07-174 | Virginia Tax

Tax Type

Corporation Income Tax

Description

Taxpayer contests the assessment, asserting that IHC had no nexus with Virginia

Topic

Assessment

Corporate Distributions and Adjustments

Nexus

Date Issued

11-14-2007

November 14, 2007

Re: § 58.1-1821 Application: Corporation Income Tax

Dear *****:

This will reply to your letter in which you request that the Department reconsider its determination upholding the assessment of additional Virginia corporate income tax and interest issued to your client, ***** (the "Taxpayer") for the taxable years ended December 31, 1994 and 1995. I apologize for the delay in responding to your letter.

***** ("IHC") was incorporated in ***** ("State A") in 1988. It is 100% owned by the Taxpayer and files as part of the Taxpayer's consolidated group for federal income tax purposes. IHC loaned funds to the Taxpayer and several of the Taxpayer's affiliates and accrued interest income during the taxable years at issue. The Taxpayer and its affiliates deducted the amounts accrued by IHC as interest expense.

The auditor determined IHC lacked economic substance and the intercompany loan arrangement distorted Virginia taxable income. As a result, the auditor consolidated the federal taxable income of IHC with the Taxpayer and issued an assessment for additional tax and interest. The Taxpayer contests the assessment, asserting that IHC had no nexus with Virginia and the transactions between the Taxpayer and IHC were at arm's length rates. The Taxpayer also argues that Virginia lacked the authority to adjust the federal taxable income of the Taxpayer.

The Department upheld the assessment in Public Document ("P.D.") 05-28 (3/8/05). In its determination, the Department held that IHC failed to demonstrate that it was a discrete, separate business enterprise with its own employees, office space, and books and records as provided under Title 23 of the Virginia Administrative Code ("VAC") 10-120-361 E 3. In addition, the Department determined that the loan transactions between IHC and the Taxpayer were not at arm's length because the Taxpayer failed to provide documentation related to the loans (e.g., copies of notes, loan application forms, approval procedures).

The Taxpayer requests that the Department reconsider its determination. The Taxpayer argues that IHC operated for at least five years before making any intercompany loans. During that time, IHC made investments and loans to unrelated parties. To this end, the Taxpayer has provided financial statements and other documentation of the activities of IHC prior to the taxable years at issue.

The Department has examined the additional information provided by the Taxpayer and does not find it compelling. The additional information provided by the Taxpayer does not in any way establish that IHC conducted its own activities. Further, the documentation does not establish that the loans between IHC and the Taxpayer were made at a fair market value interest rate, with collateral, payments, and credit standing substantially similar to those that the borrower could obtain from an unrelated lending institution.

I have carefully reconsidered the Taxpayer's situation, but again, must respectfully disagree with its conclusions. Based on the evidence, the Taxpayer completely controls the activities of IHC. The investment and loan decisions are made by personnel, officers and directors of the Taxpayer. The activities of IHC are conducted by employees of the Taxpayer. The Taxpayer has not been compensated for its expenses incurred in operating IHC.

Although I recognize your continuing disagreement with the Department's denial of the Taxpayer's appeal, P.D. 05-28 clearly explains the Department's rationale and authority for its denial. For the reasons stated in my previous letter, the Taxpayer's request for an abatement of the assessment of corporate income tax and interest for the taxable years ended December 31, 1994 and 1995 is denied.

This letter constitutes the Department's final determination on this matter. A revised bill, with interest accrued to date, will be sent to the Taxpayer. No additional interest will accrue provided the outstanding balance is paid within 30 days from the date of the revised bill. The Taxpayer should remit its payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attention:

*****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.

The Code of Virginia sections, regulations and public documents cited 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, please contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Janie E. Bowen
        
        Tax Commissioner

AR/55589B

Rulings of the Tax Commissioner