Tax Type
Corporation Income Tax
Description
Equity income on separate VA return; Consolidated federal filer
Topic
Taxable Income
Date Issued
06-12-1990
June 12, 1990
Re: §58.1-1821 Application; Corporation Income Tax
§58.1-402 Virginia Taxable Income
Dear ******************
This is in response to your letter of October 16, 1989 in which you applied for correction of an assessment of corporation income tax.
Facts
The Taxpayer filed separate Virginia corporate income tax returns and a consolidated federal return. On the federal consolidated return, the Taxpayer included equity earnings of its subsidiary in other income and eliminated the same amount in arriving at federal taxable income. This elimination was disallowed as a subtraction on the separate Virginia return. The Taxpayer was assessed tax and interest.
Discussion
A separate Virginia return shows only the income, expenses, gains, losses, allocation and apportionment factors of the filing corporation. All activities of other members of the affiliate group are ignored. VR §630-3-442(B)(1).
The computation of Virginia taxable income for a separate return 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 why different treatment is required.
The auditor properly relied on information contained in the federal return. Based on information provided with this application it appears that the Taxpayer has substantiated its case for different treatment. The subtraction is a book-to-tax adjustment to eliminate the subsidiary's net income from the Taxpayer's federal taxable income. The subsidiary's income was taxed on a separate Virginia corporate income tax return and should not be taxed a second time on the Taxpayer's separate return.
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.
DETERMINATION
Accordingly, the audit report will be adjusted and the assessment will be abated.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner