Tax Type
Corporation Income Tax
Description
Recovery of ACRS modifications
Topic
ACRS Modifications
Date Issued
12-20-1990
December 20, 1990
Ruling of Commissioner, P.D. 90-230
Dear ****
This is in reply to your letter, in which you request a ruling regarding the proper disposition of certain unrecovered Accelerated Cost Recovery System (ACRS) additions.
FACTS
As a C corporation your client reported ACRS additions for years prior to 1988, and claimed a subtraction equal to 10% of its outstanding balance of excess cost recovery (unrecovered ACRS additions) in taxable year 1988. Effective January 1, 1989, the corporation elected and was granted S corporation status. As an S corporation, your client distributed to its shareholders |1/3 of its unrecovered ACRS additions in taxable year 1989. Thus 56.7% (100% - 10% - |1/3) of the outstanding balance of excess cost recovery has not been subtracted by the corporation or the shareholders.
RULING
On February 22, 1989, the Department adopted final regulations implementing the 1987 and 1988 legislation phasing out the ACRS modifications. See Virginia Regulation (VR) 630-3-323.1.
The regulation provides that if the entire outstanding balance of excess cost recovery has not been recovered through subtractions, then the taxpayer may apply for a refund. In most cases an S corporation will be deemed to have recovered its outstanding balance by distributing subtractions to its shareholders in 1988 and 1989. Any refund applications with respect to distributed subtractions must be filed by the shareholders.
In this case, however, 56.7% of the corporation's outstanding balance of excess cost recovery has not been distributed to the shareholders. Neither the corporation nor its shareholders can claim any subtractions in the future, assuming that the corporation maintains its status as an S corporation. If the corporation cannot apply for a refund under § 7 of the regulation no one will recover this portion of the outstanding balance of excess cost recovery.
Paragraph § 7.A.4 of the regulation provides:
- 4. Estates, trusts, partnerships and S corporations shall not apply for a refund under this section except to the extent that the fiduciary of an estate or trust paid tax on undistributed income.
For purposes of applying this paragraph, a former C corporation that has paid tax on any portion of the outstanding balance of excess cost recovery that remains undistributed after electing S corporation status will be eligible to file an application for refund with respect to such undistributed subtractions. For purposes of subsection 7.C of the regulation the applicable time for filing the application for refund is three years from the due date of the last return in which a subtraction is allowable. Based on the facts provided, your client may apply for a refund within three years of April 15, 1990, the due date for the 1989 return in which 1/3 of the outstanding balance was an allowable subtraction.
I trust that this ruling and the enclosed copy of the regulation will sufficiently answer your questions. If not, please do not hesitate to contact the Department.
Sincerely
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner