Tax Type
Corporation Income Tax
Description
Subtraction for previously taxed income; Consolidated return; Affiliated corporations
Topic
Subtractions and Exclusions
Date Issued
03-17-1993
March 17, 1993
Re: §58.1-1821 Application: Corporate Income Taxes
Dear**************
This will reply to a letter dated September 12, 1991, in which you applied for correction of the assessment for additional corporate income tax to *************** (the "Taxpayer") for the fiscal year ended March 31, 1989.
FACTS
The taxpayer files a consolidated federal and a separate Virginia return. On the Taxpayer's Virginia income tax return for the fiscal year ended March 31, 1989, a subtraction from federal taxable income was claimed for "previously taxed income." An office audit of the return resulted in the disallowance of the subtraction.
The information provided shows that several subsidiaries were merged into the Taxpayer in December of 1988. A separate Virginia income tax return was filed by a subsidiary which had income from Virginia sources, for the period ending on the date of the merger. Virginia income tax was paid on this income. The other merged subsidiaries did not have income from Virginia sources. When the Taxpayer's consolidated federal return was filed it included the income of the subsidiaries. If separate federal returns had been filed the Taxpayer's federal return would not have included the income of the subsidiaries. The "previously taxed income" claimed as a subtraction was the income from the merged subsidiaries.
DETERMINATION
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. See Virginia Regulation {VR) 630-3-442 and, for example, VR 630-3402 (1)(B)(5)(v).
The income from the subsidiaries should not have been included in the Taxpayer's separate federal taxable income. The income from the subsidiaries should have been eliminated on a worksheet in arriving at the Taxpayer's separate federal taxable income.
On the separate Virginia return the Taxpayer reported as "federal taxable income" the amount shown on the consolidated federal tax return. This amount included income from the subsidiaries. The subsidiaries' income, to the extent of the limitations of U.S. Public Law 86-272 (15 U.S.C.A Sections 381-384) was previously reported on a separate Virginia income tax return. This income was listed as a subtraction on the Virginia return. 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
TPD/5639M
Rulings of the Tax Commissioner