Tax Type
Corporation Income Tax
Description
Combined return; net operating loss and gains
Topic
Corporate Distributions and Adjustments
Date Issued
08-01-1990
August 1, 1990
Re: 1821 Application / Corporate Income Tax
§58.1-445 - Consolidation of Accounts
Dear ****
This is in reply to your letter dated February 23, 1990, in which you protest an assessment and request permission to consolidate the accounts of two related trades or businesses.
FACTS
Prior to taxable year 1985, ***** (Taxpayer) and its affiliates filed separate Virginia corporate income tax returns. In response to the Taxpayer's request, permission was granted on October 16, 1986, for the Taxpayer and its affiliates to file a combined Virginia corporate income tax return for taxable year 1985 and subsequent years.
In 1986, **** (Subsidiary # 1) transferred ownership of a warehouse to a newly formed subsidiary corporation, **** (Subsidiary # 2). Prior to the transfer Subsidiary # 1 incurred federal net operating loss deductions associated with the operation of the warehouse. During 1987, Subsidiary # 2 disposed of the warehouse and recognized a substantial gain on the disposition.
Because federal taxable income is computed on a separate company basis in a Virginia combined return, the Net operating Loss Deduction (NOLD) of Subsidiary # 1 could not be used to offset the gain realized by Subsidiary # 2. After additional tax was assessed for taxable year 1987, the Taxpayer protested the assessment and filed an amended return that consolidated the income, loss and deductions of Subsidiaries # 1 and # 2 for taxable year 1987. You request that the department accept this amended return under the authority granted under Virginia Code §58.1 -445.
DETERMINATION
Virginia law allows corporations to elect to file returns on the basis of one of three filing statuses (separate, combined or consolidated) regardless of how the corporations file their federal income tax return. once an election is made or permission to file using a particular filing status is granted, all returns for subsequent years must be filed on the same basis, unless permission to change is granted by the department.
In 1986, the Taxpayer requested and was granted permission to file a combined Virginia return. In a combined Virginia return, federal taxable income is computed as if separate federal returns had been filed for each corporation and as if separate federal returns were filed for all years affected by the net operating loss deduction. The amended return seeks to obtain some of the benefits of a consolidated return.
The purpose of Virginia Code §58.1 -445 is to assure that items of income, gain, profit, deduction and capital are properly distributed or apportioned between taxpayers who may be taxable at different rates, by different methods or in different states. This section applies to situations in which the federal taxable income is accurately stated, but the income from Virginia sources taxable by Virginia is inaccurate. (VR 630-3-445)
I find that it would be inappropriate to use the provisions of Virginia Code §58.1-445 in this situation. The federal taxable incomes of the two subsidiary corporations are accurately stated and there is no distortion of the income from Virginia sources taxable by Virginia. Consolidating the accounts of these two subsidiary corporations would act to circumvent the department's long standing policy as it relates to the election of filing status and circumstances in which permission to change is allowed.
Therefore, the Taxpayer's amended return is rejected and I find the assessment dated January 8, 1990 is due and payable. You will receive an updated bill in the near future. Please remit full payment within 30 days of the receipt of the updated bill.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner