Tax Type
Corporation Income Tax
Description
Accelerated Cost Recovery System deductions; Partnership losses
Topic
Allocation and Apportionment
Computation of Income
Date Issued
12-28-1993
December 28, 1993
Re: §58.1-1821 Application: Corporate Income Tax
Dear**********
This is in response to your letter of February 25, 1993, protesting the assessment of corporate income tax against********(the "Taxpayer") for the taxable year ending December 31, 1989.
FACTS
The Taxpayer is a member of a combined return group which consists of 15 corporations. As a result of an audit, a number of adjustments were made to the Taxpayer's 1989 income. The Taxpayer protests two types of adjustments that were made to several members. First, the ACRS subtractions taken by three members of the combined return group were denied. The auditor also denied partnership losses of two members of the combined group.
DETERMINATION
When the General Assembly fully conformed to the federal ACRS deductions, taxpayers were allowed to deduct either 10% or 20% of their outstanding balance of unused ACRS subtractions depending on the taxable years in question. Nothing in the law limits the subtraction to not reducing Virginia taxable income below zero. However, the regulations implemented a carryover mechanism for unused ACRS subtractions that required an assumption that amounts that took Virginia taxable income below zero were not used and thus were available for carryover. VR 630-3-323.1 does not address the situation created by the filing of a combined return. However, the regulation does establish the framework for computing the subtraction available in each taxable year, and 5.A.2 of the regulation clearly assumes that a negative Virginia taxable income includes the full ACRS subtraction allowable for the taxable year.
Therefore, a corporation which is a member of a combined group may include its full ACRS subtraction in its separately computed Virginia taxable income in lieu of a carryover to subsequent taxable years. If the result is a negative Virginia taxable income, then income of other members of the group may be offset in the combined Virginia return. Of course, if any of the ACRS subtraction is used to reduce Virginia taxable income below zero in this manner, none of it will be available for carryover.
The second contested adjustment arose because the auditor removed partnership property from the apportionment factors of two corporate members on the grounds that the factors of limited partnerships do not flow through to corporate partners, citing P.D. 88-235 (8/10/88). As a result, the apportionment factors of the two corporations were reduced from 100% to 0%. Both partnerships' sole activities were the operation of businesses in Virginia. Therefore, the income from these partnerships was income from Virginia sources. Both of the corporations involved were incorporated under Virginia law and their sole activities were the holding of the limited partnership interests.
Virginia Code §58.1-405 provides that the Virginia income tax is imposed on the entire Virginia taxable income of a corporation unless it is subject to tax in another state, in which case the income is allocated and apportioned. The facts indicate that the two corporations clearly have income from Virginia sources and are subject to Virginia income tax. There is no indication that either corporation is subject to taxation in any other state. Therefore, they are not allowed to allocate and apportion income and the entire income or loss of the limited partnerships and any other income of the two corporations is subject to Virginia income tax and included in the combined Virginia taxable income of the group.
As a convenience, audit reports often show corporations not eligible to allocate and apportion income at all (because they are not subject to tax in any other state) as having an apportionment factor of 100%. Similarly, corporations that do not have sufficient nexus with Virginia to be subject to tax are sometimes shown as having an apportionment factor of 0%. This method enables audit reports to start with information as shown in the taxpayer's return and make adjustments to arrive at the correct tax. In this case, the corporations are subject to Virginia income tax but are not eligible to allocate and apportion income at all. However, the audit report for the combined group can achieve the correct result if both corporations are shown as having an apportionment factor of 100%.
Accordingly, the audit report will be revised to allow the full ACRS subtractions and partnership losses as shown in the Taxpayer's return. Although other adjustments were made, they appear to have a negligible impact on the group's assessment. Therefore, the assessment will be abated.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/6790L
Rulings of the Tax Commissioner