Tax Type
Corporation Income Tax
Description
Motor Carriers; Investment tax credit; Milage factor
Topic
Computation of Income
Date Issued
09-06-1991
September 6, 1991
Re: §58.1-1821 Application; Corporation Income Tax
Dear************************
This will reply to your letter of June 6, 1989, in which you seek correction of assessments of corporation income tax for**************("Taxpayer #1") and ***************** ("Taxpayer #2").
FACTS
The taxpayers are motor carriers operating in several states, including Virginia. During the years under review, Taxpayer #2 was a wholly owned subsidiary of Taxpayer #1; each taxpayer filed a separate Virginia corporation income tax return. The taxpayers' returns for 1985, 1986 and 1987 were audited and adjustments were made, resulting in the assessment of additional taxes. The issues you raise will be addressed separately.
DETERMINATION
Subtraction for Income Previously Taxed: In computing its 1985 Virginia taxable income, Taxpayer #1 reported a subtraction for the income of a merged corporation which was included in Taxpayer #1's federal taxable income. The auditor disallowed the subtraction. Your justification for the subtraction is that the income had been previously taxed on a final short year state return (1/1/85-3/31/85) filed by the merged corporation. Therefore, the same income should not be taxed at the state level again.
Taxpayer #1 had been filing a separate Virginia return and a consolidated federal return. The merged corporation properly filed a separate Virginia return upon merger, conforming to the election of the affiliated group. Taxpayer #1 should have computed its federal taxable income for Virginia purposes as if its federal and Virginia returns were filed on the same basis (separate), which in this case, would have excluded the income of the merged corporation. The "subtraction" of income was not authorized by Virginia law; however, the income should not have been included in Taxpayer #1's federal taxable income for Virginia purposes in the first place. Accordingly, the income from the merged corporation will be removed from Taxpayer #1's 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.
Investment Tax Credit: Taxpayer #1 and Taxpayer #2 claimed a subtraction for excess state over federal depreciation deduction due to basis adjustment for the investment tax credit at the federal level. This subtraction was disallowed by the auditor. You contend that additional depreciation expense, based on the original cost of the asset, is required at the state level because Virginia does not allow an investment tax credit.
It is recognized that the depreciable basis of certain assets is reduced by a portion of the investment tax credit allowed for federal tax purposes, thereby reducing annual depreciation. Virginia does not allow a similar credit and basis reduction. However, there can be no adjustment at the state level to reflect depreciation expense on the full cost of the depreciable assets for state purposes without statutory authority to do so. The Code of Virginia does not provide for such an adjustment; consequently, the subtraction must be disallowed.
Mileage Factor: The income tax auditor adjusted the numerators of the mileage factors of both taxpayers to equal the original motor fuel road tax audit mileage figures computed by the Virginia Motor Carrier Division of the State Corporation Commission (SCC). At the time of the income tax audit, the taxpayers were contesting the Motor Carrier Division's mileage figures. The taxpayers requested that settlement of the income tax mileage factors await the resolution of the motor fuel road tax audit, so that the correct apportionment factors could be used.
The auditor was justified in using the motor fuel road tax mileage figures as the basis for computing the numerators of the mileage factors for income tax purposes, because those figures represent the total number of miles traveled within Virginia by the taxpayers' vehicles. However, following the income tax audit, the motor fuel road tax mileage figures for the years under review were modified in a settlement between the taxpayers and the SCC. The department will adjust its audit report so that the numerators of the mileage factors will reflect Virginia mileage as determined in the settlement of the motor fuel road tax audit.
Accordingly, the audit report and the assessment will be revised to reflect the changes noted in this letter. You will receive an updated bill with interest accrued to date. The bill should be paid within 30 days to avoid the accrual of additional interest.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner