Tax Type
Corporation Income Tax
Description
Removal of subsidiary from consolidated return
Topic
Collection of Tax
Date Issued
07-25-1994
July 25, 1994
Re: §58.1-1821 Application; Corporate income taxes
Dear***********
This will reply to your letters of July 12, 1994, June 30, 1994, and January 23, 1993, in which application was made for correction of assessments of additional corporate income tax to
********** (the "Taxpayer") for the taxable years ended December 31, 1989, 1990 and 1991. I apologize for the delay in responding.
FACTS
The Taxpayer was the subject of a field audit, and numerous adjustments were made. The Taxpayer protests an adjustment made to remove a subsidiary from the Taxpayer's consolidated return. The Taxpayer also contests the department's taxation of a gain on the sale of the same subsidiary in 1990.
DETERMINATION
The Taxpayer filed a Virginia consolidated return for 1989 and 1990. During each of these two years, the consolidated return contained two corporations; the Taxpayer and the Subsidiary. The Subsidiary operated outside of and did no business in Virginia. Because the Subsidiary had no Virginia property, payroll, or sales, it was eliminated from the Virginia return.
VR 630-3-442 provides that in order to be included in a Virginia consolidated return, a corporation must be subject to Virginia tax if separate returns were filed. Generally, a corporation must have sufficient business activity within Virginia to make one or more of the applicable apportionment factors positive. See Public Document (P.D.) 92-238 (11/16/92), copy attached.
In the instant case, the facts indicate that the Subsidiary had no positive Virginia apportionment factors. Accordingly, the auditor's adjustment to exclude the Subsidiary from the consolidated return must be upheld.
The Taxpayer believes that if the Subsidiary is removed from the consolidated return, thereby eliminating the losses realized by the Subsidiary from Virginia taxable income, then the gain realized by the Taxpayer upon the sale of the Subsidiary should not be taxed by Virginia.
The gain realized by the Taxpayer is included in its federal taxable income. Therefore, it is properly included in the starting point for determining Virginia taxable income. However, where federal and Virginia returns are filed using different methods, or containing different members, federal taxable income must be determined as if only the corporation(s) contained in the Virginia return were contained in the federal return.
In the instant case, the gain from the sale of the Subsidiary reported by the Taxpayer on its federal consolidated tax return was determined by reducing the Taxpayer's basis in the Subsidiary by the Subsidiary's consolidated operating losses. If the Subsidiary had not been included in the federal consolidated return, the Taxpayer's stock basis would not have been reduced by these losses. Accordingly, in determining federal taxable income for Virginia purposes, the Taxpayer may determine its gain from the sale of the Subsidiary as if separate federal returns had been filed.
As a result of the adjustments made to 1990, the Taxpayer has an unused ACRS subtraction which may be carried to 1991. An adjustment will be made to the 1991 assessment to reflect the
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 ******, c/o Office of Tax Policy, Department of Taxation, P.O. Box 1880, Richmond, Virginia 23282-1880.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/6728M
Rulings of the Tax Commissioner