Can a corporation amend its Virginia sales factor and claim a refund without also amending the related federal return when taxable income did not change?

Plain-English summary

A corporate group filed a combined Virginia return for 2013. Two affiliated corporations jointly owned an LLC taxed as a pass-through entity. The group later amended its Virginia return to reduce the Virginia sales factor associated with those entities, but it did not amend the LLC's federal Form 1065. The Department initially denied the refund because the sales on the amended Virginia return no longer matched the gross sales reported federally.

The taxpayer explained that the LLC had overstated both sales and expenses by the same amount. Correcting both items therefore reduced gross receipts without changing federal taxable income, giving it no reason to amend federal taxable income.

The Department agreed that the absence of an amended federal return was not an automatic bar. Under P.D. 92-135, a taxpayer may amend a Virginia income-tax return even when the corresponding federal return has not been amended. Virginia ordinarily reconciles the sales factor to federal gross receipts, but the taxpayer may prove why the federal number does not correctly reflect receipts connected with its trade or business for Virginia purposes.

Because the Virginia amended return was timely, the Department returned the matter to audit staff to examine the documentation and determine whether the LLC's revised sales factor could be substantiated. A refund would issue only as appropriate after that review.

What this means for you

Corporations correcting a Virginia-only apportionment item

An amended federal return is not always a prerequisite to a Virginia amendment, especially when correcting offsetting gross-receipt and expense errors that do not change taxable income.

Taxpayers whose Virginia sales factor differs from federal gross receipts

Expect scrutiny. You bear the burden of documenting why the federal gross-receipts figure does not represent the correct amount for Virginia apportionment.

Refund claimants

A favorable legal ruling may still lead to an audit remand rather than an immediate refund. The amount must be substantiated before money is returned.

Common questions

Q: Did Virginia require an amended federal Form 1065 before considering the state amendment?
A: No. The Department said the missing federal amendment did not, by itself, prevent acceptance of the Virginia amended return.

Q: Was the refund granted immediately?
A: No. Audit staff had to review and substantiate the revised sales factor first.

Q: Why could gross sales change without changing taxable income?
A: The taxpayer documented that both sales and expenses had been overstated by the same amount.

Citations and references

• Va. Code § 58.1-414 -- sales-factor computation
• Va. Code § 58.1-302 -- definition of sales
• Va. Code §§ 58.1-407 through 58.1-421 -- PTE allocation and apportionment
• P.D. 92-135 (8/6/1992) -- Virginia amendment without a corresponding federal amendment
• P.D. 88-165 (6/29/1988) and P.D. 07-150 (9/21/2007) -- PTE apportionment rules

Subject

Administration: Refunds - Filing Requirements, Amended Returns

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 19-123

Original ruling text

November 15, 2019

Re: § 58.1-1821 Application: Corporate Income Tax

Dear *:

This will reply to your letter in which you seek a refund of corporate income tax paid by * (the “Taxpayer”) for the taxable year ended December 31, 2013.

FACTS

* (Corporation A) and (Corporation B) are affiliates wholly owned by the Taxpayer. Corporation A and Corporation B jointly owned ** (CLLC), a limited liability company. The Taxpayer and its affiliates filed a combined Virginia income tax return for the taxable year at issue.

The Taxpayer filed an amended Virginia return to report a reduction of the Corporation A, Corporation B and CLLC’s Virginia sales factor. Under review, the Department disallowed the return on the basis that the Taxpayer did not file an amended federal return for CLLC reflecting the reduction in sales. The Taxpayer appeals, contending that it was not required to file an amended federal return because the reduction in sales did not change the taxable income of CLLC.

DETERMINATION

Under Virginia Code § 58.1-414, the sales factor for a taxable year is a fraction, the numerator of which is the total sales of the corporation in Virginia, and the denominator of which is the total sales of the corporation everywhere, “to the extent that such sales are used to produce Virginia taxable income and are effectively connected with the conduct of a trade or business within the United States and income therefrom is includable in federal taxable income.” Virginia Code § 58.1-302 defines the term “sales” as the gross receipts of the corporation from all sources (except dividends, which are allocated), whether or not such gross receipts are generally considered sales. As such, the sales factor includes all gross receipts that are included in Virginia taxable income and are connected with the conduct of the taxpayer’s trade or business within the United States.

Pass-through entities (i.e., CLLC) that have income from activity both within and without Virginia are required to compute their Virginia source income in accordance with the corporate statutory formula set forth in Virginia Code §§ 58.1-407 through 58.1-421. As such, pass-through entities must allocate dividends to the state of commercial domicile and apportion all other income. Income is apportioned using a three-factor formula based on the property, payroll and sales within Virginia. See Public Document (P.D.) 88-165 (6/29/1988), and P.D. 07-150 (9/21/2007).

As a normal review practice, the Department reconciles sales to the gross receipts or sales reported on a taxpayer’s federal return. See P.D. 92-135 (8/6/1992). In this case, the reviewer denied the Taxpayer’s amended Virginia return because the gross sales reported on CLLC’s Federal Form 1065 did not match the amount reported in the sales factor of its amended Virginia return.

The Taxpayer has provided documentation indicating CLLC overstated both its sales and expenses in the same amount. Under these circumstances, CLLC’s federal taxable income would not change even though the amount of its gross sales was reduced.

In P.D. 92-135, the Department concluded that a taxpayer may amend a Virginia income tax return even through the corresponding federal return has not been amended. As such, the fact that the Taxpayer did not amend its 2013 federal return does not preclude the Department from accepting the Virginia amended return. The Taxpayer, however, will have the burden of showing why the gross receipts reported on a federal return do not reflect income connected with the conduct of the Taxpayer’s trade or business within the United States.

Because the Taxpayer filed its 2013 Virginia corporate amended return within the statutory period, the case will be returned to audit staff to review the amended return and see if it can substantiate CLLC’s amended sales factor. If necessary, the Department may request additional information to make an accurate adjustment. Upon completion of the review, a refund will be issued, as appropriate.

The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1711.B

Related Documents

88-165

07-150

92-135