Tax Type
Corporation Income Tax
Description
Capital losses from consolidated federal return
Topic
Computation of Income
Date Issued
08-24-1992
August 24, 1992
Re: Va. Code §58.1-1821 Application
Dear********************
This will reply to your letter dated November 19, 1991 in which you are in disagreement with an adjustment resulting from a recent audit of**************(the "Taxpayer").
FACTS
The taxpayer was included in a consolidated federal return and filed a combined 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 consolidated federal return. You contend that the losses qualify for Internal Revenue Code (I.R.C.) §1231 treatment and propose that they be allowed as ordinary losses in computing Virginia taxable income.
RULING
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.
I.R.C. §1211 allows a corporation's losses from sales or exchanges of capital assets only to the extent of gains from 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 losses included in the taxpayer's federal taxable income.
You state that your review of the related forms 1120 and 4797 indicates that the losses arose from the sale of assets used in the taxpayer's business; therefore, I.R.C. §1231 should apply and the losses, which exceeded the taxpayer's gains, should be treated as ordinary losses and allowed in their entirety. You have supplied supporting schedules which appear to substantiate this claim.
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. However, a single corporation's losses might have exceeded its gains, meaning that all of its Sec. 1231 losses and gains would be treated as ordinary income for purposes of inclusion in a Virginia combined return.
Accordingly, it appears that on a separate company basis, your claim is substantiated. The audit report will be revised to reflect separate company I.R.C. §1231 losses, and you should receive notice regarding your recomputed tax refund in due course.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner