Tax Type
Corporation Income Tax
Description
Virginia Tax Treatment of IRC Sec. 338(h)(10) Election
Topic
Corporate Distributions and Adjustments
Date Issued
12-30-1991
December 30, 1991
Re: Corporation Income Tax
Virginia Treatment of Federal Section 338(h)(10) Election
Dear********************
This is in reply to your letter requesting guidance regarding the Virginia treatment of an election under Internal Revenue Code (I.R.C.) §338(h)(10).
Background: An election under IRC §338 allows a purchaser of stock in a target corporation to obtain a stepped up basis in the target's assets as if there had been a direct purchase of the assets. In order to avoid potential double taxation, IRC §338(h)(10) allows the purchaser and seller to make a joint election, provided that the target and seller are part of an affiliated group of corporations that file a consolidated federal return. The result of the election is that a series of fictitious steps are deemed to have occurred:
- The target is deemed to have sold its assets, recognizing gain or loss that must be included in the selling group's consolidated federal return;
- The target is deemed to have distributed all its assets in a complete liquidation to which IRC §332 applies;
- Any gain or loss on the sale of target stock incurred by the selling group is ignored.
In all cases, if the seller, target, purchaser or any combination thereof are Virginia taxpayers the §338(h)(10) election actually made on a federal return will be recognized exactly as it is for federal purposes. To the extent that any gain or loss is deemed to be recognized for federal purposes by any party it will be similarly recognized by the applicable entity for Virginia purposes. A separate Virginia election with no accompanying federal election is not allowed.
Property apportionment factor: Assuming that the target is subject to taxation in Virginia, the selling group would include its real and tangible personal property in the consolidated apportionment factor. Because the deemed sale results in a substantial fluctuation in value, the selling group is required to use monthly property values of the target's assets in computing both the average numerator and denominator for the group. The stepped up value resulting from the deemed sale is used as the "original cost" for the month of the deemed sale. (See Virginia Regulation (VR) 630-3-411.) The target would use the stepped up basis as the original cost after it is acquired by the purchaser.
Sales apportionment factor: The selling group's consolidated sales factor shall include the deemed gross proceeds arising from the deemed sale of target's assets. The numerator shall include the gross proceeds attributable to (1) real or tangible property located in Virginia on the day of the transaction and (2) intangible property if the target's headquarters is in Virginia. In any event, the selling group's consolidated sales factor numerator or denominator will not include any deemed sales proceeds or proceeds from the sale of target stock if the target is not subject to Virginia tax.
Administrative issues: Assuming that the target is subject to taxation in Virginia and that the selling group files a consolidated or combined Virginia return, the Virginia return would include the target's income up to the date of the sale, including the deemed gain or loss on the sale of target's assets. If the selling group files separate Virginia returns, then the target's taxable year would be deemed to end on the date it was sold and a return for the short taxable period would be required.
The Virginia return and tax is due on the 15th day of the 4th month following the close of the taxable period. When the selling and/or purchasing groups extend their federal return, including the extension allowed for electing treatment under §338(h)(10), the Virginia separate, combined or consolidated returns are similarly extended. However, the due date for the tax payment is not extended and interest will be charged for the period commencing with the original due date of the tax to the date paid. See VR §630-3-453.
Since there is no "deemed sales return" (commonly referred to as a "one day return") required for federal purposes under a §338(h)(10) election, none is required for Virginia.
A complete copy of the selling group's federal consolidated return, including all schedules and supporting documents supplied to the IRS, must be included with the Virginia return. See VR 630-3-442.
If you require additional information regarding specific fact situations, do not hesitate to contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
TPD/3734G
Related Documents
Rulings of the Tax Commissioner