The Virginia Department of Taxation refused to consider whether a taxpayer was entitled to claim an exception from the state’s addback statute because the taxpayer failed to follow the statutory procedure.
The Virginia Department of Taxation refused to consider whether a taxpayer was entitled to claim an exception from the state’s addback statute because the taxpayer failed to follow the statutory procedure. P.D. 11-174 (Oct. 12, 2011).
Virginia law requires the addback of intangible expenses and costs, which includes losses related to, or incurred in connection with, factoring transactions. The taxpayer paid factoring fees to a related company and deducted them on its federal income tax return. The taxpayer claimed an exception from Virginia’s addback requirement on its original Virginia return based upon the exception that it had a valid business purpose other than the avoidance of tax. Upon audit, the Department disallowed the exception from the addback rules because the sales lacked a valid business purpose.
The Department disallowed the taxpayer’s claimed exception because the taxpayer did not petition the Department to consider whether there was clear and convincing evidence that the related party transactions had a valid business purpose other than the avoidance or reduction of tax. Because the taxpayer had claimed the business purpose exception on its original return—rather than applying the addback, paying the tax, and petitioning for relief—the Department upheld the assessment.
The ruling went on to recognize that facilitating the securitization of receivables and complying with lending requirements of unrelated third-party lenders may be a valid business purpose. The Department invited the taxpayer to follow the proper procedures within the applicable statute of limitations to claim the valid business purpose exception.
Eversheds Sutherland is an international law firm helping the Fortune 100, industry leaders, sector innovators and business entrepreneurs solve their biggest challenges and reach their business goals. Dedicated to unfaltering excellence in client service, we are known for our business savvy and industry intelligence, providing creative and custom solutions for each of our clients. Industry and business experience makes the difference for our clients.
Complete the fields below to send your briefcase via email. Separate multiple email addresses with semi-colons(;)