03-46 | Virginia Tax

Tax Type

Corporation Income Tax

Description

Virginia source income for apportionment factor purposes, Partnership

Topic

Payment and Refund

Date Issued

04-28-2003

April 28, 2003

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 assessment issued to ********** (the "Taxpayer') for the taxable year ended December 31, 1998.

FACTS

Prior to 1997, the Taxpayer, an out-of-state corporation, owned a general and limited interest in a partnership (the "Partnership") that operated solely in Virginia. The Taxpayer conducted no other business activities in Virginia. In February of 1997, the Partnership sold all its real, tangible and intangible assets to an unrelated third party.

Despite the sale, the Partnership accrued income for the 1998 taxable year, which was passed through to the Taxpayer. On its 1998 Virginia income tax return, partnership and miscellaneous income was reported as Virginia source income for apportionment factor purposes. The Taxpayer also reported interest income that was attributed to the Taxpayer's state of commercial domicile in the apportionment factors.

Under audit, the Department adjusted the Taxpayer's sales factor numerator to include the interest income on the basis that the only source of the interest income appeared to be from the Partnership. The Taxpayer contests the adjustments on the basis that the interest income was not passed through the Partnership and that the Taxpayer, in fact, had no nexus with Virginia after the Partnership sold its assets in 1997.

DETERMINATION

Interest Income

The Taxpayer contends that the interest income was derived from an intercompany transaction with an out-of-state affiliate. The auditor concluded that all of the Taxpayer's income was derived from the Partnership, which was located in Virginia. Based on this finding, the auditor apportioned the interest income to Virginia.

There is no evidence that the Partnership generated the interest income. The information provided clearly indicates the Taxpayer derived the interest income from an intercompany receivable located in another state.

Apportionment

The Taxpayer filed its original 1998 income tax return using the standard three-factor formula showing only a sales factor. The auditor adjusted the sales factor for the interest income. A review of the record reveals the interest income exceeded 90 percent of the Taxpayer's gross income.

Va. Code § 58.1-418 requires financial corporations to apportion income based on cost of performance. Va. Code § 58.1-418 defines a "financial corporation" as one that derives more than 70 percent 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. Pursuant to Title 23 of the Virginia Administrative Code ("VAC") 10-120-250, transactions with affiliated companies use net income rather than gross income for purposes of the 70 percent test. A review of the Taxpayer's income tax returns indicates that more than 70 percent of its net income is interest income. Accordingly, the Taxpayer would be considered a financial corporation for the 1998 taxable year and it must apportion its income using the cost of performance.

Title 23 VAC 10-120-250 defines the "cost of performance" as the cost of all activities directly performed by the taxpayer for the ultimate purpose of obtaining gains or profit, except activities directly performed by the taxpayer for the ultimate purpose of obtaining allocable dividends.

The Taxpayer had no employees based in Virginia and conducts no business in Virginia. With no cost of performance in Virginia, none of the Taxpayer's income could be apportioned to Virginia. As such, the Taxpayer's costs related to the interest income occurred outside Virginia.

In addition, the audit report indicates that the Partnership had no property or payroll in Virginia or elsewhere that passed through to the Taxpayer. Without assets or employees, it appears that the Partnership incurred no costs in Virginia during the 1998 taxable year. Accordingly, the Taxpayer would have no numerator for the apportionment factor for the 1998 taxable year.

Refund Claim

Because the Taxpayer should not have had a positive apportionment factor for Virginia, you contend that the corporate income tax paid for 1998 should be refunded. Generally, Va. Code § 58.1-1823 provides that an amended return claiming a refund must be filed within three years from the last day prescribed by law for the timely filing of the return. Our records indicate that the Taxpayer made no such claim for refund until the letter contesting the audit assessment was submitted. This letter was submitted well after the expiration of the three-year statute of limitations period for filing an amended return. Therefore, I do not have the statutory authority to issue a refund.

Conclusion

The assessment of additional corporate income tax and interest for the 1998 taxable year will be abated. The Taxpayer's claim for a refund for that taxable year is denied.

Copies of the Code of Virginia sections and regulations cited 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 additional questions regarding this response, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/41687B

Rulings of the Tax Commissioner