Tax Type
Individual Income Tax
Partnerships
Description
Trusts, partnerships, and S corporations
Topic
Accounting Periods and Methods
Date Issued
05-10-1988
May 10, 1988
Re: Ruling Request
Income Tax
Federal Tax Reform Act, of 1986
Dear***********************
This is in reply to your letter of January 21, 1988, in which you request a ruling regarding the Virginia income tax treatment of certain trusts, partnerships and S corporations that are changing their tax years from fiscal years to calendar years as required by the federal Tax Reform Act of 1986. Below are the specific questions that you asked and the department's responses.
1. Is the State of Virginia conforming to the Internal Revenue Service requirements concerning required changes to calendar year?
Yes, Virginia income tax law requires that trusts, partnerships and S corporations have the same taxable year as they have for federal income tax purposes.
2. Is the State of Virginia conforming to the Internal Revenue Service elections regarding the pro rata recognition of income over four (4) Years or immediate recognition?
Yes, because the computation of Virginia taxable income begins with federal taxable income, the same election made for federal income tax purposes will be applicable for Virginia income tax purposes .
3. If the State of Virginia will allow the election for pro rata recognition of income over four years or the immediate recognition of income as with federal regulations, must the election made at the federal level be used at the state level?
Yes, because there is no provision under Virginia law for making an independent election.
4. If the State of Virginia allows the four year "spread", how will the modifications be calculated?
Generally, if the taxpayer makes the federal election for pro rata recognition of income over four years, the Virginia modifications related to the short taxable year should be reported ratably over the same four year period. If the taxpayer makes the federal election for the immediate recognition of income, the Virginia modifications related to the short taxable year should all be reported in the year in which the short taxable year ends.
5. If the modifications are "spread", how will the ACRS modifications be handled in light of the repeal of Code §58.1-323? How will the biennium concept or the percentage method be calculated?
As an integral part of the Virginia Tax Reform Act of 1987, the Virginia ACRS addition modification was repealed effective for taxable years beginning on and after January 1, 1988. The Virginia Tax Reform Act of 1987 also provides that individuals can recover any outstanding additions over a two-year period and corporations can recover their outstanding additions over a five-year period beginning in taxable years that begin on or after January 1, 1988.
As stated above in the answer to your fourth question, generally, if the taxpayer makes the federal election for pro rata recognition of income over four years, the Virginia modifications related to the short taxable year should be reported ratably over the same four year period. If the taxpayer makes the federal election for the immediate recognition of income, the Virginia modifications related to the short taxable year should all be reported in the year in which the short taxable year ends. However, the Virginia modifications related to the Accelerated Cost Recovery System (ACRS) are exceptions to this general rule.
The department has determined that, like the other Virginia modifications, the ratable portion of the Virginia ACRS addition and subtraction modifications from the 1987 short year return must be reported on the 1987 return. However, since taxable year 1987 is the last year in which it is necessary to make an ACRS addition modification and to claim an ACRS subtraction based upon additions made in preceding bienniums, it will not be necessary to make a ratable ACRS modification in any taxable year that begins on or after January 1, 1988.
For taxable years beginning on or after January 1, 1988, the allowable subtraction will be based upon the total amount of previously unrecovered additions. Therefore, it will not be necessary to include in the subtraction amount a ratable portion of the 1987 short year subtraction modification.
EXAMPLE:
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- Assume: (1) a taxpayer is a calendar year shareholder in a fiscal year S corporation which is required under IRC §1378 to change to a calendar year; (2) the taxpayer received a Schedule K-1 from the corporation for its July 1, 1986 to June 30, 1987 tax year and a Schedule K-1 for the corporation's short tax year beginning July 1, 1987 and ending December 31, 1987; and (3) the income in excess of expenses for the short-year Schedule K-1 is reported ratably over a four year period.
The taxpayer's 1987 Virginia return would include his share of the corporation's income and Virginia modifications based upon the corporations July 1, 1986 to June 30, 1987 tax year and his share of the ratable portion of the July 1, 1987 to December 31, 1987 short tax year income- and Virginia modifications (including ACRS addition and subtraction modifications).
The taxpayer's 1988 Virginia return would include his share of the corporation's income and Virginia modifications based upon the corporation's January 1, 1988 to December 31, 1988 tax year and his share of the ratable portion of the July 1, 1987 to December 31, 1987 short tax year income and Virginia modifications (excluding the ACRS addition and subtraction modifications). The taxpayer will not be required to make an ACRS addition modification based upon either his share of ownership of the corporation for the period January 1, 1988 to December 31, 1988 or for his share of the ratable modifications from the July 1, 1987 to December 31, 1987 short year period.
- Assume: (1) a taxpayer is a calendar year shareholder in a fiscal year S corporation which is required under IRC §1378 to change to a calendar year; (2) the taxpayer received a Schedule K-1 from the corporation for its July 1, 1986 to June 30, 1987 tax year and a Schedule K-1 for the corporation's short tax year beginning July 1, 1987 and ending December 31, 1987; and (3) the income in excess of expenses for the short-year Schedule K-1 is reported ratably over a four year period.
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- The taxpayer's ACRS subtraction will be based upon his total unrecovered ACRS additions. This includes the ratable portion of the 1987 short-year ACRS addition that was actually reported in taxable year 1987.
- The taxpayer's ACRS subtraction will be based upon his total unrecovered ACRS additions. This includes the ratable portion of the 1987 short-year ACRS addition that was actually reported in taxable year 1987.
I hope that this ruling has satisfactorily answered your questions and if you have any additional questions, please do not hesitate to contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner