A bank holding company that has its commercial domicile in West Virginia and its wholly owned and regulated bank subsidiaries that also have their commercial domicile in West Virginia filed a timely request with the Tax Commissioner for permission to file a West Virginia combined corporation net income tax return and a combined business franchise tax return for their 1991 taxable year.

This bank holding company and its wholly owned subsidiaries are members of an affiliated group that files a federal consolidated income tax return. For years prior to 1991, this affiliated group also filed West Virginia consolidated corporation net income tax returns and consolidated business franchise tax returns. One of these subsidiaries has its commercial domicile in another state. This affiliated group engages in a unitary business.

During the 1991 Regular Session of the West Virginia Legislature, both the corporation net income tax and the business franchise tax laws were amended to provide special rules for determining the tax liabilities of a financial organization that is taxable in West Virginia and in one or more other states. See W. Va. Code §§ 11-23-5a, 11-23-27, 11-24-7, 11-24-7b and 11-24-24.

As a result of these statutory changes and since one member of this affiliated group has its commercial domicile in another state, this affiliated group may no longer file consolidated West Virginia returns. The out-of-state financial organization is required to file on a separate return basis for taxable years beginning after December 31, 1990, if it is taxable in this State.

DISCUSSION and CONCLUSIONS

For taxable years beginning after December 31, 1990, a "financial organization," as defined in W.Va. Code § 11-24-3a(10) doing business in this State and in another state where it is also taxable may not apportion its business income in the manner provided in W.Va. Code § 11-24-7(e), or apportion its capital in the manner provided in W.Va. Code § 11­23­5. Instead, the financial organization is required to follow the special rules for financial organizations set forth in W. Va. Code § 11-23-5a, in the case of the business franchise tax, and §§ 11-24-7(c) and 11­24­7b, in the case of the corporation net income tax. These rules are essentially the same for both taxes. For this reason and to simplify discussion of the issue presented for ruling, we will discuss and cite only the relevant corporation net income tax provisions.

The term "financial organization" is defined in W. Va. Code § 11-24-3a(10) which states:

(10) Financial organization. -- The term "financial organization" means:

(A) A holding company or a subsidiary thereof. As used in this section "holding company means a corporation registered under the federal bank holding company act of 1956 or registered as a savings and loan holding company other than a diversified savings and loan holding company (as defined in section 408(a)(1)(F) of the federal national housing act (12 U.S.C. 1730(a)(1)(F));

(B) A regulated financial corporation or a subsidiary thereof. As used in this section "regulated financial corporation" means:

1. An institution, the deposits, shares or accounts of which are insured under the federal deposit insurance act, or by the federal savings and loan insurance corporation;
2. An institution that is a member of a federal home loan bank;
3. Any other bank or thrift institution incorporated or organized under the laws of a state that is engaged in the business of receiving deposits;
4. A credit union incorporated and organized under the laws of this state;
5. A production credit association organized under 12 U.S.C. 2071.
6. A corporation organized under 12 U.S.C. 611 through 631 (an edge act corporation); or
7. A federal or state agency or branch of a foreign bank (as defined in 12 U.S.C. 3101); or

(C) A corporation which derives more than fifty percent of its gross business income from one or more of the following activities:

1. Making, acquiring, selling or servicing loans or extensions of credit. Loans and extensions of credit include:

   (I) Secured or unsecured consumer loans;

   (II) Installment obligations;

   (III) Mortgages or other loans secured by real estate or tangible personal property;

   (IV) Credit card loans;

   (V)Secured and unsecured commercial loans of any type; and

   (VI) Loans arising in factoring

2. Leasing acting as an agent, broker or advisor in connection with leasing real or personal property that is the economic equivalent of an extension of credit (as defined by the Federal Reserve Board in 12 C.F.R. 225.25(b)(5)).
3. Operating a credit card business.
4. Rendering estate or trust services.
5. Receiving, maintaining or otherwise handling deposits.
6. Engaging in any other activity with the economic effect comparable to those activities described in item (1), (2), (3), (4) or (5) of this subparagraph.

General rules pertaining to allocation and apportionment of income for purposes of the West Virginia corporation net income tax are set forth in W. Va. Code § 11-24-7. With respect to financial organizations, however, different rules apply depending on whether the commercial domicile of the financial organization is in West Virginia or in another state. Subsection 11-24-7(c) provides:

(c) Business activities entirely within West Virginia. -- If the business activities of a taxpayer take place entirely within this state, the entire net income of such taxpayer is subject to the tax imposed by this article. The business activities of a taxpayer shall be deemed to have taken place in their entirety within this state if such taxpayer is not taxable in another state": Provided, That the business activities of a financial organization having its commercial domicile in this state shall be deemed to take place entirely in this state, notwithstanding that such organization may be "taxable in another state": Provided, however, That the income from the business activities of a financial organization not having its commercial domicile in this state shall be apportioned according to the applicable provisions of this article. (Emphasis added.)

We observe that the general rule of subsection 11-24-7(c) applies to all corporations that have their commercial domicile in this State, unless they are taxable in another state. This general rule was expanded in 1991 to expressly include all financial organizations that have their commercial domicile in West Virginia, whether or not they are also taxable in another state. These financial organizations are prohibited from apportioning their business income under the apportionment rules set forth elsewhere in section 11-24-7, or in section 11-24-7b. Instead, a financial organization that has its commercial domicile in this State may apply the amount of income taxes it pays to another state or states for the taxable year as a credit against its West Virginia corporation net income tax liability for that taxable year, as provided in W. Va. Code §11­24­24.

Special apportionment rules are provided in section 11-24-7b for financial organizations doing business in West Virginia that do not have their commercial domicile in this State. Subsection 11­24­7b(a) states:

(a) General. -- The Legislature hereby finds that the general formula set forth in section seven of this article for apportioning the business income of corporations taxable in this state as well as in another state is inappropriate for use by financial organizations due to the particular characteristics of those organizations and the manner in which their business is conducted. Accordingly, the general formula set forth in section seven of this article may not be used to apportion the business income of such financial organizations, which shall use only the apportionment formula and methods set forth in this section [§11-24-7b].

Under these special rules, an out-of-state financial organization that "regularly engages in business in this State," as defined in subsection 11-24-7b(b)(1), pays West Virginia corporation net income tax on its adjusted federal taxable income apportioned to this State under rules specified in subsection 11­24­7b(b)(4), and no credit is allowed under section 11-24-24 for income taxes paid to another state.

Whenever the section 11-24-7b apportionment rule applies, the subsection 11-24-7b(c) method of filing rule also applies, requiring that corporation to file on a separate return basis. Subsection 11­24­7b(c) states:

(c) Method of filing. -- Financial organizations subject to apportionment under subsection (b) of this section shall file only separate tax returns, and may not file on a consolidated or any other basis: Provided, That financial organizations which are members of an affiliated group may file on a consolidated basis if all members of the affiliated group have their commercial domicile in this state. (Emphasis added.)

This method of filing rule clearly applies to any financial organization that has its commercial domicile in another state. Therefore, the out-of-state subsidiary of this bankholding company must file a separate West Virginia corporation net income tax return if it is taxable in this State; it is prohibited from filing a consolidated return, under W. Va. Code § 11-24-13a, or a combined return, under W. Va. Code § 11-24-7(h), with those members of its affiliated group that have their commercial domicile in this State.

We next examine whether this bank holding company and its West Virginia subsidiaries may file a consolidated West Virginia corporation net income tax return for the 1991 taxable year.

West Virginia allows an "affiliated group of corporations" to file a consolidated West Virginia corporation net income tax return provided it complies with the rules set forth in W. Va. Code § 11­24­13a. Taxpayer's method of filing for corporation net income tax purposes generally controls its method of filing for other business taxes such as the business franchise tax. W. Va. Code § 11-24-13a(c) (method of filing controlling).

One consolidated return filing rule specifies that if an election is made to file a West Virginia consolidated corporation net income tax return then all members of taxpayer's affiliated group required to be included in a federal consolidated income tax return must be included in the West Virginia consolidated return, whether or not a federal consolidated return is filed for that taxable year. W.Va. Code §11­24­13a(a).

Clearly, the out-of-state subsidiary of this bank holding company must be included in a federal consolidated income tax return if such a return is filed. It is equally clear that this subsidiary may not be included in a West Virginia consolidated return due to the prohibition set forth in subsection 11-24-7b(c), which is an express limitation on the section 11­24­13a privilege of filing West Virginia consolidated corporation net income tax returns. Therefore, this bank holding company's affiliated group may not file a West Virginia consolidated return for the 1991 taxable year, and the filing of a partial consolidated return is not allowed under section 11-24-13a.

The essence of the several corporation net income tax method of filing rules is that, unless use of a particular method is prohibited by law, taxpayer's corporation net income tax liability must be determined using a method of filing that properly reflects taxable income and prevents the avoidance of tax liability. See W. Va. Code §§ 11-24-7(h), 11-24-7a(a), 11-24-7b, and 11-24-13a(d) and (f). This is generally accepted as the basis for permitting or requiring related corporations engaging in a unitary business to file combined state income tax returns.

Since this bank holding company and its West Virginia subsidiaries are financial organizations, as defined in W. Va. Code § 11-24-3a(10), that (1) elected to file West Virginia consolidated corporation net income tax returns in prior years, (2) have their commercial domiciles in this State, (3) are engaged in conducting a unitary business in this State, and (4) are not allowed to apportion any of their business income outside this State, we believe it is appropriate to grant their request to file a West Virginia combined corporate income tax return and a combined business franchise tax return for the 1991 taxable year.

Combined West Virginia returns are prepared using the standard West Virginia annual return forms for the business franchise tax (WV/BFT-120) and the corporation net income tax (WV/BFT-112) supplemented by the following documents and schedules:

(1) A copy of pages 1 through 4 of the federal consolidated income tax return filed for the 1991 taxable year by the affiliated group,

(2) A consolidated balance sheet showing the inclusions and eliminations, whether they be positive or negative, for each member of the affiliated group included in the federal consolidated return,

(3) A consolidated profit and loss statement, in columnar form, disclosing for each corporation included in the federal consolidated return its statement of profit and loss,

(4) A schedule listing: (A) members of the affiliated group included in the West Virginia combined return, (B) members of the affiliated group not included in the combined return and whether or not such members will be filing separate returns,

(5) A schedule, in columnar form, disclosing the profit and loss statement for each corporation included in the combined return and the various adjustments necessary to convert each corporation's pro forma federal taxable income to West Virginia taxable income,

(6) A combined balance sheet showing the inclusions and eliminations, whether they be positive or negative, and the beginning and ending balances for each corporation included in the combined return, and

(7) Supplemental schedules, in columnar form, showing for each corporation included in the combined return the following information:

(A) Itemization of the amount of taxes paid to another state or political subdivision for which credit is claimed under W. Va. Code §11­23­27 (credit for franchise tax paid to another state), and the measure upon which such taxes were paid,

(B) Itemization of the amount of taxes paid to another state or political subdivision for which credit is claimed under W. Va. Code §11­24­24 (credit for income tax paid to another state), and the measure upon which such taxes were paid,

(C) The amount of taxes claimed as credit against business franchise taxes under W. Va. Code § 11-23-17(d),

(D) Itemization of the amount of net operating loss deductions claimed, if any, under W. Va. Code § 11-24-6(d), and

(E) The numerator and denominator of the allowance for certain government obligations and obligations secured by residential property, determined under W. Va. Code § 11-24-6(f), and the amount of interest giving rise to the allowance.

The conclusions reached in this advisory are based on the facts recited herein, review of previously filed consolidated returns, and application of current statutes and administrative regulations. If the material facts change or are different, or if there is a material change in the applicable law, whether such change is legislative, judicial or administrative, a different result may apply.

Combined returns may be filed in subsequent years, unless the preceding sentence applies. In that event, a supplemental ruling should be requested.

 

Issued: March 16, 1992

Alan L. Mierke Acting Tax Commissioner and Assistant Secretary West Virginia State Tax Department