Document Number
07-75
Tax Type
Corporation Income Tax
Description
The Department's policy holds the use of separate accounting in disfavor
Topic
Allocation and Apportionment
Date Issued
05-18-2007


May 18, 2007




Re: Request for Ruling: Corporate Income Tax

Dear *****:

This will reply to your letter in which you request permission to use an alternative method of apportionment and allocation for ***** (the "Taxpayer"). I apologize for the delay in responding to your letter.
FACTS


The Taxpayer owns an interest in the ***** (the "Partnership"). The Partnership owns 100% of ***** ("LLC A"), a disregarded entity for income tax purposes. LLC A owns 98% of ***** ("LLC B"). The majority of LLC B's income resulted from the sale of land in Virginia. It filed a Virginia pass-through entity income tax return and apportioned almost all of its income to Virginia.

The Taxpayer incurs income and losses from operations in other states. In 2004, the Taxpayer reported a net operating loss ("NOL") that exceeded net income reported by LLC B. The Taxpayer requests an alternative method of apportionment and asks to be allowed to allocate the income derived from LLC B to Virginia in order to reflect a true economic picture.

RULING


The policies that apply to a request 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 a return using the statutory method and pay the tax due. Next, the taxpayer is required to file an amended return proposing an alternative method and request a refund. The Department will not grant an alternative method of allocation and apportionment unless it determines that: (1) the statutory method produces an unconstitutional result; 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 of the Virginia Administrative Code ("VAC") 10-120-280.

In a situation where there are multiple layers of pass-through entities, any item of partnership income, gain, loss, deduction, or credit will retain its Virginia source character no matter how many partnerships it passes through.

The pass through of Virginia source income will continue to occur from partnership to partner until the income is passed through to a partner that is a taxable entity. See Public Document 88-165 (6/29/88). The Taxpayer contends that using the statutory apportionment method is inequitable because income earned in Virginia, and that flows through to the taxable entity, is offset by its losses incurred in other states. The Taxpayer's proposed method would essentially allow for separate accounting for the sales of Virginia real property by LLC B.

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 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, Va. Code § 58.1-421 expressly prohibits allowing an alternative method of allocation and apportionment if the alternative method increases the tax liability of a taxpayer. In the case presented, the pass-through of net income from Virginia sources to the taxable entity is negated by the net operating losses incurred by the other entities. As such, the taxable entity would not be liable for any Virginia income tax. The Taxpayer's proposed method of allocation, however, would create a Virginia income tax liability for the taxable entity. In light of the prohibition in Va. Code § 58.1­421, I could not grant the Taxpayer's request even if it were properly filed pursuant to Title 23 VAC 10-120-280.

CONCLUSION


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The Taxpayer has not followed Virginia regulatory procedures for requesting an alternative method of allocation and apportionment. Furthermore, the Taxpayer has not demonstrated that Virginia's statutory method of allocation and apportionment produces an unconstitutional result or is inequitable. Accordingly, permission to use an alternative method of allocation is denied.

The Code of Virginia section, regulation and public document 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 ruling, please contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
                • Sincerely,


                • Janie E. Bowen
                  Tax Commissioner




AR/56548B


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46