Tax Type
Intangible Personal Property Tax
Description
Capital not otherwise taxed
Topic
Taxable Transactions
Date Issued
10-12-1984
October 12. 1984
Re: § 58-1118 Application
Capital Not Otherwise Taxed
For the Years ****
Dear ****
This ruling is issued in response to your application under § 58-1118, Code of Virginia, taxpayer hearings, and additional information submitted.
For purposes of this determination, "inventory" will be referred to as "Category 1," "excess receivables over payables" will be referred to as "Category 2," and "all other taxable property" will be referred to as "Category 3."
Attachments A, B, and C summarize the determinations discussed in this ruling and will assist in their explanations.
Use of trial balance amounts - Issue 1
FACTS
The Department, for audit purposes, made adjustments based on Taxpayer's final trial balance sheets before adjustments for financial reporting purposes. Taxpayer contends that filed returns used financial statement balances. In addition, for the years 1979 and 1980, the Department made its audit adjustments by averaging the July and December account balances. Taxpayer originally filed such returns using a combination of averaged and year-end values. Taxpayer desires that the financial statement balances on December 31 be used for the capital tax audit.
DETERMINATION
The Department will use the December 31 financial statement balances for all audit adjustments.
Classification of reserve for guaranty expenses as inventory - Issue 2
FACTS
The reserve for guaranty expenses was established by Taxpayer in 1977 for income tax purposes to account for potential costs of guaranty expenses on two specific contracts. Taxpayer never incurred the costs and the reserve was eliminated from the financial statements in 1978. The Department, in audit, included the reserve in "Category 1" since the account appeared on the trial balance sheet.
DETERMINATION
The Department has agreed to use the financial statements, as discussed in issue 1 above; and this reserve has been eliminated from such statements and will, accordingly, be eliminated from audit.
Reclassification of "work in process" accounts - Issue 3
FACTS
Taxpayer, for trial balance purposes, accounts for work in process on the completed contract method of accounting and for financial statement purposes on the basis of the percentage of completion method.
Taxpayer's balance sheet for audit years reflects an asset entitled "costs incurred and estimated profits or losses recorded on contracts in progress, less billings." The accounts comprising such asset include work in process accounts entitled (a) builders risk, (b) other than new government and commercial, (c) miscellaneous, (d) expenditures, profit and billings on contracts, (e) new construction--government and commercial. In audit, the Department included the work in process accounts in "Category 1." Taxpayer contends that the work in process accounts should be included in "Category 2." Taxpayer has consistently filed capital tax returns including the aggregate balance of such property in "Category 2" since prior to a 1943 ruling of the Department. Taxpayer also provides evidence that for government contracts, title vests with the government as construction proceeds.
DETERMINATION
On the basis of the evidence presented, the Department will include in "Category 2" the work in process accounts entitled (a) builders risk, (b) new ***** construction-government, (c) other than new ***** construction-government. The Department will include in "Category 3" the net of (1) work in process accounts entitled (a) new construction-commercial, (b) other than new **************** construction-commercial, (c) miscellaneous sales and (2) billings in excess of costs and profits. This determination takes into consideration that all retainage accounts and all government contracts are considered accounts receivable which are billed or billable under the terms of contract and any unbilled portion of the work in process is due to billing cycle timing differences. No evidence has been provided showing that title vests in commercial contracts as work progresses. On the contrary, in certain terminated commercial contracts, the termination agreement required Taxpayer to transfer ownership of the uncompleted vessel and inventory of materials to purchaser. In order to reflect the equity value of the work in process asset on commercial construction contracts, the net of such work in process accounts and billings in excess of costs and profits is included in "Category 3."
Taxpayer also contends that the statutory amendment to § 58-411, effective July 1, 1980, which addresses "underbillings" and "overbillings" should be applied to the audit. Such amendment is applied prospectively and such change will be reflected in audit year 1981
Disallowance of deduction for inactive and obsolete stores and stores for plant upkeep - Issue 4
FACTS
Taxpayer computes the amount of obsolete stores based upon historical inventory turnover data. The method reflects losses which have accrued at the time of valuation and in no way anticipates future losses.
Taxpayer also computes the value of stores used for plant upkeep and maintenance. Taxpayer contends that such stores are current expenses and are not includible as inventory under § 58-411(1), Code of Virginia.
The Department, in audit, disallowed the reduction in the inventory.
DETERMINATION
Taxpayer provided substantiating evidence supporting the reduction in inventory for inactive and obsolete stores and the proper adjustment will be made. The Department must deny any adjustment for stores for plant upkeep. § 58-411(1) provides that inventory shall include all materials for use in the business. This provision includes any supplies inventory which may be on hand for use by the manufacturing business for maintenance or repair.
Exclusion of inventory losses - Issue 5
FACTS
Taxpayer's reserve for inventory losses reflects the fact that the fair market value of certain inventory is less than the company's cost and also reflects the additional costs attributable to conversion from an average cost method for book purposes to LIFO for financial statement purposes. The Department, in audit, disallowed the reserve for inventory losses.
DETERMINATION
Taxpayer has shown the inventory losses were deducted for Federal income tax purposes and has substantiated, through supplemental information, that such reserves are necessary to reflect the actual value of inventory under the LIFO method. The Department will recognize the reserve for inventory losses in its audit adjustments.
Reclassification of miscellaneous receivables - 1980 - Issue 6
FACTS
Taxpayer takes the position that the accounts classified as miscellaneous receivables are in the usual course of business and includible in "Category 2." The Department classified the receivables in "Category 3" for audit purposes.
DETERMINATION
Taxpayer has substantiated that the receivables are in the usual course of business and accordingly, the Department will include them in "Category 2."
Reclassification of other receivables - Issue 7
FACTS
Taxpayer accepted a promissory note from subsidiary. The proceeds of the note were used to remove an oyster bed. Such promissory note and certain other cash deposits were classified as other receivables. Taxpayer contends the promissory note should be included in "Category 2" and that the cash deposits are not includible in taxable capital. The Department included the other receivables in "Category 3."
DETERMINATION
For audit year 1979, the promissory note from subsidiary cannot be considered to be a receivable in the usual course of Taxpayer's business and must be included in "Category 3." The cash deposits are considered to be money and are not includible in capital.
For tax years 1980 and 1981, the amendment to § 58-411(4), Code of Virginia, pertaining to intercompany advances from corporations which are members of an affiliated group of corporations prohibits the taxing of the promissory note from a subsidiary.
Tax on plant under construction - Issue 8
Recomputation of depreciation - Issue 9
FACTS
Taxpayer inadvertently omitted from its return the balance of its plant under construction account, which includes depreciable equipment. The Department recomputed the amount of allowable depreciation for capital tax audit purposes.
DETERMINATION
Taxpayer concurs with audit findings. The Department will use December 31 amounts in computing revised calculations.
If Taxpayer desires to further discuss the adjustments as proposed, please let me know within thirty (30) days from the date of this letter. If I do not hear from you, upon expiration of thirty (30) days, this determination will become final and revised assessments shall be issued with interest accruing to date. Such assessments will be due and payable upon receipt by Taxpayer.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner