Tax Type
Corporation Income Tax
Description
DISC adjustment
Topic
Taxable Income
Date Issued
02-27-1987
February 27, 1987
Re: §58.1-1821 Application; Corporation Income Tax
§58.1-446 Adjustment for DISC
Dear **********************
This is in response to your letter of June 12, 1986, in which you apply for correction of an assessment dated April 14, 1986, for the taxable year 1983.
You protest the audit adjustment under §58.1-446 to include the income of a Domestic International Sales Corporation (DISC) in the taxpayer's income. You state that "the sales of products from [the taxpayer] to DISC were, in fact, at a fair arm's-length price." Inspection of the federal form 1120-DISC for 1983 discloses that the arm's length pricing method was used for at least 25% of the total receipts, but that some commission income was received.
In a prior ruling dated July 23, 1982, (copy enclosed) the department held that
-
- When all transactions between affiliates are subject to Section 482 I.R.C., the income of each affiliate should reasonably reflect the business done by that affiliate. Therefore the income from Virginia sources of those affiliates subject to Virginia income tax will reasonably reflect the income from Virginia sources of the entire affiliated group and no adjustments are necessary. (Emphasis supplied.)
In the prior case, virtually all transactions were subject to the arm's length pricing rules and the adjustments under §58.1-446 were limited to only those transactions not subject to the arm's length pricing rules.
The DISC pricing methods are applied on a transaction by transaction basis (or by product groups). It appears that the arm's length pricing method was used for at least a substantial portion of the transactions during 1983. However, it is not clear that the arm's length pricing method was used for each and every transaction.
Accordingly, the audit is being returned to the Technical Services Section for further review and revision if warranted. You should supply documentation that the arm's length pricing method was used for all, or substantially all, of the transactions. Upon receipt of the appropriate documentation the audit report will be revised accordingly. Correspondence should be addressed to: ***********Supervisor, Technical Services Section, office Services Division, Department of Taxation, P. O. Box 6-L. Richmond, Va 23282.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner