Tax Type
Corporation Income Tax
Description
Returns of Affiliated Corporations
Topic
Returns and Payments
Date Issued
04-12-1999
April 12, 1999
Re: § 58.1-1821 Application: Corporation Income Taxes
Dear****
This will respond to your letter in which you seek correction of assessment of additional corporate income taxes to ***** (the "Taxpayer') for the taxable year ended December 31, 1992. I apologize for the delay in responding.
FACTS
The Taxpayer is a member of an affiliated group that files a federal consolidated income tax return, but files a separate income tax return in Virginia. On its 1992 return, the Taxpayer reported a subtraction from federal taxable income for an "equity in earnings' adjustment to the basis of stock in a subsidiary. This change in basis is required under federal consolidation rules and was taken into account when a taxpayer sells stock in a subsidiary. On audit, the department removed the subtraction because no such subtraction is permitted under Virginia statute.
The Taxpayer states that the subtraction is merely an adjustment to convert its federal taxable income under consolidation rules to separately stated federal taxable income as required by the Code of Virginia. In addition, the Taxpayer believes it is entitled an adjustment to the basis of the subsidiary's stock for dividends paid to the Taxpayer by the subsidiary.
DETERMINATION
Code of Virginia § 58.1-402 defines Virginia taxable income as federal taxable income, adjusted as provided in subsections B, C, and D thereunder. If an affiliated group member files a separate Virginia return and federal consolidated return, respectively, the separate federal taxable income for Virginia purposes must be computed as if a separate federal return had been filed for all relevant years.
Under Treasury Regulation §1.1502-32, a parent corporation's basis in a subsidiary's stock is either increased or decreased by a taxable income or loss, tax exempt income, noncapital or nondeductable expenses, and distributions (i.e., dividends). In this case, the basis of the subsidiary's stock was reduced by dividends and equity in earnings (losses) and increased by capital contributions. This adjusted basis was used in calculating a gain on the sale of the subsidiary's stock.
A corporation that files a separate federal income tax return is only required to make a basis adjustment in the stock of a subsidiary for contributions to capital and nondividend distributions under Internal Revenue Code (IRC) Secs.118 and 301, respectively. Thus, for the purposes of computing the gain on the sale of the subsidiary's stock, the Taxpayer would not adjust the basis in the stock by the dividends and equity in earnings. Based on the information provided, the Taxpayer will be allowed to use the basis on the stock as required under separate return rules.
By using separate return rules, the stock sale results in a capital loss instead of the capital gain reported on the federal consolidated return. IRC §1211 allows a corporation's losses from sales or exchanges of capital assets only to the extent of gains from sales or exchanges. Losses exceeding gains are utilized in the form of a capital loss carryback and carryover. Because Virginia conforms to this federal provision, a capital loss can only be used to reduce capital gains included in a taxpayer's federal taxable income. In a given taxable year, if the capital losses are greater than the capital gains, the loss can only be utilized to the extent it does not exceed the capital gains. As such, the Taxpayer's capital loss for 1992 will be limited to the amount of the capital gains reported on the corporation income tax return.
Under regulations for IRC §1212, the capital loss must first be carried back three years before being carried forward to the succeeding five years, unless an election to carry the loss forward is made on the loss year return. The taxpayer did not make such an election on the copy of the federal return filed with its 1992 Virginia return. Under Code of Virginia § 58.1-1823, a taxpayer has three years from the date a return is due, or 90 days from the final determination of a federal change or correction, whichever is later, to file an amended return to request a refund. As such, the Taxpayer may amend its Virginia income tax returns for all open years to absorb the capital loss carryover. The capital loss carryover, however, will be limited by the amount that the capital loss exceeds the capital gains of the years included in the carrying period, but outside the statute of limitations.
The audit assessment has been adjusted as provided in this letter, and is reflected on the attached schedules. Pay the balance due within 30 days to prevent the additional interest charges. Please 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
OTP/12863O
Rulings of the Tax Commissioner