Tax Type
Corporation Income Tax
Description
Capital losses from consolidated return
Topic
Allocation and Apportionment
Date Issued
09-30-1991
September 30, 1991
Re: §58.1-1821; Corporation Income Tax
Dear*****************
This will reply to your letter of May 31, 1990, in which you seek correction of corporation income tax assessments************** (the "Taxpayer").
FACTS
The taxpayer was included in a consolidated federal return and filed a separate Virginia return for the years under review. The taxpayer was audited, and an adjustment was made to the computation of Virginia taxable income by adding back "capital losses" subtracted on the federal consolidated return. You contend that the losses qualify for Internal Revenue Code (IRC) §1231 treatment and propose that they be allowed as ordinary losses in computing Virginia taxable income.
DETERMINATION
Virginia has adopted federal taxable income as the starting point for computing a corporation's Virginia taxable income. Therefore, Virginia relies on the amount and character of each item reported on the federal return and supporting schedules.
IRC §1211 allows a corporation's losses from sales or exchanges of capital assets only to the extent of gains from such sales or exchanges; losses exceeding gains are utilized in the form of a capital loss carryback and carryover. Virginia conforms to the federal provisions. Because the losses were reported as "capital losses" on the consolidated federal return, the auditor was justified in relying on this characterization and adding back excess losses included in the taxpayer's federal taxable income.
You state that your review of the related federal forms 1120 and 4797 indicates that the losses arose from the sale of assets used in the taxpayer's business; therefore, IRC §1231 should apply and the losses, which exceeded the taxpayer's gains, should be treated as ordinary losses and allowed in their entirety. However, no documentation has been supplied to substantiate your claim. According to the auditor, supporting schedules were not available at the time of the audit, and no such information has been provided with your letter. Without the federal forms and supporting schedules, the department is unable to determine the character of the losses.
Because a consolidated federal return was filed which included corporations not subject to taxation in Virginia, it is possible that the consolidated §1231 gains exceeded losses, resulting in capital treatment for all such gains and losses for federal purposes, but a single corporation's losses might have exceeded its gains, meaning all its §1231 losses and gains would be treated as ordinary income on a separate Virginia return.
The department will allow you to submit documentation to substantiate your claim that the taxpayer's losses qualify for treatment under IRC § 1231. The documentation must include federal Form 4797 and supporting schedules, as filed with the Internal Revenue Service, showing the proceeds, basis and gain and loss amounts for each corporation. The documentation must be sufficiently detailed to reconcile to amounts reported on the consolidated federal return and on the separate Virginia return. Should you choose to submit the information, please send it to the department's Technical Services Section, P.O. Box 6-L, Richmond, Virginia 23282, within 30 days.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner