Tax Type
Corporation Income Tax
Description
Erroneous adjustments; responsible officer
Topic
Corporate Distributions and Adjustments
Persons Subject to Tax
Date Issued
08-27-2004
August 27, 2004
Re: § 58.1-1821 Application: Corporate Income Tax
Dear *****:
This will reply to your letter in which you seek correction of the assessment of penalty issued to ***** (the "Taxpayers") for the taxable year ended December 31, 1992. The assessment of penalty resulted from the conversion of an assessment of corporate income tax issued to ***** (the "Corporation") pursuant to Va. Code § 58.1-1813.
FACTS
The Taxpayers are husband and wife. The husband was president of the Corporation, which was registered to do business in Virginia during the taxable year at issue. The Corporation failed to file a Virginia corporate income tax return and remit tax for the 1992 taxable year. The Taxpayer had filed Virginia corporate returns in prior years.
In January 1997, the Internal Revenue Service issued Revenue Auditor's Report (RAR) adjustments to the Corporation and assessed additional federal corporate income tax. As a result of the RAR adjustments, the Department issued an assessment for tax, penalty and interest to the Corporation for the 1992 taxable year. Because the Corporation ceased operations in 1992, and the husband was the responsible officer, the Department assessed the Taxpayers a penalty in the amount of the tax, penalty, and interest owed by the Corporation, pursuant to Va. Code § 58.1-1813.
The Taxpayers contend that the Corporation relocated to ***** ("State A") as of January 1, 1992, and it transacted no business in Virginia prior to the Corporation's dissolution in June 1992. Consequently, the Taxpayers maintain the Corporation was not liable for Virginia corporate income tax in 1992, and the assessments converted to the Taxpayers because the husband was a responsible officer are erroneous.
DETERMINATION
Public Law (P.L.) 86-272, codified at 15 U.S.C. §§ 381-384, prohibits Virginia from imposing a net income tax on a foreign corporation when its only contact with Virginia constitutes solicitation of sales. This same protection has been extended by the United States Supreme Court to include activities that are ancillary to solicitation or de minimis in nature. Although P.L 86-272 applies to tangible property, the Department's policy has been to extend the "solicitation test" of P.L. 86-272 to situations involving the sales of services.
The Department interprets P.L. 86-272 within the context of the decision of the U.S. Supreme Court in Wisconsin Department of Revenue v. William Wrigley, Jr. Co., 505 U.S. 214 (1992). A taxpayer that engages in activities that may exceed the protection provided by P.L. 86-272 would be subject to the Virginia corporate income tax. Title 23 of the Virginia Administrative Code (VAC) 10-120-90 (G), however, exempts activities that are de minimis in nature. Pursuant to Wrigley, all nonancillary activities are examined to determine if, when considered together, they create more than a de minimis connection to the Commonwealth.
Based on the information provided, it is clear that the Corporation did not engage in any transactions or activities in Virginia during 1992 that would create nexus for Virginia corporate income tax purposes. The Taxpayers have provided documentation that demonstrates the Corporation relocated to State A as of January 1, 1992. The Taxpayer also provided a corporate income tax return for State A for the 1992 taxable year that apportioned all income to State A, indicating all the Corporation's business activity occurred in State A.
Accordingly, I find that the Corporation is not liable for Virginia corporate income tax for the 1992 taxable year, and the Department's assessments issued to the Corporation based on the RAR adjustments are erroneous. As a result, the assessment of penalty issued to the Taxpayers because of the husband's role as a responsible officer for the Corporation will be abated.
The Code of Virginia sections cited are available on-line 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 determination, 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/49567B
Rulings of the Tax Commissioner