Tax Type
Corporation Income Tax
Description
Returns of Affiliated Corporations
Topic
Returns/Payments/Records
Date Issued
10-15-1991
October 15, 1991
Re: §58.1-1821 Application; Corporation Income Tax
Dear*****************
This will reply to your letter of May 31, 1990, in which you seek correction of corporation income tax assessments for ************** (the "Taxpayer").
FACTS
The taxpayer was included in a consolidated federal return and filed a separate Virginia return for the years under review. The taxpayer was audited, and an adjustment was made to the computation of Virginia taxable income by adding back "capital losses" subtracted on the consolidated federal return. You contend that the losses qualify for Internal Revenue Code (IRC) §1231 treatment and propose that they be allowed as ordinary losses in computing Virginia taxable income. Furthermore, you propose that the taxpayer's net operating loss carryover be adjusted to reflect the §1231 treatment of the losses.
DETERMINATION
Capital losses: The department has previously ruled on the treatment of capital losses and §1231 losses, and the possibility of different characterization for consolidated federal return and separate Virginia return purposes. See P.D. 91-225 (9/18/91) (copy enclosed).
You state that your review of the related federal forms 1120 and 4797 indicates that the losses arose from the sale of assets used in the taxpayer's business; therefore, IRC §1231 should apply and the losses, which exceeded the taxpayer's gains, should be treated as ordinary losses and allowed in their entirety. However, no documentation has been supplied to substantiate your claim. According to the auditor, supporting schedules were not available at the time of the audit, and no such information has been provided with your letter. Without the federal forms and the supporting schedules, the department is unable to determine the character of the losses.
The department will allow you to submit documentation to substantiate your claim that the taxpayer's losses qualify for treatment under IRC §1231. The documentation must include federal Form 4797 and supporting schedules, as filed with the Internal Revenue Service, showing the proceeds, basis and gain and loss amounts for each corporation. The documentation must be sufficiently detailed to reconcile to amounts reported on the consolidated federal return and on the separate Virginia return. Should you choose to submit the information, please send it to the department's Technical Services Section, P.O. Box 6-L, Richmond, Virginia 23282, within 30 days.
NOLD carryover: The auditor applied net operating losses to offset 1987 taxable income. You contend that the adjustment to "capital losses," which will result in the losses being allowed in their entirety as ordinary losses, will reduce 1987 federal taxable income; therefore, a reduced NOLD will be utilized to completely offset taxable income for 1987, and the NOL carryover to future periods will be increased.
If the taxpayer is able to substantiate its claim that the losses are not capital losses, but rather qualify for treatment under IRC §1231, then the NOLD carryover will be reviewed and adjusted accordingly.
Sincerely,
W. H. Forst
Tax Commissioner
TPD/5391F
Rulings of the Tax Commissioner