Tax Type
Corporation Income Tax
Description
DISC adjustment
Topic
Subtractions and Exclusions
Date Issued
05-07-1987
May 7, 1987
Re: §58.1-1821 Application; Corporation Income Tax
§58.1-446 DISC Adjustment
Dear *****************
This is in response to your letter of December 17, 1986, in which you applied for correction of an assessment of corporation income tax for the taxable years 1983 and 1984. Although you requested a conference, in view of the determination this letter has been issued without one.
Facts
You object to the adjustment for the presence of a Domestic International Sales Corporation (DISC) which the auditor based on consolidation of the DISC with the taxpayer. The DISC is a wholly owned subsidiary of the taxpayer. All of the commission income attributed to the DISC was derived from sales by another subsidiary which is not subject to taxation in Virginia. The only expense deducted on the taxpayer's federal returns which related to the DISC was interest expense on producer's loans. The taxpayer added back this expense-in computing its Virginia taxable income. All other expenses incurred in producing the DISC income were deducted on the DISC return, not on the taxpayer's return.
Discussion
Under §58.1-446, the department can require a consolidated report (as was done in the audit) and then "equitably adjust the tax" if we determine that the income earned from business done in Virginia has been distorted. The department has determined that the use of a DISC to shelter income from federal taxation distorts income earned from business in Virginia. The distortion occurs because income is shifted between affiliates, and because expenses related to the DISC may be deducted by the taxpayer. However, the department is not required to adjust the tax on the basis of consolidation in every cafe.
In this case, the fact that none of the commission income of the DISC was derived from the taxpayer (or from other affiliates subject to taxation in Virginia) indicates that consolidation may not be appropriate. The only DISC related expense deducted on the taxpayer's return was added back by the taxpayer in computing Virginia taxable income.
Form 4797, Part III Proceeds
In reviewing the audit it was noted that the auditor excluded from the sales factor the proceeds from sales shown on Form 4797, Part III. Thee proceeds should have been included in the sales factor and the audit report will be revised accordingly.
Determination
Accordingly, the Virginia taxable income shown on the return filed by the taxpayer is not distorted by the existence of the DISC and no adjustment under §58.1-446 is necessary. You will shortly receive a revised audit report and bill. The revised bill should be paid within thirty days to avoid the accrual of additional interest.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner