *** (State B), also owns a number of subsidiaries. Ten facilities were operated by Taxpayer B's subsidiaries in Virginia. These subsidiaries (Group B) filed a Virginia consolidated income tax return. In November 2010, Taxpayer A acquired Taxpayer B and became the parent corporation of the new family of corporations. Immediately prior to the merger, Taxpayer B held a less than 40% of the value of the combined corporate assets and netted slightly more than 35% of total revenue of both groups. Taxpayer A requests a ruling that the merger meets the standard for eligibility to make a corporate filing status election pursuant to the Department's policy with regard to the merger of equal corporations. In the alternative, Taxpayer A requests that it be permitted to change its filing status election from separate to consolidated because of the extraordinary circumstances of this merger.

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.

Merger of Equals

In Public Document (P.D.) 07-155 (10/4/2007), the Department ruled that 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, Taxpayer B's net value is less that 45% of value of the purchasing group. Accordingly, the transaction between Taxpayer A and Taxpayer B does not meet the Department's policy requirements of a merger of equals.

Change of Filing Status

Taxpayer A also argues that the merger was atypical because it involved the two largest entities in its industry. The Department has found that mergers and acquisitions are normal business transactions generally within a taxpayer's control. Therefore, the consequences of a merger and acquisition do not constitute extraordinary circumstances for purposes of requesting a change in filing status. See P.D. 94-170 (6/8/1994). Based on the facts presented, no extraordinary circumstances exist to warrant granting permission to change to filing on a consolidated basis. Accordingly, permission to file a Virginia consolidated return is not granted.

The Department has previously ruled that new members of an affiliated group that had been filing using the consolidated filing basis must adopt the filing status of the purchasing corporation. See P.D. 93-187 (8/26/1993). In this case, Taxpayer A's subsidiaries (Group A and Group B) would be required to adopt the filing status election made by Group A. Accordingly, all of the Taxpayer's subsidiaries operating in Virginia would be required to file separate corporate income tax returns.

Virginia Code § 58.1-442 does, however, permit affiliated corporations to file a combined return. Permission to change between the separate and combined return filing methods generally will be granted, because the allocation and apportionment formulas are not affected by changes between these two statuses. Such permission is only granted if the request is made before the due date or extended due date for the taxable year for which the request is made. Because your request to change to a consolidated filing status was timely filed, the Department will allow a change to the combined filing method beginning with the taxable year ended December 31, 2010 in lieu of filing separate returns. If Taxpayer A's Virginia affiliated group chooses to file a combined return, it should attach a copy of this letter.

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

The Code of Virginia and public documents 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

Tax Commissioner

AR/1-4793524498.E