Tax Type
Corporation Income Tax
Description
Taxable income; Profit from sale of bonds
Topic
Computation of Income
Date Issued
01-11-1995
January 11, 1995
Re: §58.1 -1821 Application: Corporate income taxes
Dear***************
This will reply to your letter of November 28, 1994, in which you have contested the assessment of additional corporate income taxes to****************(the "Taxpayer") for the taxable years ended December 31, 1991 and 1992.
FACTS
The Taxpayer, a dealer in securities, was audited by the department and an adjustment was made to the subtraction claimed for the gain on the sale of certain Virginia bonds. The Taxpayer claimed a subtraction for the gain realized on the sale of certain Virginia bonds, as provided by various provisions in the Code of Virginia. However, in computing the amount of the subtraction, the Taxpayer did not reduce the gain realized by selling commissions paid to brokers with respect to such sales. The department's auditor reduced the subtraction claimed by the amount of commissions paid with respect to such sales. You contest the department's adjustment, and believe that the subtraction should not be reduced by selling commissions.
DETERMINATION
The Taxpayer claimed a subtraction for the gain recognized on the sale of certain Virginia bonds. This subtraction is not provided for by Title 58.1 of the Code of Virginia, and consequently does not appear in the sections which define Virginia taxable income. Rather, the subtraction is provided in the enabling legislation of various bond authorities found throughout the Code. For example, see Code of Virginia 23-30.33, relating to bonds issued by the Virginia College Building Authority. The subtractions are written in general terms, typically providing for an exemption of "any profit made on the sale thereof."
Neither the Code nor the department's regulations define the term "profit" for purposes of determining the subtraction. The general rule of statutory construction in Virginia is that the words in a statute are to be given their plain meaning.
The Taxpayer cites U.S. Treasury Regulation 1.263(a)-2(e) as support for its position. This regulation provides that "commissions paid in selling securities are an offset against the selling price, except that in the case of dealers in securities such commissions may be treated as an ordinary and necessary business expense" (emphasis added). The Taxpayer believes that this federal language should provide a basis for determining the Virginia subtraction on a gross, rather than a net basis.
The department agrees that dealers in securities receive different federal treatment with respect to commissions. However, we believe that this is because of the overall difference in the tax treatment of a securities dealer. Whereas securities generally produce capital gain or loss subject to special rules, dealers hold securities as inventory, and recognize ordinary gains or losses from the sale thereof. Therefore, the determination of the amount of gain or loss from the sale of a particular security is of little importance to a dealer, and all such activity is netted in order to determine federal taxable income.
Where it is critical to determine the gain or loss from a particular security sale, such as when determining a capital gain or loss, federal law and regulations require sales commissions to be considered a sales expense. In such cases, sales commissions are subtracted from sales proceeds for purposes of determining the gain or loss from the sale of that particular bond.
Because there is no Virginia definition which applies to the term "profit" which the department may rely on for purposes of determining the subtraction, the term should be given its ordinary meaning in Virginia statutes exempting from tax gains on the sale of certain obligations. As such, the department believes that it is appropriate and reasonable to determine the profit from the sale of a bond by subtracting direct sales commissions paid with respect to the sale of such bond. The department also believes this is consistent with federal concepts applied in similar circumstances.
Accordingly, the department finds that the audit adjustment is correct and the assessment must be upheld.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8759M
Rulings of the Tax Commissioner