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.