Document Number
Tax Type
Corporation Income Tax
Allocation and Apportionment : Alternative Method - Non - Business Income, Pass-Through Entities - Factor Attributes Pass Through To Owners
Date Issued

March 16, 2021

Re:  58.1-1821 Application: Corporate Income Tax

Dear *****:

This will respond to your letter in which you seek correction of the corporate income tax assessments issued to your client ***** (the “Taxpayer”), for the taxable years ended ***** and *****.


In *****, the Taxpayer, a corporation, sold its interest in a joint venture (the “Joint Venture”), that was organized as a limited liability company and taxable for federal income tax purposes as a partnership. On its Virginia corporate income tax return for the taxable year ended *****, the Taxpayer treated the gain from the sale of its interest in the Joint Venture and its distributive share of partnership income as nonapportionable income and subtracted them from Virginia taxable income.

Under audit, the Department denied the subtractions and issued an assessment. Because of the Joint Venture’s status as a manufacturer apportioning income using a single sales factor under Virginia Code § 58.1-422, the Department essentially applied the Joint Venture’s sales factor percentage to the Taxpayer’s Virginia taxable income as adjusted, but reduced the factor slightly to account for the Taxpayer’s own payroll. In addition, the Department slightly adjusted the Taxpayer’s Virginia apportionment factor on its return for the taxable year ended *****, and issued an assessment for the increase in tax due. The Taxpayer appealed, contending the subtractions should have been allowed because it did not have a unitary business relationship with the Joint Venture.    


Assessment for the Taxable Year Ended *****

Under audit, the Department adjusted the Taxpayer’s apportionment factor, resulting in an increase in tax due. The apportionment factor, as adjusted, matched the Joint Venture’s sales factor computed per the audit results. On appeal, the Taxpayer has not demonstrated how this adjustment was erroneous. This assessment, therefore, is upheld.

Assessment for the Taxable Year Ended *****

The Code of Virginia does not provide for the allocation of income other than certain dividends. Accordingly, a taxpayer’s entire federal taxable income adjusted and modified as provided in Virginia Code § 58.1-402 and § 58.1-403, less allocable dividends pursuant to Virginia Code § 58.1-407, is subject to apportionment. The Taxpayer’s subtractions have been treated as a request for an alternative method of allocation and apportionment in accordance with Virginia Code § 58.1-421.

Virginia Code § 58.1-391 B provides “[e]ach item of pass-through entity income, gain, loss or deduction shall have the same character for a partner under this chapter as for federal income tax purposes.”  For Virginia income tax purposes, income retains its character as income from the operations of a pass-through entity in computing Virginia taxable income and is properly included in the apportionable income of the shareholder. This means that, for income tax purposes, the owners are considered to be reporting the operating income of the business conducted by the pass-through entity. As such, the Department generally presumes that the income passed through from a pass-through entity to be operational. See P.D. 07-197 (11/30/2007).

The Department has previously ruled that a corporation that holds a general partnership interest in a partnership must include its proportionate share of partnership property, payroll and sales in its own factors for purposes of apportioning Virginia taxable income. See Public Document (P.D.) 88-226 (7/12/1988). This ruling has been expanded to include a limited partner, unless certain conditions are met. See P.D. 95-19 (2/13/1995). More recently, this ruling has also been expanded to include interests in limited liability companies. See P.D. 19-114 (10/4/2019).

In P.D. 99-152 (6/18/1999), the Department opined that the gain on the sale of a partnership interest by a partner would be included in a corporate partner’s apportionable income and must be reflected in the numerator of the corporate partner’s sales factor in proportion to how much Virginia property is included in total property included in the sale. For federal income tax purposes, a limited liability company is treated as a partnership for purposes of determining income, even though the pass- through election may be more characteristic of shareholders in an S Corporation. See P.D. 07-70 (5/18/2007). Pursuant to Virginia Code § 58.1-391 B, the Department would generally treat the sale of a membership interest in the same manner as the sale of a partnership interest.
The Taxpayer was a corporation that held an interest in the Joint Venture. Because the Joint Venture was a limited liability company, the Taxpayer should have included its proportionate share of the Joint Venture’s property, payroll and sales in its own factors for purposes of apportioning Virginia taxable income. In this case, the Joint Venture was a manufacturer using a single sales factor pursuant to Virginia Code § 58.1-422. The Department adjusted the Taxpayer’s apportionment factors, accounting for the single sales factor. The only difference was that the Department accounted for the Taxpayer’s own payroll. The result of this adjustment, however, was a reduction in the factor that was ultimately applied to Taxpayer’s Virginia taxable income. Otherwise, that factor would have matched the Joint Venture’s sales factor exactly.

The Taxpayer contends that the subtractions were justified because the Taxpayer did not have a unitary relationship with the Joint Venture. The Taxpayer asserts that the Joint Venture was separately managed and generally operated independently of the Taxpayer.

The Department is not persuaded that the question whether the Joint Venture had a unitary relationship with the Taxpayer determines the outcome of this case. To exclude income from an apportionment formula, a taxpayer must prove that the income was earned in the course of activities unrelated to those carried out in the taxing state. See Allied-Signal, Inc. v. Director, Division of Taxation, 504 U.S. 768, 787, 119 L.Ed.2d 533, 552 (1992). Furthermore, the existence of a unitary relationship between payee and payor is one justification for apportionment, but it is not necessarily the exclusive one. See id. 

The Joint Venture itself had significant contacts with Virginia, including a manufacturing facility in the state. According to the Department’s policies described above, the amount of Virginia income attributable to the Taxpayer was determined by including the Joint Venture's apportionment factors in the Taxpayer’s. As such, in the Department’s opinion, these policies resulted in a fair apportionment of Virginia taxable income. The result sought by the Taxpayer, i.e., no part of the income being apportioned to Virginia, ignores the extensive contacts the Joint Venture maintained with Virginia. To conclude that no part of the gain from the sale of the company should be attributable to the contacts the Joint Venture maintained with Virginia during its existence, not the least of which was its manufacturing facility in Virginia, is not a result that the United States Constitution mandates.   

The Department acknowledges that the United States Supreme Court (the “Court”) has declined to address the question whether a company’s own contacts with a state may justify the apportionment of gain to that state upon the sale of the company by a corporate owner with which there is no unitary relationship. See MeadWestvaco Corp. v. Illinois Department of Revenue, 553 U.S. 16, 31 128 S.Ct. 1498, 1508 (2008). The Court did, however, acknowledge that the laws of several states have adopted such a rationale in its apportionment schemes and that at least one state court has acknowledged that basis as constitutionally sound. See MeadWestvaco at 553 U.S. 16, 31, 128 S.Ct. 1498, 1509, citing Allied-Signal, Inc. v. Department of Taxation and Finance, 229 App. Div. 2d 759, 762, 645 N.Y.S.2d 895, 898 (3rd Dept. 1996). Although it has not addressed the issue because it had not previously been raised in the case record, the Court commented that if a constitutionally sufficient link between the state and the value it wishes to tax is founded on the state’s contacts with the company being sold, then the apportioned tax base should be determined by applying the state’s apportionment formula to the such company, not the corporate owner. See MeadWestvaco, Footnote 4. In this case, Virginia’s policies assured exactly that - effectively, it was the Joint Venture’s apportionment percentage that was applied to determine the tax base. Although the Department did also take into account the Taxpayer’s own payroll, this only reduced the factor that was ultimately applied.

In asserting this basis for taxation, however, the Department does not concede that a unitary business relationship did not exist in this case. Although the Taxpayer provided general explanations of its business relationship with the Joint Venture to both the auditor and on appeal, the Taxpayer did not return a more detailed questionnaire sent by the auditor. Pursuant to Virginia Code § 58.1-205 any assessment of tax by the Department is deemed prima facie correct. This means that the burden of proof is upon the Taxpayer to establish that the assessment is incorrect. Further, Virginia Code § 58.1-1826 precludes a court from granting relief to taxpayers seeking correction of erroneous state tax assessments in cases in which the erroneous assessment is attributable to the taxpayer’s willful failure or refusal to provide the Department with necessary information as required by law. 

The assessment for the taxable year ended *****, therefore, is upheld. Updated bills will be issued to the Taxpayer which will include interest accrued to date. 

The Code of Virginia sections and public documents cited are available on-line at in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.



Craig M. Burns
Tax Commissioner


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Last Updated 05/26/2021 08:33