Tax Type
Corporation Income Tax
Description
Apportionment factor; Stock sale of financial corporation
Topic
Allocation and Apportionment
Date Issued
03-21-2001
March 21, 2001
Re: § 58.1-1821 Application: Corporate Income Tax
Dear ****
This will respond to your letter in which you protest an assessment of corporate income tax for the taxable year ended May 21, 1997, for **** (the "Taxpayer").
FACTS
The Taxpayer was audited for the taxable years ended December 31, 1995, 1996 and May 21, 1997. For the years under audit, the Taxpayer was classified and filed as a financial corporation. The auditor adjusted the single factor apportionment factor for financial corporations to apportion income for both years involved. The Taxpayer protests the method used by the auditor to determine the single factor. Because only the taxable year ended May 21, 1997, resulted in an assessment, the protest is limited to this year.
During 1997, the parent corporation (the "Parent") of the Taxpayer sold the stock of the Taxpayer to an unrelated third party and elected to treat the sale as an asset sale under Internal Revenue Code ("IRC") § 338(h)(10). As a result, the Taxpayer asserts that the three factor formula should be used to apportion income because the proceeds from the stock sale would remove the Taxpayer from the financial corporation status.
DETERMINATION
Virginia's conformity to federal law is set forth in Code of Virginia § 58.1-301, which provides that the terms used in Virginia income tax statutes will have the same meaning as used in the IRC. Therefore, federal taxable income ("FTI"), which is the starting point for determining Virginia taxable income for corporations is identical to that as defined by the IRC. Consequently, Virginia's treatment of the IRC § 338(h)(10) election will mirror the federal treatment as closely as possible, while ensuring that any Virginia tax accurately reflects the business activity in Virginia. Virginia's policy regarding elections under IRC § 338(h)(10) is set forth in Public Document (P.D.) 91-317 (12/30/91), copy enclosed.
Code of Virginia § 58.1-418 defines a "financial corporation" as one that derives more than 70% of its gross income from (1) fees for financial services, (2) gross profits from securities trading, (3) interest, and (4) dividends to the extent included in Virginia taxable income.
The Taxpayer's stock was sold by the Parent which, in concert with the purchaser, elected to treat the sale of the stock as a sale of assets under IRC § 338(h)(10). By including this gain in its income for purposes of the 70% test, the Taxpayer ceases to qualify as a financial corporation for the taxable year ended May 21, 1997. Consequently, the Taxpayer is excluded from using the one-factor formula and must use the three-factor formula to apportion income.
Accordingly, the Taxpayer must file an amended return for the taxable year ended May 21, 1997, using the three-factor formula to apportion income within Virginia. The department will allow 30 days for the Taxpayer to furnish the amended return and the assessment will be adjusted as needed. Please forward the amended return to of the Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880. If you have any questions, you may reach **** at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/24398P
Re: § 58.1-1821 Application: Corporate Income Tax
Dear ****
This will respond to your letter in which you protest an assessment of corporate income tax for the taxable year ended May 21, 1997, for **** (the "Taxpayer").
FACTS
The Taxpayer was audited for the taxable years ended December 31, 1995, 1996 and May 21, 1997. For the years under audit, the Taxpayer was classified and filed as a financial corporation. The auditor adjusted the single factor apportionment factor for financial corporations to apportion income for both years involved. The Taxpayer protests the method used by the auditor to determine the single factor. Because only the taxable year ended May 21, 1997, resulted in an assessment, the protest is limited to this year.
During 1997, the parent corporation (the "Parent") of the Taxpayer sold the stock of the Taxpayer to an unrelated third party and elected to treat the sale as an asset sale under Internal Revenue Code ("IRC") § 338(h)(10). As a result, the Taxpayer asserts that the three factor formula should be used to apportion income because the proceeds from the stock sale would remove the Taxpayer from the financial corporation status.
DETERMINATION
Virginia's conformity to federal law is set forth in Code of Virginia § 58.1-301, which provides that the terms used in Virginia income tax statutes will have the same meaning as used in the IRC. Therefore, federal taxable income ("FTI"), which is the starting point for determining Virginia taxable income for corporations is identical to that as defined by the IRC. Consequently, Virginia's treatment of the IRC § 338(h)(10) election will mirror the federal treatment as closely as possible, while ensuring that any Virginia tax accurately reflects the business activity in Virginia. Virginia's policy regarding elections under IRC § 338(h)(10) is set forth in Public Document (P.D.) 91-317 (12/30/91), copy enclosed.
Code of Virginia § 58.1-418 defines a "financial corporation" as one that derives more than 70% of its gross income from (1) fees for financial services, (2) gross profits from securities trading, (3) interest, and (4) dividends to the extent included in Virginia taxable income.
The Taxpayer's stock was sold by the Parent which, in concert with the purchaser, elected to treat the sale of the stock as a sale of assets under IRC § 338(h)(10). By including this gain in its income for purposes of the 70% test, the Taxpayer ceases to qualify as a financial corporation for the taxable year ended May 21, 1997. Consequently, the Taxpayer is excluded from using the one-factor formula and must use the three-factor formula to apportion income.
Accordingly, the Taxpayer must file an amended return for the taxable year ended May 21, 1997, using the three-factor formula to apportion income within Virginia. The department will allow 30 days for the Taxpayer to furnish the amended return and the assessment will be adjusted as needed. Please forward the amended return to of the Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880. If you have any questions, you may reach **** at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/24398P
Related Documents
Rulings of the Tax Commissioner