Tax Type
Corporation Income Tax
Description
ACRS additions to taxable income
Topic
ACRS Modifications
Computation of Income
Date Issued
10-17-1988
October 17, 1988
Re: §58.1-1821 Application; Corporation Income Tax
§58.1-323 ACRS Modifications
Dear****************
This is in response to your letter of August 9, 1988, in which you applied for correction of an assessment of corporation income tax.
Facts
In taxable year 1985 the taxpayer earned a profit, but its federal taxable income reported on line 30 of the federal return was negative because of large net operating loss deductions (NOLD) from 1979 - 1982. In an office audit the department applied its longstanding policy, set forth in regulation VR 630-3-402, which does not allow a net operating loss deduction to reduce federal taxable income below zero for Virginia income tax purposes. As a result, there was a significant Virginia tax liability due to the fact the Virginia additions were greater than the Virginia subtractions in 1985 and in each of the taxable years from which the federal NOLD was derived.
The taxpayer objects to the inclusion of ACRS additions in its Virginia taxable income on the grounds that it did not receive a Virginia tax benefit due to the losses and due to the fact that the federal ACRS deductions are less generous for its property than was permitted under the old system.
Discussion
The federal "tax benefit rule" permits the Internal Revenue Service to require the recognition of income when an event occurs which is inconsistent with a prior deduction. It is a one-way rule. That is, it can be invoked by the I.R.S. to require recognition even though no statute expressly deals with the situation, but it may not be invoked by the taxpayer to avoid recognition of income clearly required by statute. In the case you cite, U. S. v. Nash, 398 U.S. 1, the court held that the I.R.S. could not invoke the rule because an event was not inconsistent with the deduction. Therefore, the tax benefit rule does not permit the taxpayer to avoid reporting the Virginia ACRS additions and subtractions as required by Virginia law.
In 1987 and 1988 the General Assembly enacted legislation to fully conform to federal ACRS deductions for taxable years beginning on and after January 1, 1988, and to return the outstanding balance of excess cost recovery to corporations over a five-year period.
We have reviewed the corrected information submitted for 1985 with your application and agree that the subtraction for dividends 50% or more owned is allowable and that the net modification associated with the federal NOLD is overstated. The assessment will be adjusted to reflect this information. However, the ACRS subtraction for 1985 was correctly stated on the return as 20% of the 1982 and 1983 additions. Subtractions may not be claimed with respect to the 1984 addition until the taxable year beginning on January 1, 1986.
Determination
Accordingly, the assessment for 1985 will be adjusted and you will shortly receive updated bills for 1985 and 1986 with interest accrued to date. The bills should be paid within thirty days to avoid the accrual of additional interest. Although you requested conference, this letter has been issued without one because the application of the law is clear. If you still desire a conference you should request one within thirty days.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner