Tax Type
Bank Franchise Tax
Description
Contesting Assessment
Topic
Basis of Tax
Date Issued
09-30-1999
September 30, 1999
Re: 1821 Appeal: Bank Franchise Taxes
Dear****
This will reply to your letter in which you contest the assessment of bank franchise tax against ***** (the "Bank') for the 1996 taxable year.
FACTS
On its 1996 bank franchise tax return (Form 64), the Bank included the full amount of its deferred tax liability reported on its reports of condition and income (the "Call Report') in reserve for loan loss reconciliation on Reserve for Loan Losses schedule ("Schedule G'). The department made an adjustment to limit the amount of the deferred tax includable on Schedule G to the liability attributable to the difference between the reserve for loan loss reported on the Call Report (the "Book Reserve') and the loan loss reserve for income tax purposes under Internal Revenue Code § 585 (the "Tax Reserve'). The Bank is contesting this adjustment on the basis that the instructions included on Schedule G did not clearly specify the limitation on the deferred tax liability.
DETERMINATION
Form 64 includes Schedule G for the purpose of reconciling a bank's reserve as reported on the Call Report, as required by the Federal Deposit Insurance Corporation, with the Tax Reserve. When the Schedule G was developed, the department recognized that banks could report their reserve divided among as many as three different accounts on the report of condition, including deferred income taxes and capital accounts (either "undivided profits' or "reserve for contingencies'). As such, the department included an adjustment on Schedule G for the deferred income tax asset or liability.
The computation of the Virginia bank franchise tax starts with gross book capital as reported on the report of condition. In 1999 Senate Bill 1017 (Chapter 84 of the 1999 Acts of the Assembly), copy enclosed, the General Assembly changed the deduction from gross capital of a bank for a reserve for loan loss, which was allowed only for the Tax Reserve. This bill replaced that Schedule G reconciliation with an addition to capital equal to 50% of a bank's Book Reserve net of any applicable deferred taxes. The bill also makes it clear that, prior to the 1999 taxable year, any bank entitled to a Tax Reserve must add the amount by which the bank's Book Reserve, net of deferred tax, exceeds the Tax Reserve.
This law change clarified the department's interpretation of Code of Virginia § 58.1-1205 before the amendment. Prior to the change, the statute stated that the computation of net capital included a deduction from gross capital for "any reserve for loan losses which is allowable by the Internal Revenue Service in computing federal taxable income.' It is clear that the statute allowed a deduction for the Tax Reserve only to the extent that it was included in gross capital.
Based on the Code of Virginia, the deferred asset or liability adjustment is limited to the deferred tax resulting from the difference between the Book Reserve and the Tax Reserve. By allowing the Bank an adjustment for the full amount of its deferred tax liability, the departrnent would be permitting a deduction from gross capital that exceeds the Tax Reserve.
Accordingly, the assessment for the 1996 taxable year is correct. Please pay the balance due within 30 days to prevent the additional interest charges. You can send your payment to ***** c/o Office of Tax Policy, Department of Taxation, P.O. Box 1880, Richmond, Virginia 23218-1880. If you have any questions, you may contact ***** at****.
Sincerely,
Danny M. Payne
Tax Commissioner
Re: 1821 Appeal: Bank Franchise Taxes
Dear****
This will reply to your letter in which you contest the assessment of bank franchise tax against ***** (the "Bank') for the 1996 taxable year.
FACTS
On its 1996 bank franchise tax return (Form 64), the Bank included the full amount of its deferred tax liability reported on its reports of condition and income (the "Call Report') in reserve for loan loss reconciliation on Reserve for Loan Losses schedule ("Schedule G'). The department made an adjustment to limit the amount of the deferred tax includable on Schedule G to the liability attributable to the difference between the reserve for loan loss reported on the Call Report (the "Book Reserve') and the loan loss reserve for income tax purposes under Internal Revenue Code § 585 (the "Tax Reserve'). The Bank is contesting this adjustment on the basis that the instructions included on Schedule G did not clearly specify the limitation on the deferred tax liability.
DETERMINATION
Form 64 includes Schedule G for the purpose of reconciling a bank's reserve as reported on the Call Report, as required by the Federal Deposit Insurance Corporation, with the Tax Reserve. When the Schedule G was developed, the department recognized that banks could report their reserve divided among as many as three different accounts on the report of condition, including deferred income taxes and capital accounts (either "undivided profits' or "reserve for contingencies'). As such, the department included an adjustment on Schedule G for the deferred income tax asset or liability.
The computation of the Virginia bank franchise tax starts with gross book capital as reported on the report of condition. In 1999 Senate Bill 1017 (Chapter 84 of the 1999 Acts of the Assembly), copy enclosed, the General Assembly changed the deduction from gross capital of a bank for a reserve for loan loss, which was allowed only for the Tax Reserve. This bill replaced that Schedule G reconciliation with an addition to capital equal to 50% of a bank's Book Reserve net of any applicable deferred taxes. The bill also makes it clear that, prior to the 1999 taxable year, any bank entitled to a Tax Reserve must add the amount by which the bank's Book Reserve, net of deferred tax, exceeds the Tax Reserve.
This law change clarified the department's interpretation of Code of Virginia § 58.1-1205 before the amendment. Prior to the change, the statute stated that the computation of net capital included a deduction from gross capital for "any reserve for loan losses which is allowable by the Internal Revenue Service in computing federal taxable income.' It is clear that the statute allowed a deduction for the Tax Reserve only to the extent that it was included in gross capital.
Based on the Code of Virginia, the deferred asset or liability adjustment is limited to the deferred tax resulting from the difference between the Book Reserve and the Tax Reserve. By allowing the Bank an adjustment for the full amount of its deferred tax liability, the departrnent would be permitting a deduction from gross capital that exceeds the Tax Reserve.
Accordingly, the assessment for the 1996 taxable year is correct. Please pay the balance due within 30 days to prevent the additional interest charges. You can send your payment to ***** c/o Office of Tax Policy, Department of Taxation, P.O. Box 1880, Richmond, Virginia 23218-1880. If you have any questions, you may contact ***** at****.
Sincerely,
Danny M. Payne
Tax Commissioner
Rulings of the Tax Commissioner