South Carolina Rules Subsidiaries Of Foreign Corporation Can File Single Consolidated Return

On August 27, the South Carolina Department of Revenue issued a private letter ruling that permits a group of subsidiary corporations of a foreign corporation to file a single South Carolina consolidated return even though the subsidiaries were required to file two different consolidated returns for federal income tax purposes.1 The Department adopted the position that as long as the subsidiaries had income tax nexus with the state and also met the "substantial control" test, they could be included on the same consolidated return regardless of whether the common parent corporation was included on the return.

Background

A parent company (Parent), organized outside the United States, owned a controlled group of entities that manufactured and sold automotive components. As a foreign company, Parent was not subject to federal or South Carolina corporate income tax.

Parent owned 100 percent of a series of foreign disregarded entities that did not have nexus with South Carolina. These foreign disregarded entities owned 100 percent of two groups of subsidiaries that engaged in a multistate business, conducted business within South Carolina and had income tax filing requirements with the state. Both of these groups had lower-level subsidiaries that conducted activities in the state that subjected them to South Carolina corporate income tax, but some of the lower-level subsidiaries did not have nexus with South Carolina. Both subsidiary groups filed their own federal consolidated returns that included lower-level subsidiary corporations for which the federal ownership and control requirements were met.

Because Parent was a foreign corporation, it was ineligible to file a federal consolidated return with the two subsidiary groups.2 Also, the subsidiary groups could not file a single federal consolidated return because they were unable to include the common parent corporation in the return. All of the companies in both subsidiary groups used the same accounting year. The two subsidiary groups asked the South Carolina Department of Revenue whether they could file a single state consolidated return together.

Subsidiary Groups May File Single Consolidated Return

Under South Carolina law, a consolidated return is permitted for "a parent and substantially controlled subsidiary or subsidiaries" or "two or more corporations under substantially the entire control of the same interest."3 "Substantially controlled" or "under substantially the entire control"...