How did Virginia revise a corporation's 1998 property factor when the audit included construction in progress and unreconciled Virginia property?

Subject

Adjustment to the property factor contested, included construction in progress.

Plain-English summary

Virginia revised the taxpayer's 1998 property factor after receiving reconciled records and removed construction in progress from both sides of the factor. The official page metadata used an earlier date, but the reproduced ruling itself is dated November 21, 2007, which this page uses as the issued date.

The auditor had adjusted an affiliate's denominator to match property reported for federal income tax purposes and used a taxpayer schedule for the Virginia numerator. The Commissioner agreed that federal tax basis generally controlled the property's value, so reconciling the denominator to the federal return was correct.

The numerator schedule, however, had not been reconciled to federal basis. Additional records clearly accounted for the affiliate's federal balance-sheet property and the corresponding Virginia property. Virginia therefore adjusted inventory and depreciable assets in both the numerator and denominator.

Property under construction also had to be excluded until actually used. The revised audit removed construction in progress from both the Virginia numerator and the everywhere denominator. An updated bill with interest was still to be issued.

What this means for you

• Reconcile state apportionment schedules to the federal tax basis before an audit.
• Support the Virginia numerator with records that tie directly to the same property population used in the denominator.
• Construction in progress was excluded under the rule applied here until the property was actually used.
• A successful adjustment to the factor may reduce an assessment without eliminating the remaining balance.

Common questions

Did Virginia reject the federal-basis denominator? No. The Commissioner said the auditor correctly reconciled it to property reported for federal income tax purposes.

Why was the numerator changed? The taxpayer later supplied information clearly reconciling its Virginia inventory and depreciable assets to the federal return.

Was construction in progress included anywhere in the final factor? No. It was removed from both numerator and denominator because it was not yet in use.

Citations and references

• 23 VAC 10-120-170(B).
• 23 VAC 10-120-160(A)(4)(b).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-189

Original ruling text

November 21, 2007

Re: § 58.1-1821 Application: Corporate Income Tax

Dear *:

This will reply to your firm's letter in which you seek correction of the corporate income tax assessment issued to * (the "Taxpayer") for the taxable year ended December 31, 1998.

FACTS

The Taxpayer and its affiliates file a combined Virginia income tax return. The Department audited the Taxpayer's 1998 Virginia corporate income tax return and made several adjustments. Among the adjustments, the auditor found that the property factor for * (the "Affiliate") did not reconcile with schedules provided by the Taxpayer. The auditor adjusted the denominator of the property factor to reconcile to property reported for federal income tax purposes and the numerator to match amounts reported on the Taxpayer's documentation. The Taxpayer contests the adjustment to the property factor, asserting the auditor's adjustment includes construction in progress.

DETERMINATION

Under Title 23 of the Virginia Administrative Code (VAC) 10-120-170 B, the value of property included in the property factor is generally its basis for federal income tax purposes at the time of acquisition and including any subsequent capital additions and improvements or partial dispositions by reason of sale, exchange, or abandonment. Thus, the auditor correctly adjusted the denominator of the property factor to match amounts reported for federal income tax purposes.

The property values included in the numerator of the property factor, however, were taken from a schedule that was not reconciled to the federal income tax basis. At the request of the Department, the Taxpayer has provided additional information that clearly accounts for the property values reported on the Affiliate's federal income tax return balance sheet and the corresponding property values in Virginia. As such, both inventory and depreciable assets have been adjusted for both the denominator and the numerator in accordance with the Virginia regulation.

Under Title 23 VAC 10-120-160 A 4 b, property under construction during the taxable year in question must be excluded from the property factor until it is actually used. Based on the information provided, construction in progress has been removed from the numerator and denominator of the property factor.

A revised audit report is enclosed, reflecting the adjustments required as a result of this determination. An updated bill with interest accrued to date will be sent to the Taxpayer. Please remit payment for the total outstanding balance to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203. Attn: *. No further interest will accrue provided the bill is paid within 30 days from the date of the updated bill.

The regulations cited 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, you may contact * at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1310398344B