Tax Type
Corporation Income Tax
Description
Capital losses; Foreign source income and expenses
Topic
Allocation and Apportionment
Returns/Payments/Records
Subtractions and Exclusions
Date Issued
04-27-1992
April 27, 1992
Re: § 58.1-1821 Application; Corporation Income Tax
Dear ****
This will reply to your letter of May 31, 1990, in which you seek correction of corporation income tax assessments for ***** (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 numerous adjustments were made. The issues you raise will be addressed separately.
DETERMINATION
Capital losses: 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 (IRC) § 1231 treatment and propose that they be allowed as ordinary losses in computing Virginia taxable income.
The department has previously ruled on the treatment of capital losses and § 1231 losses, and the possibility of different characterization for consolidated federal return and separate Virginia return purposes. See P.D. 91-225 (9/18/91) (copy enclosed).
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 the supporting schedules, the department is unable to determine the character of the losses.
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.
Addition to Virginia Taxable Income - Taxes: The taxpayer increased its Virginia taxable income by income taxes deducted on the federal return. The auditor increased the income by adding back additional taxes deducted on the federal return. You claim that these taxes should not have been added back, because they are measured by capital, not by net income.
Va. Code § 58.1-402 B.4. provides that any net income taxes or other taxes which are based on, measured by, or computed with reference to net income, imposed by Virginia or any other taxing jurisdiction and deducted in determining federal taxable income shall be added to Virginia taxable income.
It appears that the auditor reconciled to total state taxes deducted on the federal return. The taxpayer has not provided a breakdown of state taxes to substantiate its claim that a portion of the state taxes deducted were not measured by or computed with reference to net income. Therefore, the auditor was justified in adding back the entire amount of state taxes deducted on the federal return. If the taxpayer chooses to furnish the department with a breakdown of the taxes, the department will consider it.
Foreign source income and expenses: The auditor proposed a subtraction for foreign source income net of expenses. While you agree with the application of the law, you disagree with the computation of the subtraction and maintain that the auditor's proposed subtraction overstates Virginia taxable income.
You have provided a calculation of an adjusted foreign source income subtraction, based on your review of federal Form 1118. However, no documentation has been provided to substantiate your figures. Absent federal Form 1118 and the supporting schedules to support your calculations, the department cannot accept your position.
The department will allow you to submit additional information to support your foreign source income subtraction. The documentation must include federal Form 1118 and supporting schedules, as filed with the Internal Revenue Service, showing the income and expense items for each corporation. The documentation must be sufficiently detailed to reconcile to amounts reported on the consolidated federal return and the separate Virginia return.
Should you choose to submit the required information regarding § 1231 losses, a breakdown of state taxes deducted on the federal return, and foreign source income documentation, 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