Tax Type
Corporation Income Tax
Description
Combined return; Net operating loss deduction of subsidiary
Topic
Returns/Payments/Records
Date Issued
11-16-1992
November 16, 1992
Re: §58.1-1821 Application; Corporation Income Tax
Dear******************
This will reply to your letter of January 30, 1989, in which you seek correction of corporation income tax assessments for********************(the "Taxpayer").
FACTS
The Taxpayer filed a combined Virginia income tax return with its affiliates for the taxable years ended 1984 and 1985. The Taxpayer was audited and numerous adjustments were made, resulting in the assessment of additional tax. Since the audit report was issued, the assessment for 1985 has been abated. Therefore, this letter will address only those issues raised in connection with the audit for 1984.
DETERMINATION
ACRS addback: The auditor increased the ACRS addback for the************* ("Subsidiary #1"). You contend that not only is the auditor's adjustment incorrect, but that the addback reported by the Taxpayer was in excess of the correct amount.
A review of federal Form 4562 shows the amount of ACRS depreciation subject to the addback and verifies the addback amount you propose. The audit report has been revised to remove the auditor's adjustment and to reduce the addback to the amount you have computed.
Nexus: **************("Subsidiary #2") reported a loss on the 1984 combined return. The Taxpayer included Subsidiary #2 in its combined return based on the receipt of proceeds from a prior year's installment sale of real property located in Virginia. The auditor determined that this was insufficient to establish nexus with Virginia and removed the Subsidiary #2 from the combined return.
To be included in a Virginia combined tax return, a corporation must be subject to Virginia income tax, if separate returns were to be filed. See Virginia Regulation (VR) 630-3-442. Corporations organized under Virginia law and foreign corporations having income from Virginia sources are subject to Virginia tax. Generally, a corporation will have income from Virginia sources if there is sufficient business activity to make one or more of the applicable apportionment factors positive.
A review of the audit report indicates that Subsidiary #2 had no property or payroll in Virginia. Subsidiary #2 reported a positive sales factor, based on the inclusion of the proceeds from the installment sale in the numerator.
For purposes of computing the sales factor numerator in years subsequent to the origination of an installment sale, the gross profit and interest income from installment notes are included in the Virginia numerator only if the recordkeeping and collection activities are performed in Virginia. See VR 630-3-416.D., Example 4. In this case, Subsidiary #2 had no activities in Virginia; all collection and income producing activities in the year of receipt occurred outside Virginia. Therefore, the receipts from the installment note are not to be included in the numerator of the sales factor.
Subsidiary #2 had no positive apportionment factors and, therefore, did not have income from Virginia sources. With no income from Virginia sources, Subsidiary #2 was not subject to Virginia income tax, and was not eligible to be included in the combined return. Accordingly, the auditor's adjustment is correct.
NOLD carrybacks: You assert that the auditor omitted an NOLD from the taxable year ended May 31, 1984 in computing taxable income for the taxable year ended December 31, 1984 for ("Subsidiary #3").
Virginia law has no separate provision for a net operating loss deduction (NOLD). Therefore, an NOLD is allowable for Virginia purposes only to the extent that the NOLD is allowable as a deduction in computing federal taxable income for Virginia purposes, i.e., as if federal returns had been filed on the same basis as Virginia returns for all affected years.
At the time the audit was conducted, documentation verifying federal taxable income was not available for the taxable year ended May 31, 1984. Therefore, the auditor was justified in disallowing the NOLD. You have not provided federal information to substantiate the amount of the NOLD being carried back. Furthermore, the information supplied to the auditor indicates that Subsidiary #3 reported income, and not a loss, on its federal return for the year in question. Without more information, the NOLD cannot be allowed.
You also contend that the auditor omitted NOLD's from the taxable year ended November 24, 1986 in computing taxable income for the taxable year ended December 31, 1984 for Subsidiary #1 and for***************"Subsidiary #4").
The NOLD carried back for Subsidiary #1 has been reviewed and verified. The audit report has been revised to include the NOLD in computing the taxable income of Subsidiary #1 for the taxable year ended December 31, 1984.
For Subsidiary 4, the auditor indicated that there was no documentation provided to substantiate the NOLD from the taxable year ended November 24, 1986. The only information received for that year was Form 500-NOLD, Corporation Application for Refund from the carryback of the NOL. This is not sufficient to substantiate the federal NOLD for that year.
Accordingly, the department will allow you to submit information to substantiate the NOLD from the taxable year ended May 31, 1984 for Subsidiary #3 and the NOLD from the taxable year ended November 24, 1986 for Subsidiary #4. The information should include copies of the federal returns for the years to which the losses were carried. Should you choose to submit this information, please send it to the department's Technical Services Section, P.O. Box 1880, Richmond, VA 23282-1880, within 30 days.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/3109F
Rulings of the Tax Commissioner