Tax Type
Corporation Income Tax
Description
Request for Alternative Method of Apportionment and Allocation.
Topic
Allocation and Apportionment
Date Issued
09-12-2001
September 12, 2001
Re: Request for a Ruling: Corporate Income Tax
Dear *****
This will reply to your request for an alternative method of apportionment and allocation that was made in the 1998 Virginia corporate income tax return of ***** (the "Taxpayer"). I apologize for the delay in the department's response.
FACTS
The Taxpayer is a foreign corporation that owns interests in various partnerships. During the taxable year in question, the Taxpayer was a limited partner in a limited partnership ("LP") that operated in Virginia. The Taxpayer reported capital gain and interest income that was earned in Virginia and allocated the remainder of its income outside of Virginia. The Taxpayer requests that the department allow its alternative method of apportionment and allocation.
RULING
A corporation that has business activities both within and without Virginia must allocate and apportion its income in accordance with Code of Virginia § 58.1-406, et. seq. The department has previously ruled that a corporation which holds an interest in a partnership must include its proportionate share of partnership property, payroll, and sales in its own factors for purposes of apportioning Virginia taxable income. See Public Document (P.D.) 88-226 (7/29/88), copy enclosed. The Taxpayer's investment in the LP does not qualify for the exception of this rule provided to limited partners in P.D. 95-19 (2-13-95), copy enclosed.
The Taxpayer asserts that actual business activities of LP accurately reflect the Taxpayer's income in Virginia. The United States Supreme Court has recognized that allocation and apportionment of income is a process designed to approximate income from business transactions within a state. As long as each state's method of allocation and apportionment is rationally related to the business transacted within a state, then each state's tax is constitutionally valid even though no single formula apportions income perfectly. See Moorman Mfg. Co. v. Bair, 437 U.S. 267, copy enclosed.
The policies that apply to requests for an alternative method of allocation and apportionment under Title 23 of the Virginia Administrative Code (VAC) 10-120-280, copy enclosed, are well established. The Taxpayer has not furnished any substantive documentation to refute the statutory method, other than a general statement that it lacks a positive apportionment factor. The Taxpayer has not shown that the statutory method of apportionment produces an unconstitutional result. The United States Supreme Court has recognized that allocation and apportionment of income is an arbitrary process designed to approximate the income from business transactions within a state. As long as each state's method of allocation and apportionment is rationally related to the business transacted within a state, then each state's tax is constitutionally valid even though there may be some overlap. See Moorman. The department has considered the nature of your business and the portion of it conducted in Virginia and finds that the statutory method is rationally related to the business conducted in Virginia for the taxable year.
The use of an alternative method is allowed only in extraordinary circumstances where the need for relief has been demonstrated by clear and cogent evidence. The department's long-standing policy holds the use of separate accounting in disfavor. See Department of Taxation v. Lucky Stores, Inc., 217 Va. 121 (1976), copy enclosed. The fact that separate accounting results in a different result from the three-factor formula is not sufficient to constitute extraordinary circumstances. Accordingly, permission to use separate accounting in lieu of the statutory three-factor apportionment formula of property, payroll, and sales for purposes of Virginia allocation and apportionment is denied.
Accordingly, the 1998 Virginia income tax return must be refiled to reflect the standard three-factor apportionment formula. Please send the return to ***** at the Appeals and Rulings Office, Virginia Department of Taxation, P.O. Box 1880, Richmond, Virginia 23218-1880, within 60 days to avoid the assessment of additional taxes. If you have any questions regarding this ruling, you may contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
ARO/29060B
Rulings of the Tax Commissioner