Tax Type
Corporation Income Tax
Description
Telecommunications companies; Net operating loss deductions
Topic
Computation of Income
Date Issued
03-20-1995
March 20, 1995
Re: §58.1-1821 Application; Corporate Income Tax
Dear**************
This will reply to your letter of July 20, 1994, in which you seek correction of a corporate income tax assessment for ********(the"Taxpayer").
FACTS
The Taxpayer is a telecommunications company subject to the minimum tax imposed by Code of Virginia §58.1-400.1. During 1990, the Taxpayer and a former affiliate ("Company A") were parties to a merger, with the Taxpayer remaining as the surviving entity. Company A was not a telecommunications company as defined in Code of Virginia §58.1400.1 (D)
The Taxpayer's return for the taxable year ended March 31, 1993, was subject to an office audit and an assessment was issued. The basis of the assessment was the disallowance of certain net operating loss deductions ("NOLDs"). Relying on Code of Virginia § 58.1-403 (6), the auditor disallowed all NOLDs attributable to taxable years beginning before January 1, 1989. These NOLDs were the result of Company A's premerger operations. You object to this assessment and believe Code of Virginia §58.1-403 (6) was not intended to apply in these circumstances.
DETERMINATION
Effective for taxable years beginning on and after January 1, 1989, Chapter 899 of the 1988 Acts of Assembly imposes the Virginia corporate income tax on telecommunications companies. In addition, telecommunications companies may be subject to a minimum tax on gross receipts in lieu of the corporate income tax, in years where the minimum tax exceeds the corporate income tax. Previously, telecommunications companies had been subject to a state license tax on gross receipts administered by the State Corporation Commission.
Chapter 899 included a prohibition against the carryforward of pre-1989 NOLDs by a telecommunications company. Code of Virginia § 58.1-403 (6), which applies exclusively to telecommunications companies, provides:
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- There shall be added to federal taxable income any amount which was deducted in determining taxable income as a net operating loss carry-over from any taxable year beginning on or before December 31, 1988.
- There shall be added to federal taxable income any amount which was deducted in determining taxable income as a net operating loss carry-over from any taxable year beginning on or before December 31, 1988.
In many respects, the merger of two entities is similar to affiliated corporations filing on a consolidated basis. In a consolidated filing, NOLDs of one affiliate will reduce the taxable income of another affiliate provided the limitations of Internal Revenue Code § 382 do not apply. If the Taxpayer and Company A were separate affiliated entities filing on a consolidated basis, Code of Virginia §58.1-403 (6) would be inapplicable to the pre-1989 NOLDs of Company A. Therefore, to deny a telecommunications company the benefit of pre-1989 NOLDs merged from a non-telecommunications company under the purview of Code of Virginia §58.1-403 (6) would be beyond the intent of the law.
Accordingly, the Taxpayer may deduct Company A's pre-1989 NOLDs in computing its regular corporate income tax liability. However, of course, pre-1989 NOLDs will have no effect on the computation of the minimum tax on gross receipts imposed under Code of Virginia §58.1 -400.1.
The assessment for the taxable year ended March 31, 1993 shall be abated in full. Should you have any questions concerning this matter, please contact****************.
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- Sincerely,
Danny M. Payne
Tax Commissioner
- Sincerely,
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Rulings of the Tax Commissioner