Tax Type
Corporation Income Tax
Description
Partnership, business activities both within and without Virginia
Topic
Allocation and Apportionment
Appropriateness of Audit Methodology
Date Issued
01-30-2003
January 30, 2003
Re: Request for Ruling: Corporate Income Tax
Dear *****:
This will reply to your request for an alternative method of apportionment and
allocation for ***** (the "Taxpayer"). I apologize for the delay in the Department's response.
FACTS
The Taxpayer, an out-of-state corporation, owns an interest in a Virginia limited partnership (the "Partnership"). The Taxpayer apportions its Virginia source income earned from the Partnership using the three-factor apportionment formula. Using the three-factor apportionment formula has resulted in the Taxpayer having Virginia source income even though the Partnership has reported a loss.
The Taxpayer requests permission to use a separate accounting basis for its investment in the Partnership due to the fact that it has Virginia taxable income when the Partnership reported a loss and apportionment creates an accounting hardship.
RULING
A corporation that has business activities both within and without Virginia must allocate and apportion its income in accordance with Va. Code § 58.1-406 et seq. The Department has previously ruled that a corporation that 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).
In P.D. 88-235 (8/10/88), however, the Department ruled that a corporation that was a limited partner was not required to include its share of partnership property, payroll and sales for purposes of determining its Virginia apportionment factor. In P.D. 95-19 (2/13/95), the Department modified this policy when it ruled that a corporate limited partner is generally required to include its proportionate share of the partnership's property, payroll and sales with its own property, payroll and sales for purposes of determining its Virginia apportionment factor. However, in that ruling the Department set forth a standard pending the promulgation of regulations in this area, under which no partnership attribution of apportionment factors would be required. Partnership attribution of apportionment factors is not required if:
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- (1) a corporation holds a limited partnership interest; (2) all general partners are unrelated third parties; (3) the combined partnership interests held by the corporation and all related parties constitute 10% or less of the profit and capital interests of the limited partnership; and (4) the structure is not a device primarily designed to avoid Virginia taxation of the limited partnership's income.
In the present case, the Taxpayer has stated that it has a limited partnership interest in the Virginia Partnership that constitutes less than 10% of the profit and capital interests of the Partnership, and all general partners are unrelated third parties. In addition, no evidence exists that demonstrates that the Taxpayer's ownership interest in the Partnership is primarily designed to avoid Virginia taxation. As such, the Taxpayer's income derived from the Virginia Partnership is not subject to factor attribution.
Accordingly, an alternative method of allocation and apportionment will not be granted. If there is no other income from sources within Virginia, it is likely that the Taxpayer is not subject to Virginia income tax.
As with any ruling provided by the Department, this analysis is limited to the facts and circumstances identified in your letter and through information you provided via the telephone. Any material changes in the facts could alter the results.
The Code of Virginia sections and public documents cited, along with other reference documents, are available online in the Tax Policy Library section of the Department's web site located at www.tax.state.va.us. If you have any questions regarding this ruling, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Kenneth W. Thorson
Tax Commissioner
- Kenneth W. Thorson
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AR/41550B
Rulings of the Tax Commissioner