Document Number
88-106
Tax Type
Corporation Income Tax
Description
DISC adjustments; Form 4797 proceeds; Net operating loss
Topic
Subtractions and Exclusions
Taxable Income
Date Issued
05-12-1988
May 12, 1988

Re: §58.1-1821 Application; Corporation Income Tax
§58.1-446 Adjustment for DISC
§58.1-402 Federal Taxable Income


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

This is in response to your letter of April. 21, 1987, in which you applied for correction of an assessment of corporation income tax. I apologize for the delay in responding. Your application asserts that the assessment is erroneous in three areas, which will be addressed in order.
DISC

You object to the inclusion of income from a Domestic International Sales Company (DISC) citing the circuit court's opinion in the General Electric case. The case is currently pending before the Supreme Court of Virginia and the department continues to require the adjustment pending a final decision. You should pay the assessment and file a protective claim for refund under §58.1-1824 pending a final decision in the case styled Commonwealth of Virginia v. General Electric Co.

You also request that the sales factor be adjusted to include DISC income. When an adjustment is made based on consolidation of a DISC with its parent all factors are adjusted as appropriate. In this case the DISC was a "commission DISC." Therefore, the consolidation eliminated the intercorporate commissions attributed to the DISC for federal income tax purposes and no adjustment to the sales factor was necessary.
Form 4797 Proceeds

The auditor removed from the sales factor the gross proceeds from sales reported in Part III of federal form 4797 (recapture). Upon review of the audit we agree that the proceeds should not have been removed. The audit report and assessment will be revised to include them.
Net Operating Losses

The taxpayer incurred a net operating loss in 1983 which was absorbed in the federal consolidated return. The taxpayer did not file form 500-NOLD to carry the losses back and requests that it be permitted to carry the loss forward.

Virginia starts with federal taxable income determined as if the taxpayer had filed its federal return on the same basis as the Virginia return, in this case a separate return. Under federal rules for net operating losses, the loss must first be carried back three years before being carried forward, unless an election to carry the loss forward is made on the loss year return. The taxpayer did not make such an election on the copy of the federal return filed with its 1983 Virginia return. Therefore, the auditor properly computed the taxpayer's 1984 federal taxable income for Virginia purposes without allowing a net operating loss deduction from 1983.
Determination

Accordingly, the audit report and assessment will be revised to include form 4794 proceeds but is otherwise correct as made. You will shortly receive a revised audit report and an updated bill with interest accrued to date. The 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

Last Updated 08/25/2014 16:46