Tax Type
Corporation Income Tax
Description
Consolidated federal taxable income
Topic
Taxable Income
Date Issued
04-27-1992
April 27, 1992
Re: Va. Code § 58.1-1821 Application Corporation Income Tax
Dear *************
This will reply to your letter dated August 22, 1991 in which you protest an assessment made by the Department against ***** (the "Taxpayer").
FACTS
On the taxpayer's 1989 separate basis Virginia income tax return, a subtraction from federal taxable income was claimed for "income of subsidiary reported on equity method." This amount represents the income earned from an investment in another corporation, as recorded using the equity method of accounting.
The subtraction was disallowed by the Department during an office audit of the return. You now appeal this disallowance.
RULING
The computation of Virginia taxable income for a separate return begins with federal taxable income. However, if an affiliated group files a separate Virginia return and a federal consolidated return, the separate federal taxable income for Virginia purposes must be computed as if a separate federal return had been filed in all relevant years. See, for example, Virginia Regulation (VR) 630-3-402, § 1.B.5(v).
The equity method of accounting increases the book value of stock in a subsidiary corporation to reflect the subsidiary's income, and treats the increased value as current income to the parent corporation. Because no taxable event occurred, such as the payment of a dividend or a sale of the stock, the taxpayer does not recognize the subsidiary's income or increased stock value when computing the taxpayer's separate federal taxable income.
On the group's consolidated federal tax return this item was removed from consolidated federal taxable income through an elimination adjustment. The subsidiary's income should not have been included in the taxpayer's federal taxable income in the consolidated return, but the elimination adjustment arrived at the correct result for federal purposes.
On the separate Virginia return the taxpayer reported as "federal taxable income" the amount shown on the federal return before the elimination (which included the subsidiary's income) and reported the elimination adjustment as a subtraction. It should be noted that this adjustment on the Virginia return is not an "addition" or "subtraction" to federal taxable income as that term is used in Va. Code § 58.1-402. Technically, this is an adjustment to reconcile federal taxable income for Virginia purposes to federal taxable income actually reported to the Internal Revenue Service. See Public Document 90-95 (6/12/90) (copy attached).
Accordingly, the assessment will be abated.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner