Tax Type
Corporation Income Tax
Description
Savings and loans associations; Bad debt deduction
Topic
Computation of Income
Date Issued
10-05-1994
October 5, 1994
Re: Ruling Request: Corporate Income Taxes
Dear****************
This will reply to your letter dated January 10, 1994 in which you request a ruling on behalf of your client (the "Taxpayer"), a federally chartered savings and loan.
FACTS
The Taxpayer is a savings and loan operating in Virginia. The Taxpayer is a wholly owned subsidiary and will soon surrender its Federal Charter. The Taxpayer will be liquidated into the parent corporation. However, the parent will continue to operate in Virginia as a mortgage banker.
The Taxpayer uses the Percentage of Taxable Income ("PTI") method under Internal Revenue Code § 593 to compute its bad debt deduction for both federal and Virginia purposes. Savings and loans using the PTI method are allowed a bad debt deduction equal to 6 percent for federal income tax purposes. For Virginia purposes, savings and loans using the PTI method are allowed a bad debt deduction equal to 40 percent of Virginia taxable income. The Taxpayer's aggregate Virginia bad debt deductions exceed the aggregate federal bad debt deductions.
You request a ruling explaining the tax consequences of the Taxpayer ceasing operations in Virginia and whether the Virginia bad debt deduction is permanent or subject to recapture upon dissolution of the Taxpayer.
RULING
Code Of Virginia §58.1403 and Virginia Regulation (VR) 630-3403 allow a subtraction for a Virginia bad debt deduction unique to savings and loans associations. This deduction is in lieu of the federal deduction. The Virginia bad debt deduction is computed after federal taxable income has been adjusted by all the additions and subtractions in Code of Virginia 58.1402 and increased by the federal bad debt deduction .
In the instant case, the aggregate Virginia bad debt deductions exceed the federal bad debt deductions. However, neither Code of Virginia § 58.1403, VR 630-3403 or any other provision of the Code of Virginia requires an addition to Virginia taxable income to recapture such excess deductions in the event that the corporation is liquidated or otherwise ceases operations in Virginia. Accordingly, savings and loan associations ceasing operation, in Virginia are not required to make any special adjustments to Virginia taxable income for these bad debt deductions upon the filing of a final return.
For corporations discontinuing operations in Virginia, VR 630-3-323.1 provides a subtraction for prior additions made to Virginia taxable income for depreciation under the federal Accelerated Cost Recovery System ("ACRS"). For taxpayers that made ACRS additions during the taxable years 1982 through 1987, 6 of this regulation allows for a subtraction to recover all previously unrecovered ACRS additions upon the filing of a final return. Furthermore, if a taxpayer is unable to recover the full tax benefit of this subtraction upon the filing of a final return, §7 of this regulation provides a refund mechanism to recover the remaining tax liability associated with unrecovered ACRS additions. However, §8 of this regulation permits an election whereby the previously unrecovered ACRS, additions can carryover from a liquidated corporation to a successor corporation. (See VR 630-3-323.1, copy attached.)
I trust this will answer the questions posed in your letter; however, please contact********* if you have additional questions or if we may be of any further assistance.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/7589L
Rulings of the Tax Commissioner