Tax Type
Corporation Income Tax
Description
Accounting methods; Change in accounting method
Topic
Accounting Periods and Methods
Date Issued
08-21-1996
August 21, 1996
Re: § 58.1-1821 Application: Corporate income taxes
Dear***********
This will reply to a letter dated August 23, 1995 from ***** , your tax preparer, in which you seek correction of assessments of corporate income taxes to ************* (the "Taxpayer") for the taxable years ended September 30, 1993 and September 30, 1994.
I am addressing this letter to you because the department does not have a power of attorney for your tax preparer on file. I apologize for the delay in responding to your case.
FACTS
The Taxpayer changed its method of accounting from the cash receipts and disbursements method to the accrual method commencing with the taxable year ended September 30, 1993. This change resulted in the recognition of additional income, which was included in federal taxable income over a six year period pursuant to Revenue Procedure 92-75 and Internal Revenue Code (IRC) § 481(a).
The majority of the additional income was attributable to years prior to the Taxpayer's doing business in Virginia. The Taxpayer modified federal taxable income so that only the § 481(a) adjustment attributable to years when the Taxpayer did business in Virginia was included in Virginia taxable income. These modifications were subsequently disallowed by the department during a field audit. The Taxpayer protested, claiming that inclusion of the entire net § 481(a) adjustment in Virginia taxable income is inequitable.
DETERMINATION
Code of Virginia § 58.1-402 provides that a corporation's Virginia taxable income for any given taxable year is the federal taxable income and any other income taxable to the corporation under federal law for such year, adjusted and modified by certain specified additions, subtractions, and exemptions. For purposes of this statute, the term "federal taxable income" means all income from whatever source derived and however named upon which a federal tax is imposed. A corporation's federal taxable income, therefore, comprises the initial base that is modified to determine Virginia taxable income.
Code of Virginia § 58.1-440 provides that any accounting adjustments made for federal income tax purposes for any taxable year shall be applied in computing the taxpayer's Virginia taxable income for the same year.
Given these statutory provisions, I have no basis to allow a modification to federal taxable income for income changes attributable to accounting method changes. Such income, therefore, is fully included in Virginia taxable income to the extent it is also included in federal taxable income.
Based on the information presented, I must disallow the subtraction attributable to a change in accounting methods, consequently, the auditor's assessment is correct. Please remit the balance due of******* within sixty days to prevent further accrual of interest. Please send your payment to ********in the Office of Tax Policy, P.O. Box 1880, Richmond, Virginia, 23218-1880. If you have any questions regarding this determination you may call *********at ******** .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10476G
Rulings of the Tax Commissioner