Tax Type
Corporation Income Tax
Description
Accounting methods; Installment sales
Topic
Accounting Periods and Methods
Date Issued
08-25-1995
August 25, 1995
Re: § 58.1-1821 Application: Corporate Income Tax
Dear***********
This will reply to your letter of December 2, 1994, concerning the 1990 and 1991 Virginia corporate income tax assessment for***************(the "Taxpayer").
FACTS
The Taxpayer, a bank, was audited by the department, and numerous adjustments were made. You have contested two adjustments, which will be addressed separately below.
DETERMINATION
Employee Stock Ownership Program (ESOP)
The Taxpayer loans funds to companies that use the funds to acquire employer securities for ESOPs. Fifty percent of the interest income is excludible from federal taxable income under Internal Revenue Code § 133(a)(1). In the audit, the interest income was added to federal taxable income and considered as income from an obligation of a state other than Virginia. You contend that there is no provision in Code of Virginia § 58.1-402 which requires an addition to federal taxable income for excluded ESOP interest.
The interest income received by the Taxpayer from loans made to acquire ESOP securities is not attributable to obligations of states other than Virginia or obligations of a federal instrumentality. The exclusion of fifty percent of this interest income is allowable in determining federal taxable income, and there is no provision in the Code of Virginia which requires this interest income to be added back to federal taxable income in computing Virginia taxable income. Therefore, the audit adjustment for this interest exclusion shall be reversed.
Installment Sale of Credit Card Loans
During taxable year 1990, the Taxpayer sold credit card loans to an affiliated corporation at a gain. The sale was made on an installment basis with the installment payments beginning in taxable year 1991. In 1991, the Taxpayer reported a portion of the gain attributable to the installment sale. The department's auditor added the full amount of the gain received from the sale to 1990 taxable income since an installment sale election was not made on the 1990 federal return by attaching federal Form 6252-Installment Sale Income.
As provided in Internal Revenue Code § 453(a), income from an installment sale must be accounted for using the installment method unless the seller elects not to use this method. A taxpayer may elect out of the installment method by indicating as such in the margin of Schedule D or Form 4797. When making this election, the entire gain is reported in the year of the sale.
In the instant case, the Taxpayers installment sale is accounted for under the installment method as they did not affirmatively elect out of the installment method. Further, the Taxpayer incurred no gains for taxable year 1990 as no payments were received until the following year. Therefore, the 1990 adjustment attributable to the installment sale gain will be reversed and the appropriate portion of the gain will be included in taxable income for the 1991 taxable year.
Accordingly, the 1990 and 1991 assessments shall be adjusted for as provided herein and as reflected on the enclosed schedules. Payments have been applied to both assessments. The overpayment of**********will be refunded to you in due course, plus statutory interest.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8935N
Rulings of the Tax Commissioner