Tax Type
Property Tax
Description
Capital not otherwise taxed
Topic
Appropriateness of Audit Methodology
Date Issued
04-29-1982
April 29, 1982
Capital Tax Audits*************
Dear ***********************
This letter is in reply to your letter of September 16, 1981 regarding the above captioned client.
FACTS
The file regarding this particular matter dates from ******** when the Department issued an audit report on capital tax f******* I issued a final determination letter to you but agreed to a hearing on *********** and in subsequent correspondence confirmed my original determination.
Audit adjustments based on taxpayer's accounting records and financial statements reflected the following amounts which were excluded as payables for the years
Jobs in Progress:
State tax on capital not otherwise taxed is a property tax imposed on specific items of property defined by the Virginia Code as the capital of a trade or business in Virginia. As such, it includes all property not specifically exempt and recognizes only those specific liabilities which the law provides for offset against the value of specific items of property.
Virginia Code §58-411 defines capital for purposes of this tax as three basic categories of property; (1) inventory, (2) the excess of bills and accounts receivable over bills and accounts payable and (3) all other taxable property. The first category includes a contractor's inventory of materials on hand for construction since such inventory is considered to be held for resale indirectly as specified by Code §58-412. It does not include construction in progress since such construction is real estate of the property owner. The second category is limited to bills and accounts receivable less the total amount of bills and accounts payable contracted in the usual course of business. See Code §58-422. The third category includes all other intangible personal property of a contractor except those classes of property which are specifically exempted by Code §58-411 and 58-412. This category of taxable property includes, but is not limited to, choices in action, equities, demands and claims. See §58-411, subparagraph A(4).
In your letter of ************** 1981 you contend that the Department of Taxation does not take into consideration or attempt to explain the denial of the deductions for billings in excess of costs. You contend that the billings in excess of costs is a definite and determinable liability payable to the owners in the event of default and is a legitimate deduction on the returns under audit.
The Department does not contend that in the event of default there would be no liability of taxpayer. However, if taxpayer has received only funds for work performed in accordance with the terms of contract, we do contend that no account payable currently exists. In default, the parties to the contract or a court of law may determine the existence and amount of liability. This may indicate the current existence of a chose in action by the property owner, but not the current existence of an account payable by the contractor.
You disclosed that the taxpayer, for audit financial purposes, accounted for construction contracts on the percentage of completion basis. You state in your September letter "the companies audited reports...are prepared on the percentage of completion basis, and in accordance with generally accepted accounting principles recognized the definite liability for billings in excess of recognized income." In the same letter you disclose that the taxpayer reports income on the completed contract basis and has consistently reported its capital tax on the same basis.
In July 1981, a Field Services auditor visited the taxpayer attempting to resolve this matter by obtaining the necessary factual data. The auditor requested a detailed list of the jobs which accounted for construction in progress. At that time the taxpayer stated that fulfilling the request would be a monumental task and felt it would be unnecessary at this time. The meeting resulted in the position that if the taxpayer could convince the Department that the taxpayer should be given credit for all or part of the construction in progress account, then the taxpayer would give the Department any information needed to resolve the matter.
In my letter to you dated September 9, 1981 I pointed out that only the amounts which were billed or billable under the terms of contracts were includible in "accounts receivable" and in accordance with the provisions of Code §58-411 only these amounts would properly be included in the category of "the excess of all bills and accounts receivable over bills and accounts payable." Accordingly, the amount of accumulated costs and earnings which is unbilled and unbillable under the terms of contracts is recorded in your accounting records as an asset but not as "accounts receivable." In your particular case these "jobs in progress" are recorded on your balance sheet for income tax purposes as an asset with a credit balance which reflects the net of the asset and liability accounts relating to the "jobs in progress."
Under the restrictive provisions of Code §58-422, liabilities may be included and offset against bills and accounts receivable only if they are represented by bills and accounts payable contracted in the usual course of a taxpayer's business. While I do not question the accounting classification of the amounts in issue as assets with credit balances, nothing has been presented to substantiate their inclusion in "accounts payable" as defined by Code §58-422.
DETERMINATION
On the basis of information submitted and for the reasons stated above, I find no error in audit computations of taxable capital or in the deficiencies assessed. Your application for correction is therefore denied and the assessments should be paid with interest accrued to the date of payment by ************* Our records disclose **** that the audit years on ********* are barred for assessment by the statute of limitations.
********* that §58-1130 of the Code of Virginia provides for your appeal to the courts if you are not in agreement with this determination.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner