Commissioner Janie Bowen
Office of the Commissioner
Virginia Department of Taxation
P.O. Box 1115
Richmond, VA 23218-1115

Via e-mail

Re: Intangible Holding Company Draft Regulation

Dear Commissioner Bowen,

We want to thank the Virginia Department of Taxation (TAX) for the opportunity to comment on your draft regulations relating to the addition of intangible expenses and implementing the amendments to Virginia Code sections 58.1-302 and 58.1-402 enacted by 2004 Acts of Assembly, Special Session 1, Chapter 3.

We are writing to you representing the Virginia Society of CPAs (VSCPA) Taxation Advisory Task Force (Task Force). This letter represents the opinion of this expert group only and does not represent a position of the VSCPA or its membership.

The Task Force has the following comments regarding the draft regulations:

1. The proposed regulations are exceedingly complex and would place an undue administrative burden on all entities to enhance and increase the accounting function.
2. The effective date of the regulations should not be retroactive to calendar years on or after 2003, but should be prospective to allow taxpayers time to gather the records. The 2004 calendar year was filed in 2005, and if the three year statute is to be followed, that year should have already passed under the Statute of Limitations.
3. Many of the statements throughout the proposed regulations are far too broad, and other sections of the statute are not being considered.
   •  On Page 1, section A.1., second line, the word “any” is extremely broad. This would require separate state accounting from those records that are kept for federal purposes. There may be entities involved from outside the United States which pass dividends or other payment to entities within the U.S. and Virginia.
   • Does the reference to 58.1-302 mean all the definitions, including the definition of related party? If so, we strongly encourage review of the new forms 1120 and 1065 being proposed by the Internal Revenue Service (IRS) for the 2008 year and beyond. We would like conformity as much as possible with the Internal Revenue Code (IRC).
   • The following issue needs to be addressed: how would these regulations affect research and development companies who are not related, but are only preparers of prototypes or models who then license their product or sell the rights to the product?
   • On page 3, section B, the provisions included seem to conflict with the IRS tracing rules and the possible election that can be made pursuant to 1.163-8T of the federal regulations.
   • On page 5, example 2, tracing the dividend or interest payment through several layers of entity structure would create an enormous task and would be virtually unauditable. Bifurcating dividend payments, some of which are related to intangibles and some portion not, would cause problems in reporting. The regulation fails to address by what basis a dividend would have to be bifurcated.
   •  On page 6, section 3, it is unclear whether there would be some additional reporting and disclosure to TAX which is different from any other disclosures, more schedules on the form or additional information returns.
   • On page 6, section C, clarification is needed regarding how corporations would demonstrate that there is an actual tax liability and whether it includes franchise taxes or just taxes based on income. Regarding entities that file consolidated or combined returns in other jurisdictions, this information may not be available to them. Since pro forma returns are not acceptable, this would cause taxpayers to undo elections that would facilitate filing in other jurisdictions. It is unclear how TAX would be able to determine the information if the related party is a foreign entity that has no filing responsibility in the United States.
   • On page 10 section D.2.a., the definition of "substantial" is overly broad. We recommend that TAX be more definitive in its approach (i.e. set some type of bar). Right now, "any difference" doesn't appear to give the taxpayer any room for error.
   • On page 12, section E.3., "significant tax savings" is too broad. Tax savings are relative to the taxpayer's situation. We feel that a more specific definition would make it easier for the taxpayer to interpret the regulation.
   • On page 13, section F.1.a., this seems to be in line with "pay to play" provision, which is no longer applicable in Virginia. Collection of monies should occur after TAX ultimately determines that relief will not be granted.
   • On page 13, section F.1.b.2., six months appears to be insufficient time. Other provisions in the regulation give TAX one year. The taxpayer should be on equal footing with TAX. Allowing the taxpayer one year would provide adequate and equal time to address this issue.
   • Finally, charging a fee for any advance determination should only apply if TAX can rule within a specific timeframe. For example, the IRS has gone to more automatic elections because of time constraints prior to filing returns.

Again, we thank TAX for its work in this area and its commitment to soliciting feedback prior to finalizing these regulations. We ask that you consider our suggestions in finalizing these regulations.

If you have any questions or concerns, please don’t hesitate to contact a member of the Task Force listed below or VSCPA Government Affairs Director Emily Walker at ewalker@vscpa.com or (804) 612-9428.

Thank you again for your consideration.

Sincerely,

VSCPA Taxation Advisory Task Force

            Art Auerbach, CPA: aauerbach@goodmanco.com 
            Damon DeSue, CPA: ddesue@dollartree.com 
            Duane Dobson, CPA: Duane.Dobson@gt.com 
            Teresa Jordan, CPA: teresa.jordan@yhbcpa.com 
            William J. Overby, CPA: woverby@mcguirewoods.com 
            Rebecca McCoy, CPA: Rebecca.mccoy2007@gmail.com 
            Julia Rogers, CPA: jrogers@biegler.net 
            Monique Valentine, CPA: valentim@agc.org 
            Mark Van Deveer, CPA: markv12@juno.com

Cc: John P. Josephs Jr., Virginia Department of Taxation