Tax Type
Corporation Income Tax
Description
Reclassify intercompany rent in computing the sales and property factors
Topic
Appropriateness of Audit Methodology
Corporate Distributions and Adjustments
Date Issued
09-19-2006
September 19, 2006
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, 2000. I apologize for the delay in responding to your appeal.
FACTS
For the taxable year at issue, the Taxpayer and its affiliates filed a consolidated Virginia corporate income tax return. Under audit, the Department made a number of adjustments. Specifically, the auditor reduced the denominators of the property and sales factors to reflect the amounts shown on the Taxpayer's federal income tax return.
According to the Taxpayer, the auditor's adjustments remove intercompany rents the Taxpayer received from its operating subsidiaries. The Taxpayer contests the adjustments made to the property and sales factors.
DETERMINATION
Virginia relies on the amount and character of each receipt included on the federal return and supporting schedules to determine gross receipts in the computation of consolidated taxable income after the elimination of intercompany items as provided in Title 23 of the Virginia Administrative Code (VAC) 10-120-322. Intercompany transactions should be eliminated in determining consolidated taxable income and, therefore, are not included in the computation of the consolidated apportionment formula.
Property Factor
Intercompany rent expense would be included in the computation of the property factor only to the extent it is included in the Virginia consolidated income of a taxpayer. See Public Document (P. D.) 03-65 (8/19/03). Accordingly, intercompany rents eliminated in determining the consolidated income of the Taxpayer and its affiliates would not be included in the computation of the consolidated property factor.
Sales Factor
The question as to whether intragroup transactions, which are be eliminated for purposes of filing a Virginia consolidated income tax return, would be included in the computation of the sales factor of the Virginia three-factor apportionment formula is addressed in Public Document (P. D.) 01-194 (12/3/01).
As with the intercompany expense, the intercompany rental receipts are eliminated in determining the consolidated income of the Taxpayer and its affiliates. Therefore, such receipts must be excluded from the consolidated sales factor.
CONCLUSION
In this case, the intercompany rent included in the sales factor matches the intercompany rent included in the property factors of the affiliates. These items were eliminated in determining the consolidated taxable income for federal income tax purposes. As such, neither the intercompany rent received by the Taxpayer nor the intercompany expense included by the affiliates can be included in the consolidated apportionment formula.
Accordingly, the Taxpayer's request to reclassify intercompany rent in computing the sales and property factors is denied. An updated bill will be sent to the Taxpayer pursuant to the enclosed schedule. No additional interest will accrue provided the outstanding balance in paid within 30 days from the date of the bill. The Taxpayer should remit its payment to: Virginia Department of Taxation, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attention: *****.
The regulation and public documents cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this determination, you may contact ***** at *****.
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- Sincerely,
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- Janie E. Bowen
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AR/57115B
Rulings of the Tax Commissioner