Document Number
87-78
Tax Type
Corporation Income Tax
Description
DISC adjustment; Sales factor; Net operating loss carryover
Topic
Allocation and Apportionment
Date Issued
02-27-1987
February 27, 1987


Re: §58.1-1821 Application; Corporation Income Tax
§58.1-446 Adjustment for DISC
§58.1-414 Sales Factor


Dear ******************

This is in response to your letter dated September 10, 1985, in which you apply for correction of an erroneous assessment for the taxable years ended March 31, 1981 and March 31, 1982.
*********************

You object to the audit adjustments made to include income of a ***************** (DISC) on three grounds. You cite the opinion of the circuit court in General Electric Co. v. Commonwealth of Virginia. However, that case has been appealed and is currently before the Virginia Supreme Court. Until a final decision is rendered in the appeal we require that such adjustments be made. We suggest that you pay the assessment and file a protective claim for refund under §58.1-1824. Under that section we will hold the refund claim without action pending a final decision in the General Electric case.

You also claim that the DISC adjustment materially distorts income apportioned to Virginia because there were numerous unrelated suppliers whose sales resulted in commission income being attributed to the DISC. 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. Although the department has determined that the use of a DISC to shelter income from federal taxation distorts income earned from business in Virginia, we are not required to adjust the tax on the basis of consolidation in every case.

Although the existence of substantial commissions from unrelated suppliers may be a factor indicating that the amount of DISC income consolidated with the taxpayer should be reduced, we must also consider the fact that virtually all of the expenses of maintaining a DISC (particularly accounting expenses) were paid by the taxpayer. In this case you have not provided us with any information on the amount of DISC income received from unrelated suppliers or with DISC expenses paid by the parent. The department's policy is that consolidation is the most equitable manner in which to adjust the tax when DISC income is involved, and you have submitted no evidence to persuade us that your situation is different.

You also claim that numerous mathematical errors were made in the adjustment but do not itemize them. Since the audit will be referred to our Technical Services Section for revision, you may submit information on any mathematical errors to them.
Net Operating Loss Carryovers

The taxpayer incurred a net operating loss in the taxable year ended March 31, 1982. The audit report reflects a Net operating Loss Deduction (NOLD) in the taxable year ended March 31, 1983, based on this loss. The taxpayer contends that the loss should first be carried back to the taxable year ended March 31, 1979, and any excess not absorbed in that year carried to the taxable year ended March 31, 1983.

The taxpayer's Virginia return for the taxable year ended March 31, 1983, included a "Separate Company Proforma" federal return, which included the following statement (dollar amounts omitted):
    • Federal taxable income per attached separate company proforma
      Less: Federal separate company net operating loss carryover from fiscal year ended March 31, 1982
      = Adjusted Federal taxable income on a separate company basis
The amount claimed on the second line is the entire loss incurred in the taxable year ended March 31, 1982. This statement is clearly intended to make an election to forgo the carryback period under I.R.C. §172(b)(3)(C). once made, such an election is irrevocable. Therefore the taxpayer may not seek to carry the loss to the earlier year.
Sales Factor, Recapture

It appears that various items which were subtracted as foreign source income were also included in the sales factor. Since these items were excluded from apportionable income they should also be excluded from the apportionment factors.

It also appears that certain items of recapture income shown on federal form 4797 were removed from the sales factor by the auditor. For taxable years beginning before January 1, 1981, all proceeds of sales producing capital gain were excluded from the sales factor because capital gain was allocable income, even though some of the gain might be treated as ordinary income (recaptured). For taxable years beginning on and after January 1, 1981, capital gain is included in apportionable income, therefore all proceeds should be included in the apportionment factors.

Accordingly, the audit report will be revised to exclude foreign source income and include form 4797 proceeds.
Determination

The audit report will be forwarded to the Technical Services Section for revision in accordance with the principles set forth in this letter. If you have any mathematical errors or other pertinent information which affects the audit revision you should contact the Technical Services Section directly at:
        • Supervisor Technical Services Section
          Office Services Division
          P. O. Box 6-L
          Richmond, VA 23282
In your letter you requested a conference if an adverse ruling was anticipated. If you desire a conference you should request one within thirty days of the revised audit report.


Sincerely,


W. H. Forst
Tax Commissioner

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46