Tax Type
Corporation Income Tax
Description
DISC adjustment; ACRS modifications
Topic
ACRS Modifications
Allocation and Apportionment
Date Issued
06-07-1988
June 7, 1988
Re: §58.1-1821 Application; Corporation Income Tax
§58.1-323 ACRS Adjustment
§58.1-446 Adjustment for Domestic International Sales Co.
Dear***********************
This is in response to your letter of September 23, 1987 in which you applied for correction of two assessments of corporation income tax.
Facts
On the Virginia returns for 1984 and 1985 the taxpayer reduced the ACRS addition required by §§58.1-323 and 58.1-402 B.3. based on 30% of:
- the amount of deferred gain or loss on intercompany transactions included in federal taxable income, and
- the amount of proceeds on the disposition of assets which have been sold to an outside party.
Discussion
The issue involved in the first ACRS adjustment, based on deferred gain or loss, was resolved by the ruling letter dated November 7, 1986, P.D. No. 86-228 (copy enclosed) which disallowed the adjustment in the previous audit of the taxpayer for 1982 and 1983. There has been no change in the department's policy.
The issue involved in the second ACRS adjustment, based on sales to outside parties, was also addressed in the 1986 letter. Virginia law does not allow any adjustments to ACRS additions and subtractions based on the sale of depreciable assets. Instead, all ACRS additions must be recovered over a five year period as specified by law.
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).
You also request that the sales factor include DISC sales. 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. No adjustment to the sales factor was necessary because the DISC itself did not make any sales. Virtually all of its income was attributable to commissions on sales made by the parent and interest on producer loans, both of which were eliminated in consolidation.
Determination
The assessments of additional tax are correct and are now due and payable. You will shortly receive updated bills with accrued interest to date. The bills should be paid within thirty days to avoid the accrual of additional interest.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner