Tax Type
Corporation Income Tax
Description
Assessment based on discovery made during an audit
Topic
Collection of Delinquent Tax
Date Issued
12-22-1999
December 22, 1999
Re: Sec.1821 Application: Corporate Income Tax
Dear***:
This will reply to your letter in which you contest the assessment of additional corporate income tax and interest against ***** (the ``Taxpayer') for the taxable year ending September 1992. Also, you request that the assessments for the taxable years ending September 1992 and 1993 be adjusted pursuant to federal RAR adjustments. I apologize for the delay in responding.
FACTS
The Taxpayer is a large multinational company with two subsidiaries. It filed consolidated federal and Virginia income tax returns for the taxable year ended September 1992. The Taxpayer pays a management fee to one subsidiary, ***** (the ``Subsidiary'), to perform certain management and support services equal to the cost plus five percent of the services.
The Taxpayer was audited and numerous adjustments were made. One adjustment removed the Subsidiary from the consolidated return because it had no nexus with Virginia. The Subsidiary had recorded an operating loss which lowered the taxable income on the Taxpayer's consolidated return. The operating loss was disallowed when the Taxpayer's taxable income was adjusted. In addition, the five percent profit on the management fee was disallowed separately even though it had been disallowed as part of the operating loss.
The Taxpayer concurs that it should not have included the subsidiary on its Virginia consolidated return. However, it contends that the correlating income and expense for the Taxpayer and the Subsidiary were not properly reflected on the Federal 1120 because of a computer error which occurred when the data was downloaded from the general ledger to the income tax working papers. Since the omission did not effect the taxable income for federal purposes, the return was not amended. However, in order to adjust the Virginia assessment, the federal return was subsequently amended to reflect the proper treatment of the expense.
The Taxpayer has requested that the department adjust the assessment of tax to reflect the proper reporting of expense. Also, the Taxpayer has requested the department's policy on raising issues that were accepted at audit and its examination rules relating to expenses that are part of federal deductions.
DETERMINATION
Federal Taxable Income
Virginia law provides that the starting point for computing Virginia taxable income is the federal taxable income (``FTI') with certain additions, subtractions, exemptions, and deductions as specified in Code of Virginia Sec. 58.1-402. Therefore, the income and deductions applied by a taxpayer to calculate federal taxable income affects the amount reported as Virginia taxable income and ultimately, Virginia income tax. Generally, the department does not look behind the items recorded on the federal tax return. However, if the department detects that an item on the federal return affects the correct determination of Virginia taxable income, the department may review and correct that figure pursuant to Code of Virginia Secs.445 and 446.
In this case, the Taxpayer has provided evidence to substantiate the proper expense. The inclusion of this expense reduces the Taxpayer's FTI. The assessment will be adjusted to reflect the Taxpayer's expense and the correct reporting of the management fee.
Issues raised at audit
The Taxpayer has requested the department's policy on raising issues not adjusted by an audit. Code of Virginia Sec. 58.1-1812 authorizes the department to assess the proper tax, penalties and interest if any tax is not paid in full. Nothing in the statute limits the department's authority to assess tax to discoveries made during an audit. Thus, the department may assess additional tax, penalty and interest at any time within the statute of limitations even if an issue is not addressed during an audit.
When a taxpayer files an appeal pursuant to Code of Virginia Sec. 58.1-1821, the Tax Commissioner may require that the Taxpayer provide additional information as he deems necessary to a fair and informed determination on an appeal. In reviewing any documentation, the department may discover issues not addressed in the audit. In such a case, the department may adjust the tax as needed within the confines of the statue of limitations.
The Taxpayer's assessment for the taxable years ending September 1992 and 1993 will be adjusted pursuant to the enclosed schedule and a refund will be issued as soon as possible. The adjustments reflect the allowance of the management fee expense for the taxable year ending in September 1992 and federal RAR adjustments for both years. If you have any questions about this determination, you may contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11420B
Re: Sec.1821 Application: Corporate Income Tax
Dear***:
This will reply to your letter in which you contest the assessment of additional corporate income tax and interest against ***** (the ``Taxpayer') for the taxable year ending September 1992. Also, you request that the assessments for the taxable years ending September 1992 and 1993 be adjusted pursuant to federal RAR adjustments. I apologize for the delay in responding.
FACTS
The Taxpayer is a large multinational company with two subsidiaries. It filed consolidated federal and Virginia income tax returns for the taxable year ended September 1992. The Taxpayer pays a management fee to one subsidiary, ***** (the ``Subsidiary'), to perform certain management and support services equal to the cost plus five percent of the services.
The Taxpayer was audited and numerous adjustments were made. One adjustment removed the Subsidiary from the consolidated return because it had no nexus with Virginia. The Subsidiary had recorded an operating loss which lowered the taxable income on the Taxpayer's consolidated return. The operating loss was disallowed when the Taxpayer's taxable income was adjusted. In addition, the five percent profit on the management fee was disallowed separately even though it had been disallowed as part of the operating loss.
The Taxpayer concurs that it should not have included the subsidiary on its Virginia consolidated return. However, it contends that the correlating income and expense for the Taxpayer and the Subsidiary were not properly reflected on the Federal 1120 because of a computer error which occurred when the data was downloaded from the general ledger to the income tax working papers. Since the omission did not effect the taxable income for federal purposes, the return was not amended. However, in order to adjust the Virginia assessment, the federal return was subsequently amended to reflect the proper treatment of the expense.
The Taxpayer has requested that the department adjust the assessment of tax to reflect the proper reporting of expense. Also, the Taxpayer has requested the department's policy on raising issues that were accepted at audit and its examination rules relating to expenses that are part of federal deductions.
DETERMINATION
Federal Taxable Income
Virginia law provides that the starting point for computing Virginia taxable income is the federal taxable income (``FTI') with certain additions, subtractions, exemptions, and deductions as specified in Code of Virginia Sec. 58.1-402. Therefore, the income and deductions applied by a taxpayer to calculate federal taxable income affects the amount reported as Virginia taxable income and ultimately, Virginia income tax. Generally, the department does not look behind the items recorded on the federal tax return. However, if the department detects that an item on the federal return affects the correct determination of Virginia taxable income, the department may review and correct that figure pursuant to Code of Virginia Secs.445 and 446.
In this case, the Taxpayer has provided evidence to substantiate the proper expense. The inclusion of this expense reduces the Taxpayer's FTI. The assessment will be adjusted to reflect the Taxpayer's expense and the correct reporting of the management fee.
Issues raised at audit
The Taxpayer has requested the department's policy on raising issues not adjusted by an audit. Code of Virginia Sec. 58.1-1812 authorizes the department to assess the proper tax, penalties and interest if any tax is not paid in full. Nothing in the statute limits the department's authority to assess tax to discoveries made during an audit. Thus, the department may assess additional tax, penalty and interest at any time within the statute of limitations even if an issue is not addressed during an audit.
When a taxpayer files an appeal pursuant to Code of Virginia Sec. 58.1-1821, the Tax Commissioner may require that the Taxpayer provide additional information as he deems necessary to a fair and informed determination on an appeal. In reviewing any documentation, the department may discover issues not addressed in the audit. In such a case, the department may adjust the tax as needed within the confines of the statue of limitations.
The Taxpayer's assessment for the taxable years ending September 1992 and 1993 will be adjusted pursuant to the enclosed schedule and a refund will be issued as soon as possible. The adjustments reflect the allowance of the management fee expense for the taxable year ending in September 1992 and federal RAR adjustments for both years. If you have any questions about this determination, you may contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11420B
Rulings of the Tax Commissioner