Tax Type
Corporation Income Tax
Individual Income Tax
Description
Corporate Officer liability.
Topic
Persons Subject to Tax
Taxability of Persons and Transactions
Date Issued
01-26-1982
January 26, 1982
Re: § 58-1118 Application
Capital Not Otherwise Taxed
Loans to Affiliates, Loans to Officers, and
Income Tax Refund Receivable
Taxpayer: ****************
Dear *****************
This ruling is issued in response to taxpayer's application under § 58-1118 and a taxpayer conference held on January 6, 1982.
Facts
Taxpayer is a construction contractor conducting business from a principal office located within Virginia.
For the year 1977, Taxpayer included loans to an affiliated entity and loans to corporate officers in the property category described in Code Subsection 58-411A(3) as "The excess of all bills and accounts receivable over bills and accounts payable...." For the year 1978, Taxpayer included loans to corporate officers in that property category and failed to include an income tax refund claim based on a net operating loss carryback in any property category in its return of capital not otherwise taxed.
In audit the Department included each of the above items of property in the property category described in Code Subsection 58-411A(4) as "All other taxable personal property of any kind whatever, including all choices in action, equities, demands and claims..." and assessed additional tax for 1977 and 1978.
After assessment Taxpayer applied under § 58-1118 protesting the portion of total assessments which was based on these audit adjustments.
Determination
In conference, Taxpayer argued that loans to an affiliated entity and loans to corporate officers were accounts receivable and accordingly were properly includable for purposes of returning capital-not otherwise taxed in the category of "The excess of all bills and accounts receivable over bills and accounts payable..."
Property classified in Code Subsection 58-411A(3) includes bills and accounts receivable and property classified in Code Subsection 58-411A(4) includes demands and claims. Since bills and accounts receivable are demands and claims, it is apparent that the classification for "the excess of all bills and accounts receivable over bills and accounts payable" is not all inclusive, but rather is limited to a certain class of receivables and payables. Code §58-422 clearly provides that payables are includable only if contracted in the usual course of business and not for purposes of capital outlay, and in West Virginia Pulp and Paper Co. v. T. C. Karnes, 137 Virginia 714, the court observed that the excess of receivables over payables is to be determined by deducting from the total of "bills and accounts receivable" only the amount of "bills and accounts payable" which are the same kind of demands or claims as "bills and accounts receivable," with the single exception that includable receivables are owed to and includable payables are owed by the taxpayer.
On the basis of the Code sections referred to and the explanatory conclusion reached by the court in West Virginia Pulp and Paper Co. v. T. C. Karnes, the department has consistently held that the category of property defined as "the excess of all bills and accounts receivable over bills and accounts payable" is limited to receivables contracted in the usual course o f business, as well as payables contracted in the usual course of business. For purposes of this limitation, bills and accounts receivable contracted "in the usual course of business" means those bills and accounts earned or received on sales or exchanges of a taxpayer's products or services and those directly related to the acquisition, production or sale of such products or services. It has not been contended that the loans in issue are within this definition.
In regard to the exclusion from taxable capital for the year 1978 of an income refund claim, Taxpayer contends that rather than representing taxable property, such a claim represents a reduction in a prior year's tax liability and even if held to be property, it should not be included in taxable property since an income tax liability is not an allowable payable in computing the excess of bills and accounts receivable over bills and accounts payable.
This contention must be rejected for the following reasons:
1. I am advised that the income tax refund claim in issue is a claim for refund of federal income taxes resulting from the carryback of a net operating loss.
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- A net operating loss establishes a claim for refund for federal as well as State income tax purposes only on or after the close of the taxable year in which the loss in sustained. While a net operating loss may be carried back and offset against previously taxed income, it represents a current claim based on a current loss rather than a correction of a prior year's tax liability.
That such a claim constitutes property is indisputable and as property it is clearly includable as a part of "All other taxable personal property of any kind whatever, including all choices in action, equities, demands and claims...," § 58-411A(4).
- A net operating loss establishes a claim for refund for federal as well as State income tax purposes only on or after the close of the taxable year in which the loss in sustained. While a net operating loss may be carried back and offset against previously taxed income, it represents a current claim based on a current loss rather than a correction of a prior year's tax liability.
For the above reasons, your application for correction is denied and the assessment should now be paid with interest accrued to date of payment.
Sincerely.
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner