Tax Type
Intangible Personal Property Tax
Description
Mortgage
Topic
Basis of Tax
Date Issued
10-23-1984
October 23, 1984
Re: Capital Not Otherwise Taxed - 1982
Dear ******
This is in response to your letter of June 19, 1984, in which you apply pursuant to the provisions of § 58-1118 of the Code of Virginia for correction of additional State capital taxes assessed ***** for the years 1981 and 1982.
FACTS
In tax years prior to 1981, taxpayer purchased and subsequently resold two parcels of real estate. Taxpayer purchased such real estate, giving a first mortgage note payable in partial payment therefor. In a subsequent year prior to 1981, taxpayer sold the two parcels of real estate, accepting the purchaser's second mortgage note payable in partial payment, while not liquidating its first mortgage note payable on the property. Accordingly, the gross amount of the wrap-around second mortgage note receivable was recorded as an asset on the books of taxpayer.
In audit, the Department included the gross amount of the wrap-around second mortgage note receivable in taxable capital as "other taxable property," a property category not subject to offset by notes and accounts payable. The Department held in audit that Taxpayer's first mortgage note payable on the property was not includable as a liability in the property category of "excess of bills and accounts receivable over bills and accounts payable" since the inclusion of liabilities obligated for purposes of capital outlay is prohibited by statute.
In protest, you argue that the prohibition to deduction of debt incurred for purposes of capital outlay, as provided in Virginia Code § 58-442, looks to a tangible asset to which the tax does not apply and since the sale of real estate in question has converted taxpayer's asset from tangible to intangible form, the prohibition is inapplicable.
Determination
I reject this argument. § 58-411 provides that the value of bills and accounts receivable may be offset by bills and accounts payable. § 58-422 limits the bills and accounts payable which may be offset to obligations contracted in the usual course of business and not for purposes of capital outlay. This is the only classification of property defined as taxable capital which may be offset by debt of any kind. § 58-412 defines certain other tangible and intangible property as taxable capital, but does not permit offset by any liabilities whether or not related. The receivable at issue is includible in this category of property.
However, in reviewing the facts and circumstances surrounding Taxpayer's notes receivable for the two parcels of real estate here involved, I agree that the gross amount of the wrap-around note receivable must be reduced by the amount of Taxpayer's unliquidated liability on the property sold in computing the taxable value of the receivable. Realization of the gross receivable amount is dependant upon liquidation of the note payable.
Assessments will be revised to decrease taxable capital by the amount of mortgage note payable; $**** for 1981 and $**** for 1982. Revised assessments will be due and payable upon receipt.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner