Document Number
09-25
Tax Type
Corporation Income Tax
Description
Permission to allocate only the Virginia source income from its partnerships to Virginia
Topic
Allocation and Apportionment
Date Issued
02-13-2009



February 13, 2009





Re: Request for Ruling: Corporate Income Tax

Dear *****:

This will respond to your request that ***** (the "Taxpayer") be permitted to use an alternative method of apportionment for Virginia income tax purposes.

FACTS


The Taxpayer is a non-stock, non-profit corporation based in ***** (State A) that has no property or payroll in Virginia. The Taxpayer generates unrelated business taxable income (UBTI) from the sale of products and services and investments in partnerships. Several of these partnerships operate in multiple states including Virginia.

In conjunction with a voluntary disclosure agreement filed with the Department, the Taxpayer filed corporate income tax returns for the taxable years ended June 30, 2004 through 2006. The returns were filed using an alternative method of allocation and apportionment. The Department has not accepted the returns as correct, but has not issued additional assessments.

The Taxpayer requests that it be granted an alternative method of allocation and apportionment. It is the Taxpayer's position that Virginia's statutory method is inequitable based on the facts and circumstances giving rise to the Taxpayer's taxable income. The Taxpayer asserts that the statutory formula would result in double taxation of a certain income. The Taxpayer, therefore, requests permission to allocate only the Virginia source income from its partnerships to Virginia and allocate all remaining UBTI outside Virginia.

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.

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, where other states statutory method differs from Virginia, 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.

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 sections and regulations 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, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
                • Sincerely,


                • Janie E. Bowen
                  Tax Commissioner



AR/1-3110136281.o


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46