If a disregarded telecommunications LLC is owned by a corporation in a combined Virginia filing group, is its minimum tax compared with its own hypothetical tax or the group's combined liability?

Plain-English summary

A telecommunications company was a single-member LLC disregarded for federal income-tax purposes and wholly owned by a corporation. The corporation and its affiliates filed combined Virginia corporate returns. The dispute was whether the LLC's telecommunications minimum tax should be compared with its own hypothetical separate-company income tax or with the affiliated group's combined liability.

For 2012, the group reported a combined loss, so comparing the minimum tax with combined liability produced minimum tax due. The LLC later amended its returns to use a standalone comparison, which would have produced a refund. It used the same standalone method for 2014 and reported no minimum tax because its hypothetical separate income tax exceeded the minimum tax. The auditor rejected that method, denied the 2012 refund, and assessed 2014 minimum tax.

The Department upheld the auditor. Va. Code § 58.1-400.1 A imposes the gross-receipts-based minimum tax when a telecommunications company's corporate income tax is lower, and noncorporate telecommunications companies are included. Under 23 VAC 10-120-89 B, a noncorporate company computes the comparison as if it were a corporation. If this LLC actually had been a corporation, 23 VAC 10-120-320 B would have required it to conform to the affiliated group's combined-return election.

Accordingly, the hypothetical corporate calculation could not ignore the return the group actually filed. The LLC had to be treated as an affiliate in the combined group, and its minimum tax had to be compared with the combined income-tax liability. Otherwise the group could avoid both income tax because of group losses and minimum tax because of the LLC's standalone income, contrary to the minimum tax's purpose.

The Department denied the 2012 refund and refused to abate the 2014 assessment.

What this means for you

Telecommunications PTEs owned by combined-return groups

Disregarded status does not permit a standalone minimum-tax comparison. Compute the PTE as if it were a corporation inside the affiliated group that elected combined filing.

Affiliated groups with loss years

Group losses can make the combined income-tax liability lower than a telecom subsidiary's minimum tax, producing minimum tax due even when that subsidiary would show standalone income-tax liability.

Taxpayers relying on form instructions

The Department said return instructions provide guidance but do not explain every nuance of the governing statutes and regulations.

Common questions

Q: Did federal disregarded-entity treatment eliminate the LLC's Virginia minimum-tax obligation?
A: No. The statutes make the minimum tax an obligation of a noncorporate telecommunications company regardless of disregarded status.

Q: Why wasn't the LLC allowed to compare against its own hypothetical income tax?
A: Because, if treated as a corporation, it would have had to join its owner's affiliated group in the combined Virginia return.

Q: What relief did the taxpayer receive?
A: None. The Department denied the 2012 refund and upheld the 2014 assessment.

Citations and references

• Va. Code § 58.1-400.1 A -- telecommunications minimum tax
• Va. Code § 58.1-390.2 -- noncorporate telecommunications company's obligation
• 23 VAC 10-120-89 A/B -- computation for noncorporate telecommunications companies
• 23 VAC 10-120-86 -- affiliated telecommunications companies
• Va. Code § 58.1-442 and 23 VAC 10-120-320 B -- affiliated-group filing elections
• P.D. 13-149 (7/31/2013) -- tax-return instructions are guidance, not a complete statement of every legal nuance

Subject

Telecommunications Minimum Tax: Pass-Through Entities - Combined Returns

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 19-124

Original ruling text

November 15, 2019

Re: § 58.1-1821 Application: Corporate Income Tax

Dear *:

This will reply to your letter in which you seek a refund for Virginia telecommunications minimum tax paid by * (the “Taxpayer”) for the taxable year ended December 31, 2012. You also seek correction of the telecommunications minimum tax assessment issued to the Taxpayer for the taxable year ended December 31, 2014. I apologize for the delay in responding to your request.

FACTS

The Taxpayer was a single member limited liability company 100% owned by * (the “Corporation”) and was treated as a disregarded entity for federal income tax purposes. Because it was a telecommunications company, the Taxpayer was subject to Virginia’s minimum tax on telecommunications companies (the income tax return for the 2012 and 2014 taxable years).

The Taxpayer filed a return by a noncorporate telecommunications company (the “noncorporate return”) and a telecommunications company’s minimum tax return (the “minimum tax return”) for the 2012 taxable year that compared the minimum tax to the Corporation and its affiliates’ combined corporate income tax liability. Because the combined return reported a loss, the minimum tax was reported as the difference between the minimum tax and zero and the Taxpayer reported and paid a minimum tax. The Taxpayer subsequently filed amended noncorporate and minimum tax returns that compared the Taxpayer’s minimum tax to its corporate income tax liability as if it filed a corporate income tax return on a separate basis.

However, for the 2014 taxable year, the Taxpayer filed noncorporate and minimum tax returns that compared the minimum tax to its corporate income tax liability as if it filed a corporate income tax return on a separate basis. Because the income tax liability was greater than the minimum tax, the Taxpayer reported no minimum tax due.

The Department’s auditor reviewed the noncorporate and minimum tax returns and determined that the minimum tax should be compared to the combined corporate income tax liability of the Corporation and its affiliates and denied the refund request for the 2012 taxable year and issued an assessment of minimum tax for the 2014 taxable year. The Taxpayer filed an appeal, contending that the regulation requires that the minimum tax of a pass-through entity be compared only to that entity’s income tax liability if it were deemed a corporation.

DETERMINATION

Virginia Code § 58.1-400.1 A provides that a telecommunications company is subject to a minimum tax, in lieu of the income tax, based on its gross receipts for the calendar year that ends during the taxable year if the corporate income tax is less than the minimum tax. Telecommunications companies that are treated as pass-through entities for federal income tax purposes are also subject to the minimum tax.

Under Title 23 of the Virginia Administrative Code (VAC) 10-120-89 A, noncorporate telecommunications companies will be deemed to have paid corporate income tax for purposes of computing the minimum tax. If the income of the noncorporate telecommunications company is deemed to be subject to Virginia income tax, then the minimum tax liability shall be compared to the income tax liability of the entity computed as if it were a corporation. See Title 23 VAC 10-120-89 B. If the minimum tax exceeds the entity’s income tax computed as if it were a corporation, the entity must pay the difference between the minimum tax and the corporate income tax. If the corporate income tax is greater than the minimum tax, the entity is not required to pay the minimum tax.

Title 23 VAC 10-120-86 addresses the application of the minimum tax of affiliated companies. It provides that when affiliated corporations file either a consolidated or combined return, the separate income tax liability of the telecommunications company be compared to the total tax liability shown on the consolidated or combined return. The lesser amount is deemed the telecommunication company’s tax liability.

Both Virginia Code §§ 58.1-400.1 and 58.1-390.2 state that the minimum tax on telecommunications companies is an obligation of a noncorporate telecommunications company regardless of its status as a disregarded entity for federal income tax purposes. While the amount of the tax may be affected by income earned and taxes paid by affiliated corporations, the minimum tax is still an obligation of the noncorporate telecommunications company.

In this case, if the Taxpayer’s minimum tax is compared to its income tax liability as if it were a corporation, the corporate income tax exceeds the minimum tax and no minimum tax would be due. Thus, the minimum tax would be refunded. If the Taxpayer’s minimum tax were compared to the combined tax liability of the Corporation and its affiliates, the minimum tax would exceed the combined tax because the Corporation and its affiliates reported a loss.

The Taxpayer contends that the regulation addressing affiliated companies only applies to corporations. Specifically, because Title 23 VAC 10-120-86 B 1 provides that “each corporation included in the consolidated or combined filing must recompute its tax liability as if it were a separate return,” the Taxpayer asserts that the regulation specifically addresses corporate, rather than noncorporate telecommunications companies. In addition, the Taxpayer argues that the instructions for minimum tax and noncorporate returns mirror the language of the regulations.

Information provided in Virginia’s tax return instructions is intended to provide helpful guidance to taxpayers. It is not intended to provide a detailed explanation of every provision of or nuance of Virginia's tax law. See Public Document (P.D.) 13-149 (7/31/2013).

Title 23 VAC 10-120-89 B requires that the income tax liability that is compared to the minimum tax liability of noncorporate telecommunications companies be “. . . computed as if it were a corporation .” [Emphasis added] This is similar to the language in Title 23 VAC 10-120-86 B 1, which required each corporation included in a combined or consolidated return to recompute its tax as if it were a separate entity.

Pursuant to Title 23 VAC 10-120-86 A, the requirements under Virginia Code § 58.1-442 and Title 23 VAC 10-120-320 et seq . apply to the income tax filing status of affiliated corporations that are telecommunications companies. Title 23 VAC 10-120-320 B requires that members of an affiliated group of corporations must conform to the affiliated group’s election to file their returns on a consolidated or combined basis. If the Taxpayer had been a corporation, it would have been required to be included in the combined Virginia income tax return filed by the Corporation. Neither the Taxpayer nor the Corporation filed a separate Virginia income tax return. As such, the Taxpayer does not account for the impact of existing laws and regulations on the combined Virginia income tax return that it actually filed and the minimum tax affected by that combined return.

As a separate corporation, a telecommunication company would pay the greater of the income tax or the minimum tax, but never both. As a member of an affiliated group filing a combined Virginia return, a telecommunication company would pay only the difference between the separate minimum tax and its portion of the combined income tax liability. The credit provided in Title 23 VAC 10-120-86 B 3 ensures that any income tax paid by the group that was attributable to income earned by the telecommunications company will fully or partially offset the minimum tax.

The purpose, under Title 23 VAC 10-120-89 B, for noncorporate telecommunications companies calculating their minimum tax by comparing it to its income tax liability as if it was a corporation is to avoid collecting both the minimum tax from the noncorporate telecommunications taxpayer and an income tax from its owner arising from income earned by the noncorporate telecommunications taxpayer. It does this by ensuring that the total paid by both entities equals the amount that would be paid by a separate telecommunications corporation. However, by not comparing the separate income tax liability of the noncorporate telecommunications company shown on the combined return, the Taxpayer and the Corporation would not pay an income tax, because of the group’s losses, or the minimum tax. This is contrary to the General Assembly’s intent to impose a minimum tax on entities conducting a telecommunications business.

As such, even though the Taxpayer was a disregarded entity, it must conform to the election made by the affiliated group in which the Corporation is a member. Thus, in calculating the Taxpayer’s income tax as if it is a corporation, it must be treated as an affiliate in the combined group the includes the Corporation. Therefore, the Taxpayer’s separate minimum tax liability was properly compared to the combined income tax liability. As such, the minimum tax reported on the Taxpayer’s 2012 original return is correct and its request for a refund for that taxable year and the abatement of the assessment for the 2014 taxable year cannot be granted.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1744.B

Related Documents

13-149