94-023
Response January 18,
1995
Mr. Val Oveson,
Chairman
Utah State Tax
Commission
210 North 1950 West
Salt Lake City, UT
84134
Dear Chairman Oveson:
We are writing on
behalf of our client, hereinafter referred to as P, to request an advisory
opinion regarding the filing of a combined tax return with exempt subsidiary
S. This matter has been discuses with
XXXXX in advance of our submitting this request. We have included below the factual background and a complete
description of the filing position.
BACKGROUND
P, a Utah corporation
domiciled in Utah, owns approximately 80% of S. Other than a de minimus amount of cash, P’s only asset is its
investment in S.
S, a Utah Corporation
domiciled in Utah, is an insurance corporation that is exempt from Utah
Franchise and Income Tax under Utah Tax Code (UTC) 56-7-102(1)(b) as a
corporation paying Utah taxes on total premiums received under Title 59,
Chapter 9.
S is contemplating the
payment of a dividend to P and its minority shareholders. In turn, P plans to distribute such dividend
proceeds out to P’s shareholder. The
dividend income will be P’s only income.
We request that P and S be allowed to file a combined Franchise and
Income Tax return under UTC 59-7-404.
The combined return would exclude the intercompany dividend under UTC
59-7-404(2) and eliminate income from S under UTC and Income Tax. Alternatively, we request that you invoke
UTC 59-7-117 to exclude the dividend income on P’s separately filed income tax
return to keep P from suffering a double tax detriment.
SUPPORT FOR FAVORABLE
RULING
Without receiving a
favorable ruling, the dividend income from S will be subject to three levels of
Utah tax. First, the income of S will
be taxed under the premium tax statutes.
Next, the dividend income will be taxed at P’s level, and finally the
shareholders of P will be taxed on the balance of the dividend being passed out
of P. If S were a regular corporation
subject to the Franchise and income tax a combined return would be filed
eliminating the intercompany dividend. By allowing P and S to file a combined
return eliminating the dividend and insurance company income you will be
placing P on a level playing field with holding companies of regular
corporations. The state will still
receive taxes on the corporate income through the premium tax and receive the
second layer of taxes from”’s shareholders as the dividends are passed out of
P.
Under pre-1994 Utah tax
law P would have qualified as a holding company exempt from Utah Franchise and
income tax under old UTC 59-7-105(c).
It is our understanding that the reason this rule was omitted from the
new law was that few requests for holding company exemptions were filed with
the state. Rather, holding company’s
simply filed combined or consolidated tax returns to eliminate the dividend
income. In the mainstream corporate
setting the elimination for the holding company exemption was a non event. In changing the Utah Statute, we do not
believe that the legislature intended to single out insurance companies and
subject them to triple taxation.
SUMMARY
In summary were
request that the Tax Commission favorable rule that P and S be allowed to file
a combined return eliminating both the intercompany dividend income and Title
59 Chapter 9 income, or alternatively, allow P to make an adjustment on its
separate Utah return to eliminate the double tax detriment that would exist if
the dividend income were taxed at P’s level.
Should you be inclined to rule unfavorably on this matter, were request
the opportunity to meet with you and more fully explain the position of the
taxpayer. Your cooperation in this
matter will be very much appreciated.
Very truly yours,
XXXXX
Re: Advisory Opinion on the taxation of a
dividend paid by an insurance company to its parent holding company for
purposes of the Utah corporation franchise tax for the year XXXXX.
Dear XXXXX:
You requested an
advisory opinion as to the taxation of a dividend paid by an insurance company
which is subject to XXXXX tax, to its parent, a holding company domiciled in
Utah. You specifically requested a
ruling that either (1) the entity be permitted to file a combined report
including the parent and subsidiary corporations but excluding the income of
the insurance company as well as the dividends; or (2) that the dividend income
be excluded from taxation through invocation of U.C.A. 59-7-117 to avoid a
double tax detriment.
Our research indicates
as follows:
We have analyzed both
of the above alternatives in context with the Utah statutes and have determined
that neither of these alternatives are permitted under the Utah statute.
With regard to the
first alternative, there are no provisions in the Utah statutes which would
permit a corporation which has been ruled exempt to be included in a combined
report for relief when a taxpayer would receive a double benefit or suffer
detriment by being required to report the same income more than one time. However, the taxpayer in this instance is
the parent holding company as a separate corporation. This company is not being required to pay double tax on its
income. Taxation is a dividend paid
form one corporation to another does not create a tax detriment. Dividend income is clearly included in the
taxable base under Part I of Title 59 Chapter 7 and there is no provision in
the statute which would exclude or exempt it from taxation.
Based on the above rationale,
it is our determination that the parent holding corporation is not entitled to
exclude the dividends received form the subsidiary insurance company in its
determination of income for Utah corporation franchise tax purposes for the
calendar year XXXXX.
It should be noted
that this matter has been brought before the corporate tax task force and a
recommendation has come out of that process and is being recommended to the
XXXXX legislature that should address this problem on a prospective basis from
XXXXX forward.
This opinion is based
upon the facts presented in your letter.
Obviously, if there are deviations form these facts, this opinion may be
negated.
If you do not agree with
this determination, you may appeal to the Tax Commission for a formal
hearing. The results of that hearing
would constitute a declaratory judgement and be appealable to the Utah Supreme
Court. A Notice of Appeal Rights and a
copy of the Utah Taxpayer Bill of Rights are attached.
Respectfully,
Alice Shearer
Commissioner