Tax Type
Corporation Income Tax
Description
Adjustment to the property factor contested, included construction in progress.
Topic
Appropriateness of Audit Methodology
Subtractions and Exclusions
Date Issued
11-14-2007
November 21, 2007
Re: § 58.1-1821 Application: Corporate Income Tax
Dear *****:
This will reply to your firm's letter in which you seek correction of the corporate income tax assessment issued to ***** (the "Taxpayer") for the taxable year ended December 31, 1998.
FACTS
The Taxpayer and its affiliates file a combined Virginia income tax return. The Department audited the Taxpayer's 1998 Virginia corporate income tax return and made several adjustments. Among the adjustments, the auditor found that the property factor for ***** (the "Affiliate") did not reconcile with schedules provided by the Taxpayer. The auditor adjusted the denominator of the property factor to reconcile to property reported for federal income tax purposes and the numerator to match amounts reported on the Taxpayer's documentation. The Taxpayer contests the adjustment to the property factor, asserting the auditor's adjustment includes construction in progress.
DETERMINATION
Under Title 23 of the Virginia Administrative Code (VAC) 10-120-170 B, the value of property included in the property factor is generally its basis for federal income tax purposes at the time of acquisition and including any subsequent capital additions and improvements or partial dispositions by reason of sale, exchange, or abandonment. Thus, the auditor correctly adjusted the denominator of the property factor to match amounts reported for federal income tax purposes.
The property values included in the numerator of the property factor, however, were taken from a schedule that was not reconciled to the federal income tax basis. At the request of the Department, the Taxpayer has provided additional information that clearly accounts for the property values reported on the Affiliate's federal income tax return balance sheet and the corresponding property values in Virginia. As such, both inventory and depreciable assets have been adjusted for both the denominator and the numerator in accordance with the Virginia regulation.
Under Title 23 VAC 10-120-160 A 4 b, property under construction during the taxable year in question must be excluded from the property factor until it is actually used. Based on the information provided, construction in progress has been removed from the numerator and denominator of the property factor.
A revised audit report is enclosed, reflecting the adjustments required as a result of this determination. An updated bill with interest accrued to date will be sent to the Taxpayer. Please remit payment for the total outstanding balance to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203. Attn: *****. No further interest will accrue provided the bill is paid within 30 days from the date of the updated bill.
The regulations cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's-web site. If you have any questions regarding this determination, you may contact ***** at *****.
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- Sincerely,
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- Janie E. Bowen
Tax Commissioner
- Janie E. Bowen
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AR/1-1310398344B
Rulings of the Tax Commissioner