Tax Type
Corporation Income Tax
Description
Capital losses; Ancillary business income
Topic
Taxable Income
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 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 Service (IRC) § 1231 treatment and propose that they be allowed as ordinary losses in computing Virginia taxable income. You also contend that the sales factor denominator should be adjusted to include "ancillary business income."
DETERMINATION
Capital losses: 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 income 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.
Sales factor: The auditor adjusted the sales factor to include interest income. You agree with this adjustment, but assert that the auditor failed to include "ancillary business income" in the denominator of the sales factor.
The Virginia sales factor is a fraction, the numerator of which is total sales in Virginia during the taxable year. The denominator is the total sales of the corporation everywhere during the taxable year.
The term "sales" means the gross receipts of the corporation from all sources (except dividends, which are allocable), whether or not such gross receipts are generally considered sales. Sales are to be included in the sales factor if the gross receipts are included in Virginia taxable income and are connected with the conduct of the taxpayer's trade or business within the United States.
"Ancillary business income" was excluded from the sales factor denominator because the taxpayer could not identify the source of the receipts. The auditor requested the source information during the audit, but none was furnished.
The department cannot allow a taxpayer to include in the denominator of the sales factor receipts from an unknown or unspecified source. Only receipts or income that can be readily attributed to a particular state (or assigned to the numerator of the sales factor of a particular state) may be included in the denominator. To do otherwise would allow a taxpayer to inflate the denominator and distort the sales factor.
You now assert that the "ancillary business income" is from sources without Virginia; however, no source information has been provided to substantiate your claim. Absent documentation showing the source of the receipts, the department will not accept your position.
The department will allow you to submit information detailing the sources of the "ancillary business income." The information must be sufficiently detailed to reconcile to amounts reported on the consolidated federal return and the separate Virginia return and must clearly show the receipts to be included in the denominator and the states to which they are attributed.
Should you choose to submit the required information regarding the § 1231 losses and the source information for the excluded "sales," 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