Tax Type
Corporation Income Tax
Description
Accelerated Cost Recovery System (ACRS) deductions
Topic
ACRS Modifications
Computation of Income
Subtractions and Exclusions
Date Issued
06-07-1988
June 7, 1988
Re: §58.1-1821 Application, Corporation Income Tax
§58.1-323 ACRS Modifications
Dear***********
This is in response to your letter of October 19, 1987, in which you applied for correction of an assessment of corporation income tax.
Facts
Your company acquired the stock of the taxpayer and elected to treat the transaction as an acquisition of assets under I.R.C. §338. In the federal return the taxpayer was required to include in its ordinary income all ACRS deductions previously claimed with respect to the assets, limited to the gain realized on the sale of the assets.
In the taxpayer's Virginia return the taxpayer claimed a subtraction of 30% of the "recaptured" ACRS on the theory that this amount had already been subject to tax in prior years. The auditor disallowed this subtraction.
Discussion
Virginia law provides that the ACRS additions made by a taxpayer shall be recovered over a five year period. The law does not authorize a taxpayer to claim a lump sum subtraction when assets are sold. Virginia Regulation VR 630-3-323 D.2. provides:
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- A corporation may claim a subtraction based upon ACRS additions made by another corporation if there has been a merger or other form of reorganization and the corporation claiming the subtraction would be allowed under federal law to claim a net operating loss deduction based upon a net operating loss incurred by the corporation which made the ACRS additions, assuming such corporation had incurred a net operating loss.
- A corporation may claim a subtraction based upon ACRS additions made by another corporation if there has been a merger or other form of reorganization and the corporation claiming the subtraction would be allowed under federal law to claim a net operating loss deduction based upon a net operating loss incurred by the corporation which made the ACRS additions, assuming such corporation had incurred a net operating loss.
In addition, it should be noted that the Virginia addition was not required for all federal ACRS deductions. The federal ACRS provisions applied to all property placed in service on and after January 1, 1981. Virginia did not require additions equal to 30% of ACRS until taxable years beginning on and after January 1, 1982. Therefore, your computation may overstate the amount of Virginia ACRS additions actually attributable to the "recaptured" ACRS in the taxpayer's federal return.
The General Assembly has restored full conformity to federal ACRS deductions effective for taxable years beginning on and after January 1,-1988, as part of the Virginia Tax Reform Act of 1987 (1987 Acts c. 9, HB 1119, copies of the act and the department's Legislative Impact Statement are-enclosed). Therefore, Virginia taxpayers will no longer be required to make an addition equal to 30% of their federal ACRS deductions.
The act added Va. Code §58.1-323.1 which permits taxpayers to subtract the outstanding balance of excess cost recovery (i.e., additions less allowable subtractions from 1982 through 1987) over two taxable years (for individuals) or five taxable years (for corporations). In 1988 the General Assembly amended this section to deal with final returns filed before 1988 (1988 Acts c. 773, SB 441, copies of the act and the department's Legislative Impact Statement are enclosed).
In your application you requested that the department issue a refund of an overpayment of withholding taxes for January through March, 1985, which had been applied toward this assessment before you filed this application. Under §58.1-1823 the department may reduce any refund by the amount of any past-due taxes, penalties and interest. While §58.1-1822 requires the department to suspend collection action after an application is filed, it does not preclude the department from applying an overpayment of tax to an outstanding assessment prior to the filing of an application.
Determination
Accordingly, the assessment is correct and is now due and payable. You will shortly receive an updated bill reflecting interest accrued and payments applied 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