Tax Type
Corporation Income Tax
Description
Change in inventory accounting method
Topic
Accounting Periods and Methods
Computation of Income
Taxable Income
Date Issued
04-14-1993
April 14, 1993
Re: §58.1-1821 Application; Corporation Income Tax
Dear********************
This will reply to a letter of July 21, 1992 from*************in which you seek correction of a corporate income tax assessment for ************* (the "Taxpayer"). We are responding directly to you as there is no power of attorney on file for**************.
FACTS
The Taxpayer was required to change its method of accounting for inventory pursuant to the Tax Reform Act of 1986. The change required that inventory be increased in accordance with Internal Revenue Code (IRC) §263A, resulting in the recognition of additional income at the state and federal levels. The IRS permitted the Taxpayer to prorate the recognition of the additional income over a period of years. These changes occurred prior to the Taxpayer becoming liable for Virginia corporation income taxes. The Taxpayer first began doing business in Virginia in July, 1989.
The Taxpayer claimed a subtraction for the proration of income recognized in the taxable year ended November 30, 1990, asserting that the prorated income should not be subject to Virginia tax. The subtraction was disallowed upon office audit.
DETERMINATION
Va. Code §58.1-440 (copy enclosed) provides that any accounting adjustments made for federal income tax purposes for any taxable year shall be applied in computing the taxpayer's Virginia taxable income for the same year.
In this case, the Taxpayer's method of accounting for inventory was changed in order to apply the provisions of IRC §263A (uniform capitalization). Adjustments were made for federal purposes in accordance with IRC §481, allowing the Taxpayer to prorate the additional income resulting from the new accounting method over a period not to exceed four years, beginning with the first year beginning after 1986. Because Virginia taxable income is based upon federal taxable income, the adjustments made to federal taxable income for any taxable year also apply to the computation of Virginia taxable income for the same taxable year. The additional income included in federal taxable income must be included in Virginia taxable income.
You contend that, because the income was earned when the Taxpayer was not active in Virginia, the income recognized on the federal return due to the IRC §481 adjustment should not be subject to corporate income tax in Virginia.
The Virginia corporate income tax is imposed on the Virginia taxable income of every corporation having income from Virginia sources. Virginia taxable income is defined as federal taxable income with certain specified additions, subtractions and exemptions. For purposes of computing Virginia taxable income, the term "federal taxable income" means all income from whatever source derived and however named on which a federal tax is imposed. There is no provision in the Code of Virginia which allows the subtraction claimed for additional income recognized as a result of a change in accounting methods.
Accordingly, the assessment is correct as made and is now due and payable. You will shortly receive an updated bill with interest accrued to date which must be paid in full to avoid additional interest and collection actions.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/6406M
Rulings of the Tax Commissioner