89-193 | Virginia Tax

Tax Type

Individual Income Tax

Description

ACRS Modifications

Topic

ACRS Modifications

Taxable Income

Date Issued

06-27-1989

June 27, 1989

Re: Ruling Request Individual Income Tax
1988 ACRS Modification

Dear******************

This is in reply to your letter dated December 15, 1988 in which you request a ruling regarding the proper treatment of the ACRS modifications for certain fiscal year conduit entities.

FACTS

The Excess Cost Recovery (ACRS) addition modification was eliminated effective for taxable years beginning on and after January 1, 1988. You question the applicability of this modification to the calendar year shareholders of an S corporation which has a fiscal year beginning in 1987 and ending after January 1, 1988.

RULING

The Excess Cost Recovery (ACRS) addition modification was enacted (1982 Acts, Chapter 633) effective for taxable years beginning on and after January 1, 1982 and repealed (1987 Acts, Chapter 9) effective for taxable years beginning on and after January 1, 1988. To fairly apply this law to "conduit entities" (partnerships, S corporations, estates and trusts) and to their investors (partners, shareholders and beneficiaries), the department adopted the "entity concept." The application of this concept is set forth in VR 630-2-323 (Virginia Individual Income Tax Regulations) and VR 630-3-323 (Corporation Income Tax Regulations). The applicable portions of these regulations sections (which are identical in language) provide that:

- B. 4. Partnerships, estates, trusts and electing small business corporations (Subchapter S) report the ACRS addition on their Virginia returns. The ACRS addition is included in the additions and subtractions reported to each partner, beneficiary and shareholder in accordance with the distributive share for the taxable year.
  
  D. 2. Additions by other taxpayers.

a. Except for those situations set forth below, a taxpayer may claim a subtraction for only those ACRS additions made by the taxpayer. For this purpose a partner, beneficiary or shareholder is NOT deemed to have made ACRS additions reported by partnerships, estates, trusts and electing small business corporations (Subchapter S corporation). A partner, for example, may claim an ACRS subtraction only to the extent that it is included in the partner's distributive share of the income, loss, additions and subtractions for the taxable year. No adjustments are required due to any changes in the partner's ownership interest between the time the ACRS addition is made by the partnership and the time the ACRS subtraction is claimed by the partnership.

The department recently adopted final regulations implementing the 1987 and l 988 legislation phasing out the ACRS modifications. These regulations (copy enclosed) also utilize the "entity concept" in the phase out of the ACRS modifications.

In a situation such as the one you describe (when an S corporation and its shareholders have different taxable years), the last ACRS addition of the S corporation will be included in the shareholder's modifications reported in 1988. Similarly, the last subtraction of the S corporation would be reported in the shareholder's modifications reported in 1990. This would also be applicable to partnerships, estates. and trusts and their partners and beneficiaries.

You also expressed a concern in your letter regarding the length of time it takes the department to process a refund when a taxpayer designates a portion of his overpayment as a contribution to one of the approved organizations listed on the tax return. You indicate that, based on your personal experience, your refund was apparently delayed when you contributed part of your overpayment to the Virginia Nongame Wildlife Program.

I assure you that contributing a portion of the overpayment has no effect upon the length of time it takes the department to process a refund. If there was a delay in you receiving your refund, it was not caused by the fact that you contributed part of your overpayment to the Virginia Nongame Wildlife Program.

Sincerely,

W. H. Forst
Tax Commissioner

Rulings of the Tax Commissioner