My S corporation and a related LLC are owned by the same family across different ownership structures -- do we count as an 'affiliated group' so fees between us are exempt from BPOL tax?

Plain-English summary

An S corporation asked the Department of Taxation for an advisory opinion on whether it qualifies as part of an "affiliated group" with a related LLC, for purposes of the BPOL (Business, Professional and Occupational License) tax's exemption for intercompany receipts and purchases. Because BPOL is a LOCAL tax administered by cities and counties, the Department's role here is limited to issuing this advisory guidance under its statutory authority over local license tax questions -- the opinion applies only to the facts as presented.

The ownership structure was layered: the S corporation is owned by four siblings, with Sibling A holding 100% of the Class A voting stock (but only 40% of the Class B non-voting stock), and Siblings B, C, and D each holding 20% of the non-voting stock. Each sibling is also the grantor of a trust for their own children, with brothers-in-law or unrelated third parties serving as trustees. The LLC, meanwhile, is owned with Sibling A holding 100% of the voting membership interests and 2% of the non-voting interests, while the four siblings' trusts collectively hold the remaining 98% of non-voting interests.

Virginia's BPOL statute exempts receipts or purchases between members of an "affiliated group" from the tax, using two possible tests -- a parent-subsidiary test and a "brother-sister" test -- applied to LLCs as if their membership interests were corporate stock. The brother-sister test requires a group of five or fewer individual, estate, or trust owners to satisfy two separate thresholds: the whole ownership group must hold at least 80% of total voting power or value (the "total membership" prong), AND a subset with identical ownership across both entities must hold more than 50% (the "common ownership" prong). Here, because Sibling A alone held 100% of the voting power in BOTH the S corporation and the LLC, that single common owner's identical 100%-of-voting-power stake automatically satisfied both the 80% and the 50% thresholds. The Department therefore ruled the two entities are an affiliated group, meaning fees the LLC pays to the S corporation (or vice versa) are exempt from BPOL tax.

What this means for you

Family-owned businesses using multiple entities (S corps, LLCs, family trusts)

The BPOL affiliated-group exemption doesn't require identical overall ownership percentages across entities -- what matters is whether a small group (five or fewer individuals, estates, or trusts) meets the specific 80%-total/50%-common voting-power or value thresholds. Here, non-voting stock/membership splits among siblings and their trusts didn't matter once one sibling's 100% VOTING control in both entities satisfied the test on its own.

Businesses restructuring around voting vs. non-voting ownership classes

If you're designing a multi-entity structure with an eye toward BPOL affiliation, focus on who controls VOTING power (or total value, if that route is used instead) in each entity -- a single common owner holding all the voting interests in two related entities can be enough to establish affiliation even if non-voting economic interests are spread across several other family members or trusts.

Businesses in multiple localities

BPOL is administered LOCALLY, not by the Department -- this advisory opinion establishes the Department's interpretation of the state statute defining "affiliated group," but you should still confirm with your specific locality's commissioner of the revenue how the exemption is applied to your BPOL filing.

Common questions

Q: What is the "brother-sister" test for BPOL's affiliated-group exemption?
A: It requires five or fewer individual, estate, or trust owners to (1) collectively hold at least 80% of the total voting power or value of both entities, and (2) hold more than 50% through IDENTICAL common ownership across both entities. Both prongs must be met.

Q: Does an LLC have to be treated differently from a corporation under this test?
A: No -- Virginia applies the same affiliated-group tests to LLCs as to corporations, treating membership interests as if they were stock.

Q: If siblings hold different percentages of non-voting stock/interests, can the entities still be affiliated?
A: Yes, if a common owner's VOTING (or value-based) ownership alone satisfies both the 80% total and 50% common-ownership thresholds -- as happened here, where one sibling's 100% voting control in each entity was sufficient regardless of how non-voting interests were split among the others.

Subject

Exemptions : Intercompany Transactions - Affiliation Requirements between S Corporation and LLC

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-132

Original ruling text

September 28, 2021

Re: Request for Advisory Opinion

Business, Professional and Occupational License Tax

Dear *:

This is in response to your letter in which you request an advisory opinion regarding the interpretation of the affiliated group provisions of the Business, Professional and Occupational License (BPOL) tax as it applies to * (the “Taxpayer”).

The local license fee and tax are imposed and administered by local officials. Virginia Code § 58.1-3701 authorizes the Department to promulgate guidelines and issue advisory opinions on local license tax issues. The following opinion has been made subject to the facts presented to the Department summarized below. Any change in these facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections and regulation cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site.

FACTS

The Taxpayer is an S corporation located in * (the “City”). The Taxpayer is owned by four siblings. Sibling A owns 100% of the Class A voting stock, but is only 40% shareholder of Class B non-voting stock. Siblings B, C, and D each own 20% of the Class B stock.

Each sibling is the grantor of a trust. The trusts’ beneficiaries are the children of the siblings. The trusts’ trustees are brothers-in-law or unrelated third parties.

A Virginia limited liability (the “LLC”) has been formed. Sibling A owns 100% of the voting membership interests of the LLC and 2% of Class B non-voting interests The four trusts own the remaining 98% interest in Class B non-voting memberships.

The Taxpayer seeks an advisory opinion as to whether an affiliated relationship exists between it and the LLC such that the Taxpayer will be exempt from paying BPOL tax on certain fees it will receive from the LLC.

OPINION

Under the provisions of Virginia Code § 58.1-3703 C 10, receipts or purchases made by members of an affiliated group of entities from other members of the same affiliated group are exempt from the BPOL tax. There are two tests, the parent-subsidiary test and the brother-sister test, that a group of entities can satisfy in order to be considered an affiliated group. In applying the statutory definition of “affiliated” under Virginia Code § 58.1-3700.1 to entities, the tests are applied “as if they were corporations and the ownership interests therein were stock.”

Under Virginia Code § 58.1-3700.1, the brother-sister test may be met if five or fewer owners that are individuals, estates, or trusts (the “ownership group”) hold stock or other ownership interests that meet both the total membership and common ownership prongs of the test. Both prongs of the test will be met if:

the total ownership group owns at least 80% of the total voting power of all classes of ownership interests or the total value of all ownership interests (total membership), and

the common ownership group holds more than 50% of the total voting power of all classes of ownership interests or the total value of all ownership interests when such ownership only includes identical interests of the common owners.

In this case, one person, Sibling A, owns 100% of the voting power in both the Taxpayer and the LLC. Therefore, both the 80% test and the 50% tests are met. Accordingly, receipts or purchases made between the Taxpayer and LLC will be exempt from the BPOL tax.

If you have any questions regarding this opinion, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3746.B