Tax Type
Corporation Income Tax
Description
Intercompany interest income; Nonsales items and sales apportionment factor
Topic
Allocation and Apportionment
Date Issued
04-14-1992
April 14, 1992
Re: §58.1-1821 Application Corporate Income Taxes
Dear***********
This is in response to your letter dated June 13, 1991 in which you request correction to assessments for the tax years ending November 1987 and November 1988 for ********* (the "Taxpayer"). The taxpayer contests the audit adjustments in three areas: addback of intercompany interest income to Virginia taxable income, exclusion of nonsales items from the sales apportionment factor denominator, and various auditor adjustments to Virginia taxable income.
RULING
Deferred Intercompany Interest Income
The taxpayer deferred interest income receivable from a related cash basis taxpayer for the year 11/86 into future years for federal tax purposes under Internal Revenue Code (IRC) §267. For separate Virginia tax return purposes, the taxpayer included the entire amount of deferred interest in Virginia taxable income for 11/86. On its Virginia tax returns for the 11/87 and 11/88 taxable years, the taxpayer reported the actual federal taxable income, which included recognition of a portion of the intercompany interest deferred from FYE 11/86, and then subtracted the deferred income that had been reported and taxed in the return for FYE 11/86.
The computation of Virginia taxable income for a separate return begins with federal taxable income. However, if an affiliated group files a separate Virginia return and a federal consolidated return, the separate federal taxable income for Virginia purposes must be computed as if a separate federal return had been filed in all relevant years. See, for example, VR 630-3-402, Sec. 1.B.5(v). Accordingly, for separate Virginia tax purposes, federal taxable income must be computed without recognizing any deferral of intercompany income, gain, loss, or deduction attributable to the filing of a consolidated 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.
Nonsales Items
The term "sales" is defined as all gross receipts except dividends allocable under Va. Code §58.1-407. Generally, the term "sales" will include all gross receipts producing apportionable income. However, not all apportionable income is derived from the actual receipt of cash or other property that would be includible in the sales factor.
A purchase discount is merely a bookkeeping entry to reconcile discounts taken after a payable has been booked at the full amount; there is nothing received to include in the sales factor. As to the foreign exchange gains, the conversion of one currency into another is not a transaction producing gross receipts, but rather a mere change in the form of the money involved. See Public Document 85-1 (1/7/85) (copy attached). Pension reversions, on the other hand, represent an actual receipt of cash by the taxpayer, and are Virginia apportionable income. See Public Document 88-2 (1/4/88).
Accordingly, the auditor correctly reconciled the sales factor to federal return information by excluding certain items of taxable income for which there were no receipts, except for pension reversion proceeds, which were properly included in the sales apportionment factor by the taxpayer.
Various Adjustments
You assert that the auditor has made several adjustments in taxable income with which you do not agree. However, you have provided no explanation or details as to how the other adjustments are erroneous. A review of the remaining adjustments made by the auditor indicates that they appear on their face to be consistent with Virginia law and policy, reconcile to federal return information, or are reasonable estimates in the absence of reliable data. In an application for correction of an erroneous assessment under Va. Code §58.1-1821, the taxpayer has the burden of proving that the assessment is erroneous by showing what the correct assessment should be. See Public Document 91-240 (10/8/91) (copy attached).
The audit will be adjusted to reflect the changes set forth in this letter, and a revised bill will be issued in due course. This bill should be paid 30 days after issuance to avoid the accrual of additional interest.
Sincerely,
W. H. Forst
Tax Commissioner
TPD/5307G
Rulings of the Tax Commissioner