Tax Type
Corporation Income Tax
Description
Assessments; foreign source income subtraction
Topic
Allocation and Apportionment
Appropriateness of Audit Methodology
Date Issued
03-06-2002
March 6, 2002
Re: § 58.1-1821 Application: Corporate Income Tax
Dear *****
This will reply to your letter in which you seek correction of the corporate income tax assessments issued to ***** (the "Taxpayer") for the taxable years ended December 29, 1995 and December 27, 1996. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a financial services company that is headquartered in another state ("State A"). For the taxable years at issue, the Taxpayer used a single sales factor to apportion income to Virginia. Under this method, the Taxpayer attributed a portion of its Virginia revenue to State A.
Pursuant to Code of Virginia § 58.1-418, the Taxpayer is required to apportion income using a single factor based on costs of performance. Because the Taxpayer could not provide such costs at the time of the audit, the department's auditor attributed 100% of the revenues from transactions that originated in Virginia to the numerator of the factor. The Taxpayer contends that its apportionment methodology should be adopted by Virginia because it is standard in the financial services industry.
In addition, the Taxpayer claimed a foreign source income subtraction for its 1995 and 1996 taxable years. Under audit, adjustments were made to recompute the foreign source income subtraction using amounts reported on the Taxpayer's consolidated federal Form 1118 for the 1995 and 1996 taxable years. The Taxpayer contests this adjustment, claiming the consolidated Form 1118 is inappropriate for computing amounts for a separate entity.
DETERMINATION
ApportionmentUnder Code of Virginia § 58.1-418, the taxable income of a financial corporation must be apportioned in the ratio that the business within Virginia is to the total business of the corporation. Business within Virginia is based on the "cost of performance" in Virginia over the "cost of performance everywhere". In the instant case, the Taxpayer is a financial services corporation that is required to apportion its nonallocable income using Code of Virginia § 58.1-418. The Taxpayer has not provided information that would allow the calculation of the "cost of performance." As such, the auditor's estimate of the apportionment factor by attributing 100% of the Taxpayer's receipts that arose from commission transactions in Virginia to the numerator of the factor is reasonable.
It is recognized that the auditor's apportionment method, in which 100% of receipts derived from a Virginia transaction are attributed to Virginia, may not represent a true financial factor. However, the factor was based on the best information available to the auditor at the time. In the absence of a true financial factor based on cost of performance in Virginia compared to cost of performance everywhere, you have not shown that the assessment is erroneous. However, I will allow the Taxpayer 45 days to submit a factor based on costs in Virginia to costs everywhere, pursuant to Title 23 of the Virginia Administrative Code ("VAC") 10-12-250 (copy enclosed). The Taxpayer must provide sufficient detail to allow the computations to be verified and reconciled to the return information.
Foreign Source Income Subtraction
It has been the department's long standing policy that the computation of the Virginia subtraction for foreign source income be determined in accordance with Internal Revenue Code ("IRC") § 861 through § 863. See Public Document ("P.D.") 91-229 (9/30/91), copy enclosed. Virginia law requires the use of the federal sourcing rules of IRC § 861 et seq., whether or not a taxpayer believes that certain expenses have any connection to income from foreign sources and regardless of what expenses would be under generally accepted accounting principles.
The purpose of Form 1118 is to compute the limitation on the amount of foreign taxes that can be claimed as a credit against federal tax liability. When the procedures of the IRC § 861 et seq. are used to complete Form 1118, the information reported on this form is considered useful and presumed correct and accurate. Such information is an appropriate starting point for computing the foreign source income subtraction allowed on the Taxpayer's Virginia return. The auditor was unable to substantiate that the Taxpayer's separate company information as reported on the consolidated Form 1118 was accurate. As such, the auditor used the total deductions reported on the consolidated Form 1118 to compute the expenses related to Virginia foreign source income.
The Taxpayer has provided additional information to substantiate foreign source income and expenses on a separate entity basis. The department has adjusted the Taxpayer's foreign source income subtraction to reflect the additional information.
Adjusted assessments will be issued to the Taxpayer for the 1995 and 1996 taxable years in accordance with the enclosed schedules. Please send the requested information and/or payment to ***** in the department's Office of Policy and Administration, Appeals and Rulings, P.O. Box 1880, Richmond, Virginia 23218-1880.
If you have any questions regarding this determination, you may contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
AR/33248B
Related Documents
Rulings of the Tax Commissioner