Tax Type
Corporation Income Tax
Description
Request is not in accordance with procedure for requesting a change in method
Topic
Allocation and Apportionment
Date Issued
07-19-2007
July 19, 2007
Re: Request for Ruling: Corporate Income Tax
Dear *****:
This will reply to your letter in which you request an alternative method of allocation and apportionment on behalf of your client, ***** (the "Taxpayer").
FACTS
The Taxpayer is a limited liability company commercially domiciled in ***** (State A). The Taxpayer derives income or loss from an investment in ***** (Company B), which conducts business in Virginia.
The Taxpayer asserts that the use of separate accounting would more accurately reflect the income subject to Virginia tax. It contends that other states allow the Taxpayer to use separate accounting. The Taxpayer requests permission to use an alternative method of allocation and apportionment because it avers that Virginia's statutory Method of allocation and apportionment is inequitable.
RULING
The United States Supreme Court has recognized that allocation and apportionment of income is an arbitrary process designed to approximate income from business transactions within a state. As long as each state's method of allocation and apportionment is rationally related to the business transacted within a state, then each state's tax is constitutionally valid even though there may be some overlap. See Moorman Mfg. Co. v. Bair, 437 U.S. 279 (1978). Thus, the Taxpayer must show that the statutory method of apportionment produces an unconstitutional result.
An apportionment formula used as an approximation of a corporation's income reasonably related to the activities conducted within a taxing state will only be disturbed when the taxpayer has proved by "clear and cogent evidence" that the income attributed to the state is in fact "out of all reasonable proportion to the business transacted . . . in that state," Hans Rees' Sons, Inc. v. North Carolina, 283 U.S. 123, 135 (1931), or has "led to a grossly distorted result," Norfolk & Western R. Co. v. Missouri State Tax Commission, 390 U.S. 317, 326 (1968).
Title 23 of the Virginia Administrative Code (VAC) 10-120-280 provides that the statutory method of allocation and apportionment is inequitable if: 1) it results in double taxation of the income, or a class of income, of the taxpayer; and 2) the inequity is attributable to Virginia, rather than to the fact that some other state has a unique method of allocation and apportionment.
The Department's long-standing policy holds the use of separate accounting in disfavor. See Department of Taxation v. Lucky Stores, Inc., 217 Va. 121, 225 S.E.2d 870 (1976). The Taxpayer has not provided any evidence that demonstrates that the statutory apportionment method is inequitable. The fact that separate accounting produces a different result from the three-factor formula is not sufficient to show the statutory apportionment method is inequitable. Moreover, Virginia does not follow other state's apportionment procedures.
In addition, the Taxpayer has not followed the established procedure for requesting an alternative apportionment method. The policies that apply to requests for an alternative method of allocation and apportionment under Va. Code § 58.1-421 are well established. In order for a taxpayer to request an alternative method of allocation and apportionment, the taxpayer must file the return using the statutory method and pay any tax due. Next, the taxpayer is required to file an amended return proposing an alternative method within the time prescribed for filing amended returns claiming refunds. The amended return must include a statement of why the statutory method is inapplicable or inequitable and an explanation of the proposed method of allocation and apportionment. The Department will not grant an alternative method of allocation and apportionment unless it determines that: (1) the statutory method produces an unconstitutional result under the particular facts and circumstances of the taxpayer's situation; or (2) the statutory method is inequitable because it results in double taxation and the inequity is attributable to Virginia, rather than another state's method of apportionment. See Title 23 VAC 10-120-280.
In the context of a ruling request, when a taxpayer does not provide the Department with the opportunity to examine the records underlying the claim, the taxpayer cannot demonstrate that Virginia's factor formula produces an unreasonable or distorted result. Further, even if other states allow separate accounting, a corporation's argument that Virginia's statutory method (rather than another state's method) causes an unconstitutional result will not be accepted without documentation revealing the sources of the corporation's profits. This cannot be done until after a corporation has fully accounted for and prepared its financial statements after the close of a taxable period. Consequently, it is impractical for the Department to issue an advanced ruling with regard to allocation and apportionment. The procedures set forth under Title 23 VAC 10-120-280 were designed for this purpose.
CONCLUSION
The use of an alternative method is allowed only in extraordinary circumstances where the need for relief has been demonstrated by clear and cogent evidence. Based on the facts presented, you have not demonstrated that the statutory method is unconstitutional or inapplicable as it would apply to the Taxpayer. Furthermore, the Taxpayer's request is not in accordance with the procedure for requesting an alternative method of allocation and apportionment outlined in Title 23 VAC 10-120-280. Based on the foregoing, I must deny the Taxpayer's request to use an alternative method of allocating and apportioning income.
The Code of Virginia and regulation sections cited are available on-line at www.tax.virgiiiia.gov in the Tax Policy Library section of the Department's website. If you have any questions regarding this ruling, please contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Janie E. Bowen
Tax Commissioner
- Janie E. Bowen
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AR/1-1002478443B
Rulings of the Tax Commissioner