Tax Type
Corporation Income Tax
Description
DISC adjustment; consolidated return
Topic
Allocation and Apportionment
Subtractions and Exclusions
Taxable Income
Date Issued
07-14-1988
July 14, 1988
Re: §58.1-1821 Application; Corporation Income Tax
§58.1-446 Adjustment for DISC
§58.1-442 Permission to File a Consolidated Return
§58.1-408 Apportionment of Income
§58.1-402 Virginia Taxable Income
Dear**************************
This is in reply to the taxpayer's letters of December 3, 1987, and February 8, 1988, in which you applied for correction of assessment of corporation income tax. You asked that the two applications be combined into a single reply. A number of issues were raised. They will be reviewed in the order raised.
Domestic International Sales Corporation
The auditor adjusted the tax pursuant to §58.1-446 to include a Domestic International Sales Corporation (DISC). The department firmly believes that the adjustment is appropriate and within its authority. The department requires all taxpayers to make the DISC adjustment, and will continue to do so until the Virginia Supreme Court rules that the policy is incorrect.
Therefore, the assessment is now due and payable. If you wish to preserve your judicial remedies, §58.1-1824 permits you to file a protective claim claiming a refund which the department would hold without action pending a final decision in the General Electric case which is currently pending before the Virginia Supreme Court. As an alternative you may, at your election, file an application with the circuit court. In either case, the assessment must be paid in full and the filing made within three years of the assessment.
Virginia law contains no provision extending or tolling the statute of limitations on a court application while an application under §58.1-1821 is pending on an unpaid assessment. Thus, if you fail to pay the assessment, any right you may have to file a protective claim or to have the assessment reviewed by a court will expire three years after the date of the assessment.
Consolidated Return
The taxpayer filed a consolidated return with a subsidiary for 1983 and 1984. The auditor disallowed the consolidated return based on the fact that the subsidiary does not have nexus in Virginia.
Virginia Code §58.1-442 authorizes the filing of a consolidated or a combined return for affiliated corporations subject to Virginia income tax. A group of affiliated corporations may not file a consolidated or combined return unless each corporation is itself subject to Virginia income tax and each meets certain criteria. Virginia Corporation Income Tax Regulations VR 630-3-442 (copy enclosed). Because only the taxpayer is subject to Virginia income tax, the auditor was correct in disallowing the consolidated return. The taxpayer must amend its returns for taxable years beginning on and after January 1, 1983, and file separate Virginia income tax returns.
Capital Gains
In its returns for the years in question the taxpayer allocated certain capital gains to other states. The auditor included this income in apportionable income.
The capital gains were derived from the sale of two wholly-owned subsidiaries. The taxpayer states that a unitary relationship did not exist between itself and the two subsidiaries. It quotes ASARCO Inc. v. Idaho State Tax Commission, 458 U.S. 307, 102 S. Ct. 3103 (1982) in which the Supreme Court ruled that capital gains may not be included in a company's apportionable income where no unitary business relationship exists between a non-domiciliary corporation and its subsidiary.
I have previously ruled on the constitutionality of apportioning capital gains. Rulings of the Commissioner dated October 31, 1984, P. D. No. 84-210; March 27, 1937, P. D. 87-104; and October 14, 1987, P. D. No. 87-224, copies enclosed. Therefore, the auditor was correct in including the capital gains in apportionable income.
Two cases are presently pending in court in which the issue is the constitutionality of including capital gains in apportionable income. You may wish to preserve your judicial remedies by paying the assessment and filing a protective claim under §58.1-1824. In view of the issues involved, your protective claim will be held without action pending final decisions in the cases styled W. R. Grace & Co. v. Commonwealth of Virginia and Corning Glass Works, Inc., v. Virginia Department of Taxation.
1985 Loss
The taxpayer filed an amended return for the tax year ended December 31, 1982, to reflect the carryback of the taxpayer's 1985 loss to the year ended 1982. The department adjusted the claim and reduced the allowable 1985 loss due to the disallowance of the consolidation between the taxpayer and its wholly-owned subsidiary for the year ended 1985. The taxpayer protests the reduction to its 1985 loss and the resulting reduced carryback and refund amount.
For reasons stated previously, the taxpayer is not eligible to file a consolidated return with its wholly-owned subsidiary. Therefore, the auditor was correct in adjusting the taxpayer's 1985 loss.
Determination
Accordingly, the assessment is correct as made and is now due and payable. You will shortly receive an updated bill with interest accrued to date. The bill should be paid within thirty days to avoid the accrual of additional interest.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner