Tax Type
Corporation Income Tax
Description
Financial corporation; DISC adjustment
Topic
Taxable Income
Date Issued
06-23-1988
June 23, 1988
Re: §58.1-1821 Application; Corporation Income Tax
§58.1-418 Financial Corporation
§58.1-446 Adjustment for DISC
Dear***************
This is in response to your letter of October 21, 1987, in which you applied for correction of an assessment of corporation income tax. I apologize for the delay in responding.
Facts
The taxpayer's consolidated Virginia returns for 1984 and 1985 were audited and a number of adjustments were made. The taxpayer contests only one issue in the 1985 audit adjustments. In years prior to 1985 the taxpayer filed a consolidated Virginia return which included a Domestic International Sales Corporation (DISC) pursuant to §58.1-446. Because of changes in federal law effective January 1, 1985, the DISC no longer qualified for special federal income tax treatment under federal law. The I.R.S. required the taxpayer to file a separate, final federal return for the former DISC for the period between January 1, 1985 and its liquidation which included a substantial-amount of interest on producer loans.
The auditor determined that the former DISC was a financial corporation under §58.1-418 because all of its gross income consisted of interest on producer loans. Therefore, the DISC could not be included in the 1985 consolidated return under §58.1-442 with corporations required to use the statutory three factor apportionment formula. Because the DISC was a Virginia corporation, a separate Virginia return was required and tax was assessed.
Discussion
Although the DISC was required to file a separate federal return in prior years, the department permitted the DISC to be included in the taxpayer's consolidated Virginia return based on the policy applied to all DISC's under §58.1-446. The type of apportionment factor which may apply to a DISC does not prevent the application of §58.1-446 to equitably adjust the tax based on consolidation.
The federal provisions for DISC's which exempted them from federal income tax and from the requirements of I.R.C. §482 expired on December 31, 1984. Thus, the department no longer requires adjustments under §58.1-446 for DISC's (unless an election is made to be treated as an "interest-charged" DISC). However, after considering the historical treatment of the taxpayer's DISC, and the circumstances of its final return, the department has concluded that the treatment of the former DISC should be consistent with its treatment while it qualified as a DISC under federal law. Therefore, the taxpayer will be permitted to continue to include the former DISC in its consolidated Virginia return pursuant to §58.1-446 for the final taxable year of the DISC.
Determination
Accordingly, the audit report and assessment will be revised to include the former DISC in the consolidated Virginia return and a refund will be issued with interest within a few weeks.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner