Tax Type
Corporation Income Tax
Description
Sales Factors
Topic
Allocation and Apportionment
Appropriateness of Audit Methodology
Date Issued
07-01-1982
July 1, 1982
Re: § 58-1118 Application Corporation Income Tax Audit
Dear ***********************
This is in reply to your petition dated July 28, 1980 for correction of Virginia corporation income taxes assessed for the years 1975 and 1976.
Your application for relief alleges error in the department's treatment of the installment sales gains of **********Credit Corporation. It is the contention of the *******Credit Corporation that $ *****of installment sales gains in 1975 was reported to Virginia by the ******Company. Therefore, you further contend that the gains should not be included as income or included in the apportionment factors of *********Credit Corporation.
In the letters from ******Credit Corporation a general discussion which relates to the recognition of deferred installment gain on the sale of contracts was presented.
The situation as I understand the facts, is that The *******Company sells to *****Credit Corporation certain installment contracts. Under federal rules, the sale of installment receivables to a subsidiary corporation included in a consolidated federal return does not accelerate the recognition of income from installment contracts. However, on a separate return basis such disposition would result in the imposition of tax on the unrealized deferred income portion of the receivables. You advise, that for this reason, The ******Credit Corporation included the profit from all sales on an accrual basis for state tax purposes.
Additionally, you furnished a schedule of ******Credit Corporation for the years 1961 through 1975 which compared the income reported to Virginia and the taxable income before net operating loss deduction and special deductions reported on the federal return. This schedule shows the income or loss reported on the consolidated federal return and the income reported to Virginia. The total *******Credit Corporation income reported to Virginia for the period 1961 to 1975 was $ ***** and for the same period for federal purposes was $ *****the net difference is $ ****. This information shows that the income from the installment sales adjustment in federal income for the year 1975 in the amount of $ **** has been reported over a period of years to Virginia and should not be reported to Virginia again.
To further support your position, on May 4, 1982, you provided additional information which reconciled the taxable income of ******Credit Corporation between federal and Virginia for the years 1970 through 1975. You attribute the difference to the installment sales adjustment between The******* Company and the **************Credit Corporation.
On the basis of these facts, I conclude that the installment sales in question were reported by The ***** Company to Virginia on a nondeferred income basis, while for federal consolidated return purposes such income was deferred. Accordingly, I agree that the $ ****adjustment was necessary for Virginia income tax purposes when the installment contracts receivable were sold to a third party.
The audit report mailed to you and the assessments subsequently mailed will be adjusted to exclude the installment sales adjustment from income and from the apportionable income sales factor for the year 1975.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner