Tax Type
Corporation Income Tax
Description
"Taxable Income" defined; Net Negative Adjustments
Topic
Computation of Income
Date Issued
07-31-1992
July 31, 1992
Re: Va. Code §58.1-1821 Application: Corporation Income Tax
Dear***************
This will reply to your letter dated October 22, 1991 in which you protest an assessment, resulting from an office audit, imposed upon ********** (the "Taxpayer").
FACTS
In 1984, the taxpayer formed a wholly owned subsidiary, with which it filed a federal consolidated return. The taxpayer filed a separate Virginia return, and the subsidiary did not file in Virginia.
Pursuant to U.S. Treasury Regulation §1.1502-32, the taxpayer reduced its basis in subsidiary stock by the subsidiary's losses used to offset the taxpayer's income in the federal consolidated return. This reduction, referred to as a "net negative adjustment," is commonly comprised of subsidiary losses of this nature. An accumulation of net negative adjustments exceeding the original subsidiary stock basis is referred to as the "excess loss account," which is added to federal taxable income upon disposing of the underlying subsidiary stock investment.
When the subsidiary was dissolved, the taxpayer deducted the remaining basis in the subsidiary's stock as a loss on its federal return. No excess loss account was established at the time of dissolution. In the Virginia separate return, the taxpayer subtracted the total net negative adjustment previously accrued.
In an office audit, this subtraction was disallowed, because there is no provision for it in the Code of Virginia. The taxpayer protests this disallowance, citing Public Document (P.D.) 91-59 (3/29/91).
RULING
In P.D. 91-59, the excess loss account was included in federal taxable income upon the deemed disposition of subsidiary stock. Since the taxpayer never filed consolidated Virginia returns, the Department ruled that the subsidiary's losses were never deducted against Virginia income; therefore, no Virginia tax was deferred. For this reason, federal taxable income for Virginia purposes was adjusted by subtracting the excess loss account. This was necessary to show the true, separate Virginia taxable income of the taxpayer, as required for a combined return under §D.l. of VR 630-3-442.
In the instant case, the taxpayer does not want to adjust federal taxable income for Virginia tax purposes to subtract an excess loss account (one did not exist at the time of stock disposition). Instead, the taxpayer is seeking to adjust federal taxable income (for Virginia purposes) by subtracting the cumulative net negative adjustments.
If an affiliated group member files a separate Virginia return and federal consolidated return, respectively, the separate federal taxable income for Virginia purposes must be computed as if a separate federal return had been filed for all relevant years. See, for example, VR 630-3-402, §1.B.5(v). Accordingly, for separate Virginia tax purposes, federal taxable income must be computed without recognizing any intercompany activity deferral, or deduction attributable to consolidated return filing.
The cumulative adjustments to the basis of the stock in a subsidiary are required because the taxpayer and subsidiary filed a federal consolidated tax return. Accordingly, the adjustment to federal taxable income for Virginia tax purposes was proper in the instant case, and this assessment is abated.
Virginia return adjustments of this nature are not "additions" or "subtractions" to federal taxable income as those terms are used in Va. Code §58.1-402; rather, they reconcile consolidated and separate federal taxable income for federal and Virginia purposes, respectively. These adjustments are properly shown on a separate schedule, reconciling the federal taxable income reported to that utilized for Virginia purposes.
Sincerely,
W. H. Forst
Tax Commissioner
TPD/5705G
Rulings of the Tax Commissioner