Tax Type
Corporation Income Tax
Description
Returns of affiliated corporations; Equity method of accounting
Topic
Returns and Payments
Date Issued
05-22-1995
May 22, 1995
Re: §58.1-1821 Application: Corporate Income Tax
Dear*******
This will reply to your letter of February 28, 1995, in which you protest an assessment made by the department against*********( the"Taxpayer").
FACTS
On its 1990 federal consolidated income tax return, the Taxpayer Included "income of subsidiaries reported on the equity method" as part of its federal taxable income on a separate company basis. This amount represents the income earned from an investment in another corporation, as recorded using the equity method of accounting for financial reporting. This income was eliminated in consolidation on the federal income tax return. When the Taxpayer filed a Virginia consolidated return including different members than the federal return, this income was excluded from the Taxpayer's federal taxable income as the starting point in the computation of Virginia taxable income. The department's auditor made an adjustment to include this income, less the amounts attributable to subsidiaries included in the Virginia consolidated return, in Virginia taxable income. You appeal this audit adjustment.
DETERMINATION
The computation of Virginia taxable income for a consolidated return begins with the federal taxable Income of those corporations included therein. Generally, federal taxable income for this purpose means that income actually reported to the Internal Revenue Service as taxable income upon which federal tax is imposed. See Virginia Regulation (VR) 630-3-402, § 1.
The equity method of accounting increases the book value of stock In a subsidiary corporation to reflect the subsidiary's income, and treats the increased value as current income to the parent corporation. This is a financial accounting entry that is never included in federal taxable income. Because no taxable event occurred, such as payment of a dividend or a sale of the stock, the Taxpayer's actual federal taxable income is not increased by these transactions.
On the group's federal tax return, this item was removed from consolidated federal taxable income through an elimination adjustment. The subsidiary's income should not have been included in the Taxpayer's federal taxable income in the consolidated return, but the elimination adjustment arrived at the correct result for federal tax purposes. The Taxpayer's adjustment on its Virginia return was necessary to reconcile federal taxable income for Virginia purposes.
Therefore, the audit adjustment to increase federal taxable income by the amounts eliminated on the federal consolidated return was improper. Accordingly, the assessment will be adjusted as provided herein and as reflected on the attached schedule.
If you have any additional questions regarding this ruling, you may contact**********.
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- Sincerely,
Danny M. Payne
Tax Commissioner
- Sincerely,
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OTP/9462P
Rulings of the Tax Commissioner