Was a substantiated Virginia corporate claim-of-right credit treated as a timely payment for penalty and interest?

Plain-English summary

Virginia treated the corporation's substantiated claim-of-right repayment credit as a timely payment and refunded the late-payment penalty and interest.

The corporation had included sale income in its 2001 federal and Virginia returns. A court reversed the sale in 2003, and the corporation used the federal claim-of-right rules on its 2003 returns.

The Virginia return initially reported the repayment as an estimated payment without identifying it as a claim-of-right adjustment, so the Department disallowed it and assessed tax, penalty, and interest. After receiving more information, the Department allowed the credit and abated the tax.

The ruling then concluded that the documented claim-of-right amount was timely for Virginia purposes and ordered a refund of the remaining penalty and interest.

What this means for you

• Virginia followed the federal method elected under IRC § 1341.
• Documentation cured the initial failure to identify the adjustment properly.
• Allowance of the credit supported timely-payment treatment here.
• Claim-of-right reporting should be clearly identified on the return.

Common questions

Was the tax itself still due?

No. It had already been abated after the credit was substantiated.

What remained disputed?

Late-payment penalty and interest.

What did Virginia refund?

The penalty and interest previously paid.

Citations and references

• IRC § 1341.
• The source cites P.D. 87-190 and P.D. 91-222.

Subject

Claim of Right Doctrine

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 06-141

Original ruling text

December 4, 2006

Re: § 58.1-1821 Application: Corporate Income Tax

Dear *:

This will reply to your letter in which you seek correction of the corporate income tax assessment issued to * (the "Taxpayer") for the taxable year ended September 30, 2003. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a Virginia corporation. During the taxable year ended September 2001, the federal taxable income reported on the Taxpayer's federal and Virginia corporate returns included income from a sale. The sale was reversed under a court order in 2003, after which the Taxpayer claimed the amount of tax benefit derived from the repayment under the claim of right doctrine on its federal and Virginia corporate income tax returns for the taxable year ended September 2003.

The Taxpayer claimed the repayment as an estimated income tax payment on its Virginia corporate income tax return; however, the repayment was disallowed because the Taxpayer did not identify the repayment as a claim of right adjustment on the corporate return. The Department issued an assessment, which included a penalty for late payment, after the repayment adjustment was disallowed.

The credit was subsequently granted after the Taxpayer provided additional information. The tax portion of the assessment was then abated, but the penalty and interest amounts were not. The Taxpayer states that the repayment amount claimed on the Virginia corporate income tax return filed for the taxable year ended September 2003 should have been considered an overpayment made on the last day of the fiscal year, as is the case under Internal Revenue Code (I.R.C.) § 1341 and, therefore, the penalty and interest for late payment is not applicable.

DETERMINATION

Under the provisions of I.R.C. §1341, a taxpayer is allowed to either: (1) reduce the tax for the year of the repayment by the amount of tax attributable to the inclusion of the income in the previous year(s), or (2) deduct the amount repaid in the year of the repayment. The taxpayer is allowed to use whichever method results in the lower tax liability. In either case, the adjustment is made to the return for the year of the repayment, not to the prior year's return in which the income was included.

In order to maintain conformity with the options available to corporations and individuals under the I.R.C., the Department will allow individuals to fully follow the provisions of I.R.C. §1341 for Virginia income tax purposes. See Public Document (P.D.) 87-190 (8/5/1987) and P.D. 91-222 (9/23/1991). This means that the method elected for federal income tax purposes will determine the method that must be used for Virginia income tax purposes.

In this case, the Taxpayer provided sufficient documentation to substantiate the claim of right. Accordingly, the claim of right repayment amount claimed by the Taxpayer will be considered a timely payment. A refund of the penalty and interest previously paid by the Taxpayer will be issued shortly.

The Code of Virginia section and public document cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this determination, please contact * in the Department's Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/52346E