Tax Type
Corporation Income Tax
Description
Subtraction of expenses recorded in error on consolidated return
Topic
Subtractions and Exclusions
Taxable Income
Date Issued
03-19-1990
March 19, 1990
Re: §58.1-1821 Application; Corporation Income Tax
§58.1-402 Virginia Taxable Income
Dear ****
This is in response to your letter of August 24, 1989 in which you applied for correction of an assessment of corporation income tax.
Facts
The Taxpayer was included in a consolidated federal corporation income tax return and filed a separate Virginia return. Due to a bookkeeping error, professional fees incurred by the Taxpayer were recorded as expenses of other affiliates. This error was not corrected in the schedules attached to the consolidated federal return, but had no impact on the consolidated federal taxable income because all affiliates involved were included. When the Virginia return was prepared, additional professional fees were allocated to the Taxpayer. These additional fees were taken as a subtraction on the Virginia corporate income tax return. The subtraction was disallowed upon audit.
Discussion
The computation of Virginia taxable income begins with federal taxable income. Therefore, Virginia relies on the amount and character of each item reported on the federal return and supporting schedules. When a taxpayer alleges that an item should be treated differently on a Virginia return than it was on a federal return, the taxpayer must clearly show that the item was erroneously reported on the federal return and must also show that the erroneous item did not affect the amount or characterization of any item of federal taxable income.
The auditor properly relied on information contained in the federal return. Based on the information provided with this application it appears that the Taxpayer has substantiated its case for different treatment. The fees were properly allocable to all affiliates, as all the operating companies benefited from the services. Since the Taxpayer was the only legal entity out of the affiliated group required to file in Virginia, the reallocation of these professional fees was necessary for reporting an accurate Virginia taxable income.
It should be noted that such adjustments on the Virginia return are not "additions" or "subtractions" to federal taxable income as those terms are used in Va. Code §58.1-402. Technically they are adjustments to reconcile federal taxable income for Virginia purposes to federal taxable income actually reported to the Internal Revenue Service.
The modifications to the information on the federal return do not affect the federal taxable income or the character of any item reported to the IRS. Therefore, it is not necessary to amend the federal return in order to allow the deduction and correct the Virginia assessment.
Determination
Accordingly, the assessment will be abated. The assessment has been paid by applying a portion of a refund due the Taxpayer to the balance due. The portion of the refund so applied will be refunded to the Taxpayer.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner