Tax Type
Intangible Personal Property Tax
Description
Accounts receivable, capital not otherwise taxed
Topic
Accounting Periods and Methods
Appropriateness of Audit Methodology
Date Issued
08-24-1984
August 1984
Re: Application for Correction
Tax on Capital Not Otherwise Taxed
Years 1976, 1977 and 1978
Dear *****************
This will respond to your letter of October 9, 1980, submitted pursuant to § 58-1118 of the Code of Virginia in protest of assessments of tax on capital not otherwise taxed for the years 1976, 1977 and 1978.
FACTS
As a result of audit Taxpayer was assessed deficiencies in tax on capital not otherwise taxed in the amounts of $****, $****, and $**** for the years 1976, 1977 and 1978, respectively. The tax deficiencies are primarily attributable to the audit inclusion of accounts receivable at gross book values without offset by certain reserves carried on Taxpayer's books as accounts receivable valuation reserves and to the exclusion in audit for the year 1976 of an account carried on Taxpayer's books as an amount due from a division of Taxpayer located in Virginia to its headquarters division located in another state.
DETERMINATION
The reserves at issue consist of reserves for uncollectible accounts, reserves for billed accounts and reserves for unbilled accounts.
Virginia Code § 58-418, as it existed for the years involved levied tax on the current value of property defined as taxable capital and the department has consistently refused to recognize various reserves for possible future losses in its determination of current value. In this regard, the department will recognize a reserve for uncollectible accounts to the extent that such reserve is utilized and allowed for federal income tax purposes. However, the department will not recognize a reserve for possible losses anticipated from future negotiations with the governmental customers or other customers.
It has not been shown that Taxpayer's reserve for uncollectible accounts was utilized and allowed for federal income tax purposes. Your claim is accordingly denied in this respect.
Submitted information indicates that Taxpayer's reserve for billed accounts provides for anticipated losses from future negotiation with governmental customers. Your claim is denied in respect to this reserve.
However, submitted information indicates that Taxpayer's reserve for unbilled accounts provides for the excess of costs incurred and booked over the amount which will become billable for work performed to date. This account is required for the proper current valuation of unbilled sales. Assessments will be adjusted to reflect this reserve in the valuation of taxable receivables.
In protest you have advised that the amount carried on Taxpayer's books for 1976 as due to its headquarters division located in another state represents the Virginia division's portion of funds borrowed under a line-of-credit arrangement with the ***** Bank and that such funds were borrowed and utilized for the purpose of meeting current working capital requirements of a Virginia division. Assessments will accordingly be adjusted to reflect this liability as an offset in the valuation of taxable receivables for the year 1976.
Taxable capital will be adjusted in accordance with this determination and revised assessments or refund will be issued.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner