Tax Type
Corporation Income Tax
Description
Returns of affiliated corporations; Intercompany sales
Topic
Returns and Payments
Date Issued
04-14-1995
April 14, 1995
Re: §58.1-1821 Application; Corporate Income Tax
Dear****************
This will reply to your letters of June 22, 1994, and March 30, 1995, in which you apply for correction of assessments of additional corporate income tax to (the "Taxpayer") for the 1991 and 1992 taxable years.
FACTS
The Taxpayer was audited and numerous adjustments were made resulting in the assessment of additional tax. You contest two of the auditor's adjustments, and believe that a corresponding reduction of the assessment is appropriate. The issues you raise are addressed separately.
DETERMINATION
Adjustment for deferred intercompany profit on inventory: The Taxpayer claimed a subtraction for deferred profit on intercompany sales of inventory. The auditor disallowed the subtraction because there is no specific provision for such a subtraction in the Code of Virginia.
Pursuant to Internal Revenue Code §1501 an affiliated group of corporations may elect to file a consolidated federal income tax return. In determining federal consolidated taxable income, U.S. Treasury Regulation § 1.1502-13 provides that gains realized from the sale of property between affiliated group members are deferred until the time such property is disposed of outside the affiliated group. These adjustments are often reflected as "eliminations" in arriving at federal taxable income on the consolidated federal return.
In the instant case, the Taxpayer subtracted the deferred gain on inventory sales made between members of the Virginia affiliated group in arriving at federal taxable income. It should be noted that such adjustments on the Virginia return are not "additions" or "subtractions" to federal taxable income as those terms are used in Code of Virginia §58.1-402. Rather, they are adjustments to reconcile federal taxable income for Virginia purposes to federal taxable income actually reported to the Internal Revenue Service. Therefore, the intercompany eliminations are necessary for purposes of determining federal taxable income for Virginia purposes, and the auditors adjustments for these items shall be reversed.
Property Factor: The auditor made adjustments to the denominator of the property factor to eliminate certain property which was no longer in use. However, the Taxpayer has produced schedules which illustrate that this property was already subtracted in determining the property factor as originally reported. Because the auditor's adjustment duplicates the Taxpayer's own actions, it shall be reversed.
Neighborhood Assistance Tax Credit: You question the amount of tax credit allowed by the auditor. As you will see by the attached schedules, the full amount of tax credits to which the Taxpayer is entitled were allowed. The credits increased the amount of the tax overpayment carried forward to subsequent years, which may not have been apparent from the audit report.
Accordingly, the assessments 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************** Department of Taxation, P.O. Box 1880, Richmond, Virginia 23282-1880. If you have any questions regarding this ruling, you may contact******************.
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- Sincerely,
Danny M. Payne
Tax Commissioner
- Sincerely,
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OTP/8415M
Rulings of the Tax Commissioner