Tax Type
Corporation Income Tax
Description
ACRS modifications; Affiliated corporations
Topic
ACRS Modifications
Returns/Payments/Records
Date Issued
03-25-1993
March 25, 1993
Re: Va. Code § 58.1-1821 Application: Corporate Income Tax
Dear************************
This will reply to your letter dated August 19, 1992 in which you request a correction of an assessment from an office audit of ***** (the "taxpayer").
FACTS
The stock of the taxpayer was sold by one corporate affiliated group to another in a transaction which all parties elected to treat as a sale of assets under Internal Revenue Code (I.R.C.) § 338(h)(10). At the time of the sale, the taxpayer had an ACRS subtraction amount remaining, which it claimed on its final Virginia income tax return filed while a member of the selling affiliated corporate group.
The amount claimed was disallowed during an office audit. You protest this disallowance, citing Public Document (P.D.) 91-317 (12/30/91) in support of your position. You point out that this public document provides that an I.R.C. § 338(h)(10) federal election will be recognized for Virginia income tax purposes exactly as it is for federal tax purposes.
There is another assessment attendant to the same tax period, which is a late filing penalty and interest for the taxpayer's final return as a member of the selling group. The taxpayer, which has a 52/53 week taxable year ending in July 1991 in the instant case, has paid the interest amount. For administrative convenience, I will discuss this assessment in this ruling.
DETERMINATION
Recently adopted amendments to Virginia Regulation (VR) 630-3-442 under Virginia Code § 58.1-442 reinforce P.D. 91-317, by providing that the Virginia returns of the affected selling group members in a I.R.C. § 338(h)(10) election "shall reflect the amount and character of income recognized in the federal consolidated return." While this may be interpreted to mean that a final Virginia return is required because of the final federal return filed for purposes of the election, it is important to note the circumstances under which a final Virginia income tax return may trigger a taxpayer's claim for its entire balance of excess ACRS cost recovery.
Final Virginia Return: When any taxpayer files a final federal return due to the dissolution of a corporation, for any taxable year beginning on and after January 1, 1988, the entire outstanding balance of ACRS recovery may be claimed on the final Virginia return. See VR 630-3-323.1, § 6.
Corporate Dissolution: In the case of an I.R.C. § 338(h)(10) election, the target corporation is not actually dissolved for purposes of VR 630-3-323.1, § 6, for several reasons.
First, the new target corporation keeps the same federal employer identification number as the old target, implying that the same legal entity remains both before and after an I.R.C. § 338(h)(10) election. See I.R.S. Temporary Regulation (Temp. Reg.) § 1.338-1T(f)(4), and Revenue Ruling (Rev. Rul.) 63-257 (1963-2, C.B. 614). Second, the new target is liable for the tax liabilities of the old target, and "for purposes of subtitle F of the Internal Revenue Code, new T (target) is treated as a continuation of old T (target)." See Temp. Reg. § 1.338-4T(l)(1). Third, the old and new target corporations are treated as a single employer for purposes of (1) applying rules applicable to certain employee benefit plans and (2) applying the I.R.S. rules relating to the mitigation of the effect of a statute of limitations. See Temp. Reg. § 1.338-4T(l)(4) & (5). There are several other provisions in the Internal Revenue Code that speak about a "final return," or allow anew target to elect a new taxable year or accounting period (see Temp. Reg. § 1.338-1T(f) (7)). However, these provisions appear to be in place to facilitate the change in ownership of the target corporation, and the election that a sale of stock be treated as a sale of assets, and do not sufficiently demonstrate a "dissolution" of the underlying target corporation as a legal entity doing business in Virginia.
Also, the taxpayer could not have dissolved under Virginia law, because it did not file articles of termination of existence with Virginia (according to the Virginia State Corporation Commission), and continued to do business in its same corporate form both before and after the I.R.C. § 338(h)(10) election. See Va. Code § 13.1-750 et.seq.
Based upon the above analysis, the taxpayer is not permitted to take the full ACRS subtraction on its "final" federal return filed as a member of the selling group.
Net Operating Loss Attributes: Under Virginia regulations, a "successor" corporation in some form of a reorganization is permitted to take the ACRS subtractions, pursuant to the same schedule permitted for all other ACRS subtractions. See VR 630-3-323.1, § 8 & § 5. A successor corporation is one that would be allowed to utilize the target's federal net operating loss (if one exists) under federal income tax law.
In an I.R.C. § 338(h)(10) election, the owner of the target stock (previous to the sale of the target) succeeds to the target's net operating losses remaining. See Temp. Reg. § 1.338(h)(10)-1T(d)(9)(3). Since the ACRS subtraction follows the federal net operating loss, the original affiliated group that is selling the taxpayer's stock succeeds to the taxpayer's remaining ACRS subtraction. Further, since the selling group utilizes the taxpayer's remaining ACRS subtraction, utilization by the purchasing group is not permitted.
This result is consistent with what would have happened if there had been a real sale of the assets followed by a real dissolution. When assets are sold, the seller retains any ACRS subtractions -- they do not follow the assets. When a corporation is dissolved the ACRS subtractions go to the successor. All of the subtractions may be claimed on a final return only if there is no successor.
Accordingly, the assessment pertaining to the ACRS depreciation subtraction is upheld, and your refund claim is denied.
Assessment for Late Filing Penal and Interest: In a I.R.C. § 338(h)(10) election, the target corporation's final federal return is filed with the selling group's consolidated federal return, which is due by the fifteenth day of the third month following the end of the taxable year. In the instant case, the Virginia income tax return is due one month after the federal return is filed; and therefore, is considered to be timely filed. Accordingly, this assessment is abated, and the interest previously paid by the taxpayer will be refunded. See P.D. 92-123 (6/9/92) (copy enclosed).
Sincerely,
W. H. Forst
Tax Commissioner
OTP/6380G
Rulings of the Tax Commissioner