Tax Type
Corporation Income Tax
Description
Audit adjustments
Topic
Computation of Income
Date Issued
11-05-1997
November 5, 1997
Re: § 58.1-1821 Application: Corporate Income Tax
Dear*****************
This will respond to****** (the "Taxpayer") application for correction of corporate income tax assessments for taxable years ending November 30, 1993, 1994, and 1995.
FACTS
The Taxpayer was field audited resulting in numerous adjustments. The adjustment in dispute resulted from the consolidation of the Taxpayer's foreign sales corporation (the "FSC") with the Taxpayer. The Taxpayer avers that the consolidation was improper since the Taxpayer and the FSC did not enter into any transactions that should trigger a consolidation pursuant to Code of Virginia § 58.1-446.
DETERMINATION
The Taxpayer paid certain commissions on foreign sales to its FSC. The amounts shifted to the FSC do not have to reflect the amount under arm's length pricing guidelines which are relaxed on these transactions between affiliated corporations. This has the effect of reducing the Taxpayer's Virginia income tax liability. In such cases, the department has historically consolidated corporations when such transactions occur.
The FSC replaced the Domestic International Sales Corporation (DISC) in 1985. Prior to the FSC, the department had held that a DISC distorted income taxable in Virginia and required that the affiliates file a consolidated report of income pursuant to Code of Virginia § 58.1-446. This authority was upheld in Commonwealth v. General Electric Co., 236 Va. 54 (1988).
Effective for taxable years beginning before January 1, 1993, Virginia Regulation (VR) 630-3-446.1 (copy enclosed) exempted a FSC from any adjustments deemed necessary pursuant to Code of Virginia § 58.1-446 relating to price manipulation and intercorporate transactions. This regulation was in effect for the taxable year ending November 30, 1993. Accordingly, the audit adjustment consolidating the Taxpayer and the FSC for this year will be removed from the audit.
Effective March 10, 1993, VR 630-3-446.1 was amended and § 4 relating to FSC's and Small FSC's was deleted. Effective for taxable years beginning on and after July 31, 1995, Chapter 472 of the 1995 Acts of Assembly exempted FSC's from the Virginia corporation income tax. This left a period of several years unaddressed by either legislation or regulation. The department, however, believes it is appropriate to continue with the previous policy set forth in VR 630-3-446.1 prior to it being amended. Consequently, the audit adjustments for the taxable years ending November 30, 1994 and 1995 will also be removed from the audit.
The enclosed schedules illustrate the revised audit report. The balance due, **** should be remitted within the next thirty days to avoid the accrual of additional interest. Your payment should be sent to*****, Office of Tax Policy, Department of Taxation, Post Office Box 1880, Richmond, Virginia 23218-1880.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12995P
Rulings of the Tax Commissioner