Tax Type
Corporation Income Tax
Description
Net operating loss adjustments; Combined return
Topic
Corporate Distributions and Adjustments
Date Issued
03-31-1994
March 31. 1994
RE: §58.1-1821 Application; Corporate Income Taxes
Dear***********
This will reply to your letter dated April 8, 1993, in which you make application for correction of the assessment for additional corporate income tax to *****(the "Taxpayer") for fiscal year ended December 31, 1988.
FACTS
The Taxpayer was audited for 1987 and 1988 and numerous adjustments were made. In the course of the audit an adjustment was made to increase the Taxpayer's Virginia taxable income for net operating losses claimed by two members of a Virginia combined return. The Taxpayer has appealed the assessment on the basis that the net operating losses should be allowed as a deduction. The Taxpayer has also contested an adjustment made by the department's auditor with respect to deferred intercompany transactions.
DETERMINATION
The department's auditor disallowed the net operating losses incurred in taxable year 1988 after learning that these losses had been carried back to earlier separate return years. This adjustment is appropriate because the 1988 combined Virginia return does not reflect a loss after all audit adjustments have been applied. See VR 630-3-442 F.3.a, copy attached. However, the auditor's adjustment exceeds the amount of the net operating loss that was actually carried back after consideration of the Virginia modifications made in the carryback years.
On the Virginia amended returns (Forms 500-NOLD) filed to carry back the 1988 net operating losses, modifications were made in the carryback years to account for the positive taxable income of other members of the combined return offset by the 1988 net operating loss. These modifications are necessary to prevent a double benefit from net operating losses that have offset the Virginia taxable income of other companies. Because the 1988 combined Virginia taxable income, after considering audit adjustments, is not a loss, a modification equal to 100% of the federal net operating loss is required. The modifications reported on the amended returns for 1985 and 1986 were less than 100% of the NOLD absorbed, which creates a prohibited double benefit when the NOL is also used to offset income in the 1988 combined return. See VR 630-3-442 F.1., copy attached.
Therefore, the auditor's adjustment to 1988 income to eliminate the double benefit is upheld, but will be corrected to reflect only the amount for which the Taxpayer received a double benefit.
The Taxpayer has presented evidence demonstrating that the deferred intercompany transactions added back by the department's auditor with respect to I.R.C. §453A installment sale income in the 1988 taxable year were already included in federal taxable income determined as a separate company for Virginia purposes. Accordingly, the audit adjustment for this item shall be reversed.
The assessment shall be adjusted as provided herein and as reflected on the attached schedules. The balance due,*************should be paid within 30 days to prevent the accrual of additional interest. Your payment may be sent to ***********Office of Tax Policy, Department of Taxation, P.O. Box 1880, Richmond, Virginia 23282-1880.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/6924M
Rulings of the Tax Commissioner