Document Number
84-162
Tax Type
Corporation Income Tax
Description
CORPORATION INCOME TAX REGULATIONS
Topic
Reports
Date Issued
01-01-1984
see date




CORPORATION INCOME TAX REGULATIONS

VIRGINIA DEPARTMENT OF TAXATION
January 1, 1985

INTRODUCTION

These regulations for the Virginia Corporation Income Tax are published by the authority granted the State Tax Commissioner under Virginia Code § 58-48.6 (§ 58.1-203 effective January 1, 1985) and are subject to amendment, revision and supplemental regulations as required or appropriate.

Amendments, revisions and updates to these regulations will be issued as replacement pages, each replacement page having on it the date of revision.

Each regulation section is numbered to reference the section of Title 58.1 of the Code of Virginia which it interprets. The first three digits, 630, identify these regulations, for purposes of the Virginia Register of Regulations, as regulations of the Department of Taxation. The digits following the first hyphen indicate the tax type, and the digits following the second hyphen indicate the section of Title 58.1 being interpreted. For example, the section number 630-3-301 identifies the agency (630), the Corporation Income Tax (3), and the section of Title 58.1, Code of Virginia, which is interpreted (301).


W. H. Forst
State Tax Commissioner
Virginia Department of Taxation
P. O. Box 6-L
Richmond, Virginia 23282



            • CORPORATION INCOME TAX REGULATIONS

EFFECTIVE DATE: January 1, 1985 with retroactive effect according to Virginia Code § 58-48.6 (recodified as § 58.1-203).

EXPIRATION DATE: N/A

SUPERSEDES: All previous documents and any oral directives in conflict herewith.

REFERENCES: The following sections of the Virginia Code are interpreted by these regulations:
    • 58.1-301 58.1-407 58.1-418 58.1-446
      58.1-302 58.1-408 58.1-419 58.1-447
      58.1-311 58.1-409 58.1-420 58.1-449
      58.1-312 58.1-410 58.1-421 58.1-453
      58.1-323 58.1-411 58.1-431 58.1-455
      58.1-400 58.1-412 58.1-440 58.1-500
      58.1-401 58.1-413 58.1-441 58.1-501
      58.1-402 58.1-414 58.1-442 58.1-502
      58.1-403 58.1-415 58.1-443 58.1-503
      58.1-405 58.1-416 58.1-444 58.1-504
      58.1-406 58.1-417 58.1-445

AUTHORITY: Virginia Code § 58-48.6 and § 58.1-203 on and after January 1, 1985.

SCOPE: Applicable to all corporations subject to the Virginia Income Tax.

SUMMARY: These are the initial regulations interpreting certain provisions of the Corporation Income Tax consisting of 43 sections set forth in the Table of Contents. Included in the 43 sections is regulation § 630-3-431, originally adopted on March 16, 1983 as Regulation § 3.58-151.014:2, which has been renumbered and included without substantive change.

The regulations contain numerous sections which provide a comprehensive explanation of which corporations are subject to income tax, how Virginia taxable income is computed, how multistate corporations allocate and apportion income, the special periods of limitations applicable only to income taxes, accounting and return filing requirements, the declaration and payment of estimated income tax and the addition to the tax for failure to pay estimated tax. See the Table of Contents for a list of the sections and subjects covered.

ADOPTION DATE: September 19, 1984

TABLE OF CONTENTS

Regulation Section Subject Page
630-3-301 CONFORMITY OF TERMS TO IRC
General
Laws of the United States

630-3-302 DEFINITIONS
Affiliated
Compensation
Corporation
Foreign source income
Income and deductions from Va. Sources
Sales
State

630-3-311 REPORT OF CHANGE OF FEDERAL
            • TAXABLE INCOME
630-3-312 LIMITATIONS ON ASSESSMENTS

630-3-323 EXCESS COST RECOVERY
    • In general
      Addition
      Subtraction
Special situations

630-3-400 IMPOSITION OF TAX

630-3-401 EXEMPTIONS AND EXCLUSIONS
In general
Public service corporations
Insurance companies
Banks, trust Co. & credit unions
Small business corporations
Charitable corporations
Limitation on jurisdiction to tax

630-3-402 VIRGINIA TAXABLE INCOME
Federal taxable income
    • Additions
      Subtractions

630-3-403 ADDITIONAL MODIFICATIONS
In general
Addition for Bad Debts
Addition for NOLD
Subtraction for NOLD

630-3-405 BUSINESS ENTIRELY WITHIN VIRGINIA In General
Definitions
Voluntary Payment of Tax
Examples

630-3-406 ALLOCATION AND APPORTIONMENT

630-3-407 HOW DIVIDENDS ALLOCATED

630-3-408 WHAT INCOME APPORTIONED AND HOW
In General
Additional Requirements
Examples

630-3-409 PROPERTY FACTOR
In General
Examples

630-3-410 VALUATION OF PROPERTY OWNED OR RENTED
        • In General
Owned Property
Rental Property
Movable Tangible Personal Property
Mineral Rights
Examples

630-3-411 AVERAGE VALUE OF PROPERTY
        • In General
Examples

630-3-412 PAYROLL FACTOR

630-3-413 WHEN COMPENSATION DEEMED PAID
In General
Definitions
Examples

630-3-414 SALES FACTOR

630-3-415 WHEN SALES OF TANGIBLE PERSONAL
            • PROPERTY DEEMED IN THIS STATE
          In General
Examples

630-3-416 WHEN CERTAIN OTHER SALES DEEMED
            • IN THIS STATE
In General
Income Producing Activity
Location
Examples

630-3-417 MOTOR CARRIERS; APPORTIONMENT
        • In General
          Exception
630-3-418 FINANCIAL CORPORATIONS; APPORTIONMENT
        • In General
Definitions
            • Inter-affiliate Transactions

630-3-419 CONSTRUCTION CORPORATIONS;
            • APPORTIONMENT

630-3-420 RAILWAY COMPANIES; APPORTIONMENT

630-3-421 ALTERNATIVE METHOD OF ALLOCATION AND
APPORTIONMENT
In General
Application Procedure

630-3-431 ENERGY INCOME TAX CREDIT
            • In General
      Definitions
      Special Rules

630-3-440 ACCOUNTING

630-3-441 REPORTS BY CORPORATIONS
            • Who to File Returns
              When Returns to be Filed
      What Information to be Filed with Return
630-3-442 SEPARATE, COMBINED OR CONSOLIDATED
            • RETURNS
              In General
              Separate Return
              Consolidated Returns
              Combined Returns
              Permission to Change
              Carryovers
              Examples

630-3-443 PROHIBITION TO WORLDWIDE CONSOLIDATION
            • OR COMBINATION

630-3-444 SEVERAL LIABILITY OF AFFILIATED
            • CORPORATIONS
630-3-445 CONSOLIDATION OF ACCOUNTS

630-3-446 PRICE MANIPULATION, INTERCORPORATE TRANSACTIONS
    • In General
      Definitions
630-3-447 EXECUTION OF RETURNS

630-3-449 SUPPLEMENTAL REPORTS

630-3-453 EXTENSION OF TIME FOR FILING RETURNS
            • Automatic Extension
              Good Cause Extension
              Tentative Tax Return
              Application Procedure

630-3-455 TIME OF PAYMENT OF CORPORATION
            • INCOME TAX
In General
Penalty
                • Interest

630-3-500 DECLARATIONS OF ESTIMATED INCOME TAX REQUIRED
In General
Who to File
Contents of Declaration
Short Taxable Year
Consolidated and Combined Returns

630-3-501 TIME FOR FILING DECLARATIONS
In General
Amendments
Short Taxable Years

630-3-502 INSTALLMENT PAYMENTS OF ESTIMATED
            • INCOME TAX
              In General
              Late Declarations
              Amendments
              Short Taxable Years
              Application of Payments

630-3-503 WHERE DECLARATIONS FILED AND HOW
                • PAYMENTS MADE

630-3-504 FAILURE TO PAY ESTIMATED TAX
Definitions
Exceptions





§ 630- 3-301 CONFORMITY OF TERMS TO I.R.C.

(A) General. (1) Chapter 3 of Title 58.1 of the Code of Virginia, 1950, as amended, imposes an income tax upon Virginia income. Generally, Virginia taxable income is federal taxable income under the laws of the United States with certain adjustments and modifications set forth in detail elsewhere in this chapter and the regulation thereunder. (2) The words and expressions used in the chapter shall have the same meaning as the same words or expressions used in comparable context in the laws of the United States unless the context of the words or expressions in this chapter clearly requires a different meaning. The meaning of a word or expression is clearly required to be different from the meaning of such word or expression in the laws of the United States if:
    • (a) chapter 3 of title 58.1 expressly defines such word or expression, or
    • (b) if required to prevent an item from being subject to double taxation or double deduction in a single return, or

      (c) if the Commissioner determines that a different meaning is required because the word or expression is not used in a comparable context in the laws of the United States and publishes such determination by regulation.
(B) Laws of the United States. (1) Whenever used in this chapter, the term "laws of the United States" means the provisions of the Internal Revenue Code of 1954, as amended (sometimes abbreviated I.R.C.) as interpreted by Treasury regulations, rulings and other material of the Internal Revenue Service, by the courts of the United States and by the courts of Virginia.

(2) Whenever the meaning of words or expressions used in the laws of the United States is changed by amendment, regulation, court decision or otherwise, the meaning of such words or expressions shall be similarly changed for application to this chapter.

(3) Any such changes shall be effective for purposes of this chapter to the same extent, at the same time and for the same taxable years as such changes are effective for federal purposes.

§ 630-3-302 DEFINITIONS

"Affiliated." (1) For the purpose of Va. Code § 58.1-442 a group of corporations may not file a consolidated or combined return unless each corporation is itself subject to Virginia income tax and

(a) One corporation owns at least eighty percent of the voting stock of the other or others, or

(b) if at least eighty percent of the voting stock of two or more corporations is owned by the same interests.

(2) It is not necessary for all members of a controlled group to be subject to Virginia income tax in order for some of the members, otherwise eligible, to file a consolidated or combined return. For example, two or more corporations subject to Virginia income tax may be 80% owned by a foreign corporation not subject to Virginia income tax. All of the subsidiaries subject to Virginia income tax may file a consolidated or combined return without the foreign parent corporation.

Compensation." (1) For the purpose of allocation and apportionment under Va. Code § 58.1-406 the term "compensation," as used in computing the payroll factor under Va. Code § 58.1-412, means all remuneration or wages for employment as defined in I.R.C. § 3121(a) except that compensation includes the excess of wages over the contribution base defined in I.R.C. § 3121(a)(1).

(2) Generally compensation will be the gross wages, salaries, tips, commissions and other remuneration paid to employees and reported to the Internal Revenue Service. The Department will accept the gross amounts reported to the IRS on Forms W-2/W-3, Form 940 or the accounting records of the corporation provided that all of the employees of the corporation are included in such reports or records.

(3) If the corporation has any employees who are not subject to the F.I.C.A. or F.U.T.A. payroll taxes or are not subject to U.S. income tax because they are nonresident aliens, compensation includes all wages, salaries, tips, commissions and other remuneration paid to or for such employees in addition to the compensation in (2) above.

(4) The corporation shall determine compensation on a consistent basis so as not to distort the compensation paid to employees located within and without Virginia. In the event the corporation is not consistent in, its reporting, it shall disclose in its return to Virginia the nature and extent of such inconsistency.

(5) The terms "employees" and "personal services" shall have the same meaning as used in the context of employment in I.R.C. § 3121(b).

(6) The term "paid or accrued" shall mean either (a) cash or property paid to employees and reported to the I.R.S. as in (2) above, or (b) amounts properly accrued on the books of the corporation under its accounting method for federal income tax purposes, but not both.

"Corporation." (1) The term "corporation" means any entity created as such under the laws of the United States, any state, territory or possession thereof, the District of Columbia, or any foreign country or any political subdivision of any of the foregoing, or any association, joint stock company, partnership or any other entity subject to corporation income taxes under the United State Internal Revenue Code. See I.R.C. § 7701.

(2) Domestic corporation. A corporation, as defined in (1) above, is a "domestic corporation" if its organized, created or existing under the applicable laws of the State of Virginia. Compare I.R.C. § 7701(a)(4).

(3) Foreign corporation. The term "foreign corporation" means a corporation, as defined in (1) above, which is not a domestic corporation, as defined in (2) above. Registration of a foreign corporation with the State Corporation Commission for the privilege of doing business in Virginia shall not make a corporation a domestic corporation.

"Foreign source income." (1) The federal taxable income of corporations organized under the laws of the United States, any of the fifty states or the District of Columbia (U.S. domestic corporations) includes their worldwide income. Virginia law provides a subtraction for "foreign source income" if any is included in federal taxable income. Corporations that are not U.S. Domestic corporations include in federal taxable income only income from U.S. sources or income effectively connected with a U.S. trade or business. Such corporations will not have any "foreign source income" included in federal taxable income.

(2) Foreign source income does not include all income from sources without the United States but is limited to specified types of income and is also limited by the federal definitions in I.R.C. §§ 861 through 864 and the regulations thereunder in determining the source of a particular item of income.

(3) Corporations having foreign source income determine the amount of the subtraction by the following procedure:

(a) The specified types of gross income included in federal taxable income are segregated. The types of income are: interest, dividends, rents, royalties, license and technical fees, also gains, profits and other income from the sale of intangible or real property.

(b) The federal definitions are applied to determine the source of each item, particularly whether or not the item is effectively connected with the conduct of a U.S. trade or business.

(c) The federal procedure in Treasury Reg. § 1.861-8 is applied to allocate and apportion expenses to income derived from U.S. and foreign sources.

(d) The gross income from sources without the U.S. from (b) less the expenses allocated and apportioned to such income in (c) is the foreign source income for purposes of the Virginia subtraction.

(4) All income and expenses included in foreign source income and property or other activity associated with such income and expenses shall be excluded from the factors in the Virginia formula for allocating and apportioning Virginia taxable income to sources within and without Virginia.

"Income and deductions from Virginia sources." (1) The term "income and deductions from Virginia sources" includes items of income, gain, loss and deduction attributable to the ownership, sale, exchange or other disposition of any interest in real or tangible personal property in Virginia or attributable to a business, trade, profession or occupation carried on in Virginia or attributable to intangible personal property employed in a business, trade, profession or occupation carried on in Virginia.

(2) If the entire business of a corporation is not deemed to have been transacted or conducted within this State by Va. Code § 58.1-405, then the "income from Virginia sources" means that portion of the corporation's Virginia taxable income resulting from the allocation and apportionment formulas set forth in Va. Code §§ 58.1-406 through 58.1-421.

(a) Allocable income is limited to certain dividends. See Va. Code § 58.1-407.

(b) Apportionable income is Virginia taxable income less allocable income. Apportionment formulas are then applied to determine the part of apportionable income that is income from Virginia sources. Generally, a corporation will have income from Virginia sources if there is sufficient business activity within Virginia to make any one or more of the following apportionment factors positive:

-Vehicle miles (for motor carriers)
-Cost of Performance (for financial corporations)
-Completed Contracts (for certain construction corporations)
-Revenue car miles (for railway companies)
-Property, payroll or sales (for all other corporations)

See Va. Code §§ 58.1-408 through 58.1-421 and the regulations thereunder for details. Accordingly, a foreign corporation may be subject to Virginia income tax on the portion of its income deemed to be derived from Virginia sources under the apportionment formulas even though no specific portion of its gross or net income may be separately identified as being derived directly from Virginia.

(3) Certificate of authority. (a) Va. Code §§ 13.1-102.1 and 13.1-265.1 provide that if a corporation's only activity in Virginia is limited to certain activity in connection with investment in notes, bonds or other instruments secured by the deed's of trust on property located in Virginia, such corporations shall not be deemed to be transacting business in Virginia for purposes of Va. Code §§ 13.1-102 and 13.1-265 which require foreign corporations to obtain a certificate of authority from the State Corporation Commission before transacting business in Virginia. All corporations having income from Virginia sources are subject to Virginia income tax regardless of whether or not they are required to obtain a certificate of authority.

(b) A foreign corporation whose only connection with Virginia is the receipt of interest on notes, bonds or other instruments secured by deeds of trust on property located in Virginia will have no payroll or real or tangible property located in Virginia. Although the interest may be paid by a Virginia resident, for purposes of the sales factor the gross receipts will not be assigned to Virginia because there is no income producing activity in Virginia. See Va. Code § 58.1-416. If the corporation is a financial corporation as defined in Va. Code § 58-1.418 there would be no costs of performance in Virginia. Therefore, such a corporation would have no income from Virginia sources and, since such a corporation is not required to obtain a certificate of authority, it would not be required to file a Virginia income tax return. See Reg. § 630-3-441. However, if such a corporation acquires real or tangible personal property in Virginia by foreclosure or any other means the corporation will have property (or cost of performance) in Virginia. Therefore the corporation will have income from Virginia sources and-be required to file a Virginia income tax return.

(4) In the course of computing income from Virginia sources a corporation may be required to make computations solely for that purpose or maintain records used only for that purpose. The effects on tax liability of a method used to determine any components of income from Virginia sources and the burden of maintaining records not otherwise maintained and of making computations not otherwise made shall be taken into consideration in determining whether such method is sufficiently precise.

(5) Example: Corporation A is a manufacturer of paper products, conducting all of its manufacturing, selling and shipping operations outside Virginia. It makes no sales to customers in Virginia. It therefore has no gross income which may be identified as being derived directly from Virginia. However, the corporation does operate a facility in Virginia solely for the purchase of pulpwood for shipment to its manufacturing plants in other states. While corporation A has no gross income derived directly from Virginia, it has property and payroll in this State. Accordingly, Corporation A has income from Virginia sources based on apportionment factors.

Sales. (1) The term "sales" means the gross receipts of the corporation from all sources not allocated under Va. Code § 58.1-407 (dividends) whether or not such gross receipts are generally considered as sales.

(2) Manufacturing sales. In the case of a taxpayer whose business activity consists of manufacturing and selling, or purchasing and reselling goods or other property of a kind which would properly be included in the inventory of the taxpayer primarily for sale to customers in the ordinary course of its trade or business, gross receipts means gross sales, less returns and allowances, and includes service charges, carrying charges, or time-price differential charges incidental to such sales.

(3) Sales made in other types of business activity:

(a) If the business activity consists of providing services such as the operation of an advertising agency, or the performance of equipment service contracts, "sales" includes the receipts from performance of such service include fees, commissions, and similar items.

(b) In the case of cost plus fixed fee contracts, such as the operation of a government owned plant for a fee, "sales" include the entire reimbursed cost, plus the fee.

(2) Manufacturing sales. In the case of a taxpayer whose business activity consists of manufacturing and selling, or purchasing and reselling goods or other property of a kind which would properly be included in the inventory of the taxpayer primarily for sale to customers in the ordinary course of its trade or business, gross receipts means gross sales, less returns and allowances, and includes service charges, carrying charges, or time-price differential charges incidental to such sales.

(3) Sales made in other types of business activity:

(a) If the business activity consists of providing services such as the operation of an advertising agency, or the performance of equipment service contracts, "sales" includes the receipts from performance of such service including fees, commissions, and similar items.

(b) In the case of cost plus fixed fee contracts, such as the operation of a government owned plant for a fee, "sales" include the entire reimbursed cost, plus the fee.

(c) In the case of the sale, assignment, or licensing of intangible property such as patents and copyrights, "sales" includes the gross receipts from such sales, assignment or licensing.

(d) In the case of the sale of real or personal property, "sales" includes the gross proceeds from such sales.

(e) The term "sales" does not include amounts required by federal law to be included in federal taxable income as recapture of items deducted in prior years.

"State." The term "State" means any state of the United .States, the District of Columbia, the Commonwealth of Puerto Rico, a territory or possession of the United States, and any foreign country. Note that this definition applies only within the allocation and apportionment § of this chapter. When used elsewhere in this chapter the term "State" may or may not include foreign countries and U.S. possessions, depending on the context.

§630-3-311 REPORT OF CHANGE OF FEDERAL TAXABLE INCOME.

(A) Report. If the amount of any corporation's federal taxable income is changed or corrected by the Internal Revenue Service or other competent authority or as the result of a renegotiation of a contract or subcontract with the United States, such corporation must report the change or correction to the department within 90 days from the date of the final determination of such change, correction, or renegotiation. In reporting a change, correction or renegotiation, the corporation shall either concede its accuracy or state why such is erroneous.

(B) Amended Return. When any corporation files an amended federal income tax return for any taxable year, it must also file an amended Virginia return for such taxable year. The amended return must be filed within 90 days of the filing of the complementary federal amended return, except that any amended return claiming a refund for overpayment of tax must be filed within 60 days of the final determination of any changes in its federal tax liability. (See Regulation § 630-1-1823.)

(C) Final Determination. For purposes of this section a "final determination" of a change in federal tax liability shall have the same meaning as set forth in Paragraph (B) of Regulation § 630-1-1823.

§630-3-312 LIMITATIONS ON ASSESSMENTS.

(A) Generally. Except as otherwise provided, the department must assess any tax deficiency within three years from the date the tax was due and payable. See Va. Code § 58.1-104.

(B) Exceptions. The three-year statute of limitations for assessment shall not be applicable to the situations set forth below.

(1) Failure to File a Return. When any corporation fails to file a return as required by law, an assessment may be made at any time.

(2) False or Fraudulent Return. If any corporation files a false or fraudulent return with intent to evade the tax legally due, an assessment may be made at any time.

(3) Failure to Report Change in Federal Income. When any corporation fails to report a change or correction which increases its federal taxable income as required by Va. Code § 58.1-311, fails to report a change or correction in federal taxable income which is treated as a deficiency for federal purposes, or fails to file an amended return as required by law, the tax may be assessed at any time.

(4) Waiver. When the Department and the taxpayer, before the expiration of the statute of limitations, agree to extend the period for assessing the tax beyond such statute, the tax may be assessed at any time prior to the expiration date of such agreement. Subsequent agreements further extending the period of assessment may be executed prior to the expiration date of the previous agreement. Any agreement waiving and extending the statutory assessment period must be in writing and must clearly specify the date to which the assessment period has been extended. Any such extension will also extend the period in which a taxpayer may file an amended return claiming a refund. See Va. Code §§ 58.1-101, 58.1-1823.

(5) Report of Change or Correction in Federal Income. When any taxpayer reports a change or correction or files an amended return pursuant to an increase in federal taxable income pursuant to Va. Code § 58.1-311, or reports a change or correction in federal taxable income which is treated as a deficiency for federal purposes, an assessment may be made at any time within one year after such report, correction, or amended return is filed. Any additional tax assessed pursuant to this provision may not exceed the amount of additional Virginia tax due as a result of the federal change or correction. However, an assessment for additional amounts due which is not attributable to the federal change or correction may be made provided such assessment is made within the otherwise applicable statute of limitations. Further, if any other provision of law allows the assessment of tax during a period which exceeds the one-year period specified in this subsection, e.g., filing of a false or fraudulent return, such other provision shall prevail.

(6) Carry-Back Deficiencies. Any deficiency which is attributable to the carry-back of a net operating loss or net capital loss may be assessed at any time an assessment may be made for the taxable year in which the loss occurred. For example, if a taxpayer incurs a net operating loss in taxable year 1983 and a portion of the loss is carried back to taxable year 1980 resulting in a refund for taxable year 1980, and a subsequent audit reduces or eliminates the loss which was carried back to 1980, assessment relative to such deficiency may be assessed within the statute of limitations applicable to taxable year 1983.

(7) Recovery of Erroneous Refund.

(a) An erroneous refund of tax shall be considered an underpayment of tax on the date the refund is made. An assessment for recovery of the erroneous refund may be made within two years of the date such refund is made except that recovery may be made within five years if any part of the refund was the result of fraud or misrepresentation of a material fact.

(b) Erroneous Refund Defined. As used in this regulation, the term "erroneous refund" means the issuance of refund to which a taxpayer is not entitled. Where a taxpayer provides complete and current information and an erroneous refund results from a departmental error, such as a clerical error, the department is limited to recovery within the two year statute of limitations.

However, the department may make an assessment for recovery of the amount erroneously refunded within five years from the date of the refund if the issuance of the erroneous refund results from a misrepresentation of a material fact by the taxpayer, including inadvertent taxpayer error, e.g., the omission of information or the incorrect listing of information which has a direct bearing on the computation of Virginia taxable income or tax liability.

§ 630-3-323 EXCESS COST RECOVERY.

(A) In General. The purpose of the adjustments described by this section is to phase in the federal Accelerated Cost Recovery System (ACRS). All taxpayers must make an addition on their Virginia income tax returns for taxable years 1982 and thereafter which is equal to 30% of the ACRS deduction claimed on their federal income tax returns. For taxable years 1984 and thereafter a subtraction is allowed which is equal to a percentage of the ACRS additions made by the taxpayer in the taxpayer's Virginia income tax returns.

(B) Addition. (1) Any taxpayer claiming a deduction for ACRS on the federal return is required to add 30% of the federal ACRS deduction to Virginia taxable income. The addition is required regardless of the location of the property and regardless of the recovery method elected under ACRS.

(2) The addition is equal to 30% of the ACRS deduction except that no addition shall be made for any federal deduction claimed with respect to property not used to produce Virginia taxable income (such as foreign source income).

3) The following refers to items on federal form 4562, Depreciation and Amortization for 1984.

(a) No addition is required for the deduction under the election to expense recovery property. I.R.C. § 179.

(b) The addition is required for all recovery property (3-year, 5-year, 10-year, 15-year public utility, 15-year real property - low income housing, 15-year real property other than low income housing, 18-year real property) regardless of recovery period or method used or year placed in service.

(c) No addition is required for property subject to I.R.C. § 168(e)(2) election to use a method not based on a term of years.

(d) No addition is required for depreciation or amortization of non-recovery property.

(4) Partnerships, estates, trusts and electing small business corporations (Subchapter S) report the ACRS addition on their Virginia returns. The ACRS addition is included in the additions and subtractions reported to each partner, beneficiary and shareholder in accordance with the distributive share for the taxable year.

(5) When less than 100% of a taxpayer's income is from Virginia sources the addition is made as follows:

(a) Resident individuals add 30% of the federal ACRS deduction regardless of where the property is located. No deduction, exclusion, exemption or proration of the addition is allowed except with respect to property used to produce foreign source income.

(b) Nonresident individuals add 30% of the federal ACRS deduction in the same manner as resident individuals. The addition will be adjusted by the percentage of Virginia income in the computation of Virginia taxable income.

(c) Part-year residents add 30% of only the portion of the federal ACRS deduction earned while a resident of Virginia. The federal ACRS deduction shall be prorated based on the number of days of residence regardless of when the property is acquired or where the property is located.

(d) Corporations add 30% of the federal ACRS deduction. Those corporations eligible to allocate and apportion income will adjust the ACRS addition as part of apportionment computations.

(e) Partnerships, electing small business corporation (Subchapter S corporations), estates and trusts add 30% of the Federal ACRS deduction. If a partnership, electing small business corporation, estate or trust has income from sources in Virginia and other states, and has partners, shareholders or beneficiaries who are not residents of Virginia, then the nonresident's share of the additions and subtractions shall be determined in accordance with generally accepted accounting principles.

(C) Subtraction. For taxable years beginning on or after January 1, 1984, taxpayers may subtract a portion of the ACRS additions made in the taxpayer's Virginia income tax returns for 1982 and thereafter. The subtraction is computed as follows:

(1) The ACRS additions for all taxable years beginning and during calendar years 1982 and 1983 are totaled. Twenty percent (20%) of this total may be subtracted in the first taxable year beginning on or after January 1, 1984 and in each of the four succeeding taxable years.

(2) The ACRS additions for the two taxable years beginning on or after January 1, 1984 are totaled. Twenty percent (20%) of this total may be subtracted in the third taxable year beginning after January 1, 1984 and in each of the four succeeding taxable years.

(3) This addition and subtraction cycle continues indefinitely. Thus, additions made in the third and fourth taxable years beginning after January 1, 1984 will be subtracted in the fifth through the ninth taxable years; additions made in the fifth and sixth taxable years will be subtracted in the seventh through the eleventh taxable years.

(4) Short taxable years beginning after January 1, 1984 are treated as ordinary taxable years. However, the first biennium, calendar years 1982 and 1983, includes all taxable years beginning during 1982 and 1983.

(5) Example. Corporation A was organized on January 20, 1982 and filed its first tax return electing a taxable year ending June 30, 1982. In 1986 A was acquired by another corporation and filed a short year return for the period July 1, 1986 to December 31, 1986 in order to be included in the acquiring corporation's consolidated federal return. A continued to file a separate Virginia return. The first biennium contains three taxable years beginning January 20, 1982, July 1, 1982 and July 1, 1983. The ACRS additions for these three years total $900, twenty percent of which ($180) will be subtracted in taxable years ending on June 30, 1985, June 30, 1986, December 31, 1986, December 31, 1987 and December 31, 1988. The ACRS additions for the second biennium (taxable years ending on June 30, 1985 and June 30, 1986) total $600, twenty percent of which ($120) will be subtracted in taxable years ending December 31, 1986, December 31, 1987, December 31, 1988, December 31, 1989 and December 31, 1990.



Taxable Year ACRS Addition Total for ACRS Subtraction
Ended On Va. Return Biennium On Va. Return

6/30/82 300 None
6/30/83 300 None
6/30/84 300 900 None
6/30/85 300 180
6/30/86 300 600 180
12/31/86 210 180
+120 300
12/31/87 300 510 180
+120 300
12/31/88 300 180
                        • +120
+102 402
12/31/89 300 600 120
+102 222
12/31/90 300 120
+102
+120 342

(D) Special Situations. (1) Additions. For taxable years beginning during 1982 and 1983, any taxable entity filing a federal return in which an ACRS deduction is claimed must add 30% of such deduction in computing Virginia taxable income. No subtraction may be claimed in 1982 and 1983 returns regardless of the taxpayer's situation.

(2) Additions by other taxpayers. (a) Except for those situations set forth below, a taxpayer may claim a subtraction for only those ACRS additions made by the taxpayer. For this purpose a partner, beneficiary or shareholder is NOT deemed to have made ACRS additions reported by partnerships, estates, trusts and electing small business corporations (Subchapter S corporation). A partner, for example, may claim an ACRS subtraction only to the extent that it is included in the partner's distributive share of the income, loss, additions and subtractions for the taxable year. No adjustments are required due to any changes in the partner's ownership interest between the time the ACRS addition is made by the partnership and the time the ACRS subtraction is claimed by the partnership.

(b) Any taxpayer (other than a surviving spouse) claiming a subtraction based upon ACRS additions made by any other taxable entity must attach to the return a statement setting forth the name and taxpayer I.D. No. of such other taxable entity, details of the ACRS additions and previous subtractions claimed by such other taxable entity, an explanation of the relationship between the taxpayer and such other taxable entity and a statement signed by the taxpayer to the effect that the subtraction claimed has not, and will not, be claimed by any other person on any other return, including the final return of such other taxable entity.

(c) A corporation may claim a subtraction based upon ACRS additions made by another corporation if there has been a merger or other form of reorganization and the corporation claiming the subtraction would be allowed under federal law to claim a net operating loss deduction based upon a net operating loss incurred by the corporation which made the ACRS additions, assuming such corporation had incurred a net operating loss.

(d) A surviving spouse may claim a subtraction based upon ACRS additions made by the decedent and the surviving spouse on a joint or combined Virginia income tax return. The statement referred to in paragraph (b) above is not required.

(3) When less than 100% of a taxpayer's income is from Virginia sources the subtraction is claimed in the same manner as additions. See subsection (A)(5) above.

§ 630-3-400 IMPOSITION OF TAX.

A tax at the rate of six percent is imposed on the Virginia taxable income of every corporation organized under Virginia law and every foreign corporation having income from Virginia sources, as defined in Paragraph (E) of Reg. § 630-3-302, regardless of whether or not such foreign corporation has registered with the State Corporation Commission and obtained a certificate of authority to transact business in Virginia.

§ 630-3-401 EXEMPTIONS AND EXCLUSIONS.

(A) In general. Generally, any corporation which is subject to federal income tax and has some income from Virginia sources (as defined in Paragraph (E) of Reg. § 630-3-302 will also be subject to Virginia income tax unless specifically exempted. Even though exempt from Virginia income tax such corporations may be required to file a return under Va. Code § 58.1-441.

(B) Public Service Corporations. Public service corporations which pay a State franchise tax or license tax upon gross receipts under Chapter 26 of this title are exempt from the Virginia income tax. The tax levied must be based upon the gross receipts of the corporation and not solely on the value of the property in order for the corporation to be exempt from income tax.

(1) Railway companies are specifically subject to income tax by Va. Code § 58.1-2608.

(2) Pipeline distribution companies pay a franchise tax on gross receipts from sales to a consumer of natural or manufactured gas and are exempt from taxation on the net income from such sales. The net income of pipeline transmission companies from sales to those who are not consumers is specifically subject to income tax by Va. Code § 58.1-2627.1.

(3) Water, heat, light and power companies are specifically exempted from income tax by Va. Code § 58.1-2690.

(4) Motor vehicle carriers pay a tax on property and fuel used within the state, but not on gross receipts, and therefore are subject to income tax. Va. Code § 58.1-2701.

(5) Taxes on gross receipts imposed by Title 58.1, Chapter 26, Article 6 are special revenue taxes and do not exempt a corporation from income tax. Va. Code § 58.1-2660.

(C) Insurance companies. Insurance companies and reciprocal or inter--insurance exchanges which pay a license tax based on gross premiums, or a premium tax, under Title 58.1, Chapter 25, are exempt from income tax by Va. Code § 58.1-2508.

(D) Banks, trust companies and credit unions. (1) State and national banks, banking associations and trust companies organized and conducted as such under Va. Code Title 6.1, Chapter 2 or similar laws of the United States and which pay an annual franchise tax imposed by Va. Code Title 58.1, Chapter 12 are exempt from income tax by Va. Code § 58.1-1202 to the extent that they are subject to the franchise tax.

(2) Credit unions organized and conducted as such under Va. Code Title 6.1, Chapter 4, or similar laws of the United States are exempt from income tax.

(E) Small business corporations. Electing small business corporations which avail themselves of the election under Subchapter S of the Internal Revenue Code to have the income of the corporation included in the income of the shareholders are exempt from corporate income tax. All such income then becomes income taxable to the shareholder under laws and regulations applicable to individuals. Such corporations are required to file a Virginia return even though exempt from income tax.

(F) Charitable corporations. Religious, educational, benevolent and other corporations not organized or conducted for pecuniary profit which by reason of their purposes or activities are exempt from income tax under I.R.C. § 501(c) are exempt from the Virginia income tax to the same extent that they are exempt from federal income tax. Such corporations having unrelated business taxable income as defined in I.R.C. § 512 are subject to the Virginia income tax on such unrelated business taxable income. Corporations claiming to be exempt from the Virginia income tax must substantiate their exempt status under the federal income tax laws. Every corporation is presumed to be taxable unless appropriate substantiation is furnished.

(G) Limitation on jurisdiction to tax. (1) Federal law prohibits any state from imposing a net income tax on a foreign corporation having no place of business within the state, whose sole activity within the state is solicitation of orders which are accepted and filled by shipment via common carrier from places outside the state. See Public Law 86-272 (15 U.S.C.A. §§ 381-384) for full details and definitions.

Accordingly, Virginia is prohibited by federal law from imposing a net income tax on certain foreign corporations which have income clearly derived from Virginia sources but have insufficient activity within Virginia. However, any additional business activities in Virginia which exceed the limitation of federal law (Public Law 86-272) may subject the corporation to the imposition of Virginia income tax on all of its income from Virginia sources. Whether or not additional activities are sufficient to subject a foreign corporation to the taxing jurisdiction of Virginia is determined by the facts of each case. Consideration is given to the nature, continuity, frequency, and regularity of the activities in Virginia, compared with the nature, continuity, frequency, and regularity of its activities elsewhere.

(2) A corporation is not exempt from Virginia income tax on income earned on a U.S. government military base, National Park, or other federal enclave. 4 U.S.C.A. §§ 104 (Note), 105.
    § 630-3-402 VIRGINIA TAXABLE INCOME.

    (A) Federal taxable income. (1) A Virginia income tax is imposed on all income from Virginia sources which is defined as federal taxable income with certain specified additions, subtractions and exemptions. For the purpose of determining Virginia taxable income, the term "federal taxable income" means all income from whatever source derived and however named on which a federal income tax is imposed.

    (2) For most corporations "federal taxable income" for Virginia income tax purposes will be the amount shown on the line of federal form 1120 designated "taxable income" (after net operating loss deduction and special deductions). However, there are some exceptions, including, but not limited to, the following:

    (a) Regulated investment companies file federal form 1120 but do not follow normal corporate rules for computing the tax. Separate taxes are imposed on "investment company taxable income" and on capital gains. The federal taxable income of a regulated investment company for Virginia purposes is the sum of:
      • (i) "investment company taxable income" defined in I.R.C. § 852(b) and
        (ii) The amount of capital gains defined in I.R.C. § 852(b).

    (b) Real estate investment trusts file federal form 1120 but do not follow normal corporate rules for computing the tax. Separate taxes are imposed on "real estate investment trust taxable income," capital gains, "income from foreclosure property" and "income from prohibited transactions."

    The federal taxable income of a real estate investment trust for Virginia income tax purposes is the sum of:

    (i) "real estate investment trust income" as defined in I.R.C. § 857(b)(2),
      • (ii) "capital gains" as defined in I.R.C. § 857(b)(3),
    (iii) "income from foreclosure property" as defined in I.R.C. § 857(b)(4),
    and
    (iv) "income from prohibited transaction" as defined in I.R.C. § 857(b)(6).

    (c) Organizations exempt from federal tax under subchapter F of the Internal Revenue Code which have unrelated business income are required to file Federal Form 990-T. For such organizations, federal taxable income means "unrelated business taxable income" as defined in I.R.C. § 512.

    (d) Corporations organized under the laws of a foreign country and doing business within the U.S. pay the regular corporate tax on net income effectively connected with the conduct of a trade or business within the U.S. and, in the absence of a treaty between the U.S. and the foreign country, a separate tax of 300 on the gross income from dividends, interest and certain other income from U.S. sources. For Virginia purposes the federal taxable income of such foreign corporations is either the taxable income under the terms of any applicable treaty, or the sum of:

    (i) the gross income defined in I.R.C. § 881, and
    (ii) the net income defined in I.R.C. § 882.

    (e) Net operating loss deductions. (i) Corporations incurring a net operating loss are allowed under federal law to carry such loss back to specified years and over to specified subsequent years. Virginia law has no provision for a net operating loss deduction (NOLD). Therefore an NOLD is allowable for Virginia purposes only to the extent that the NOLD is allowed as a deduction in computing federal taxable income.

    (ii) When a net operating loss is carried back to a prior year, the NOLD is treated as a change in federal taxable income for the year to which the loss is carried. The corporation may file an amended Virginia return claiming a refund due to the NOLD. A copy of federal form 1139, 1120X or similar form must be attached to the amended Virginia return. See Va. Code §§ 58.1-1823 (amended returns), 58.1-1823 (interest on overpayments attributable to an NOLD), 58.1-403 (special rules for railway companies) and 58.1-442 (special rules for consolidated and combined Virginia returns).

    (iii) The Virginia additions and subtractions of the loss year follow the loss to the year the NOLD is claimed. For example, if 50% of a 1983 federal net operating loss is carried back to 1980, then 50% of the 1983 Virginia additions and subtractions will also be carried back to 1980.

    (iv) Under federal law an NOLD may be used only to reduce federal taxable income. An NOLD may not create or increase a federal net operating loss. Because an NOLD cannot reduce federal taxable income below zero, it is possible that a corporation with substantial Virginia additions will owe Virginia income tax even though its federal taxable income is reduced to zero by an NOLD.

    (v) Members of an affiliated group of corporations which file a consolidated federal return and separate or combined Virginia returns must compute federal taxable income and the NOLD as if each corporation had filed a separate federal return for all affected years. If the group files a Virginia consolidated return which does not include all of the corporations included in the federal consolidated return then the federal taxable income and NOLD must be computed as if all affected federal consolidated returns included only those corporations included in the Virginia consolidated return. The provisions of Treasury Reg. § 1.1502-79 which allocate a consolidated loss to the members of the group shall not be applied in computing the separate federal taxable income in this situation. See Va. Reg. § 630-3-442.

    (f) Certain corporations may be required to redetermine Virginia taxable income to properly reflect the business done in Virginia. Va. Code § 58.1-446.

    (B) Additions. The purpose of the additions specified in Va. Code § 58.1-402 is to add to Virginia taxable income certain items excluded or deducted from federal taxable income. If an item was fully included in federal taxable income, then it will not be added to Virginia taxable income by this section. If an item was only partially included in federal taxable income, then the item will be added to Virginia taxable income only to the extent it was excluded or deducted from federal taxable income. If an item excluded or deducted from federal taxable income has already been included in Virginia taxable income by operation of some other section of the Code of Virginia, then the item will not be added again under this section. The additions are:

    (1) Interest on obligations of other states. (a) Interest on the obligations of any state other than Virginia or on the obligations of a political subdivision of such other state must be added to federal taxable income.

    (b) I.R.C. § 265 prohibits the deduction of expenses allocable to or interest on indebtedness incurred or continued to purchase or carry obligations exempt from federal income tax. If a corporation has interest income on obligations of other states and also has expenses or interest which were not deducted by operation of I.R.C. § 265, then the addition shall be reduced by the portion of such expenses or interest which is attributable to the interest income on obligations of other states.
      • Example: Taxpayer has $3,000 of income exempt from federal income tax of which $1,000 is on obligations of a political subdivision of Virginia and $2,000 on obligations of political subdivisions of states other than Virginia. Application of I.R.C. § 265 barred deduction of $300 from federal taxable income. The addition is $1,800 calculated as follows:
        • 2,000 - (300 X 2,000) = 1,800
    3,000

    (c) If the interest is on an obligation created by a compact or agreement to which Virginia is a party, such interest shall not be added to Virginia taxable income.

    (2) Interest or dividends from the United States. (a) Interest or dividends on obligations or securities of any authority, commission or instrumentality of the United States, exempt from federal income tax but not from state income tax, must be added to federal taxable income.

    (b) If any related expenses were not deducted from federal taxable income by reason of I.R.C. § 265, then the addition shall be reduced by the portion of such expenses attributable to federal interest or dividends exempt from federal income tax.

    (3) Excess cost recovery. If any deduction was claimed on taxpayer's federal return under the accelerated cost recovery system (ACRS) for taxable years beginning after December 31, 1981, thirty percent (30%) of such deduction must be added to federal taxable income. See Va. Reg. § 630-3-323.

    (4) State income taxes. If any Virginia income tax imposed by this chapter was deducted in determining federal taxable income, such amount shall be added to federal taxable income. If any net income taxes and other taxes, including franchise and excise taxes, which are based on, measured by, or computed with reference to net income, imposed by any other taxing jurisdiction and deducted in determining federal taxable income, such amount shall be added to federal taxable income. To determine if a particular tax imposed by another taxing jurisdiction is a net income tax see Va. Reg. § 630-3-405.

    (5) Unrelated business taxable income. Organizations described in I.R.C. § 501(c) are exempt from federal income tax unless they have unrelated business income, in which case a tax is imposed on "unrelated business taxable income" defined in I.R.C. § 512. The unrelated business taxable income of such organization must be added to Virginia taxable income if it has not already been included in federal taxable income.

    (6) ESOP credit carryover. Federal law allows employers to claim a credit for contributions to an Employee Stock Ownership Plan (ESOP) and further provides that the amount of such contributions may not be deducted in computing federal taxable income. I.R.C. § 44G. Virginia law allows a subtraction for such contributions. See Paragraph (C)(11) of Va. Reg. § 630-3-402. Federal law allows the ESOP credit to be carried over to subsequent years and, if any ESOP credit remains unused at the end of the carryover period, the unused credit may be deducted. If any ESOP credit carryover is deducted in computing federal taxable income under I.R.C. § 404(i) such amount shall be added to federal taxable income in computing Virginia taxable income.

    (C) Subtractions. (1) The purpose of the subtractions specified in Va. Code §§ 58.1-402 is to subtract from Virginia taxable income certain items included in federal taxable income. If an item was partially excluded or deducted in determining federal taxable income, then it shall be subtracted from Virginia taxable income only to the extent that it was included in federal taxable income. If an item has already been excluded from Virginia taxable income under this chapter, then it shall not be subtracted again under this section. The subtractions are:

    (1) Interest or dividends on obligations of the United States or Virginia. (a) "Obligation" means a debt obligation or security issued by the United States or any authority, commission or instrumentality of the United States or by the Commonwealth of Virginia or any of its political subdivisions, which obligation or security is issued in the exercise of the borrowing power of the United States or Virginia and is backed by the full faith and credit of the United States or Virginia.

    (b) Guarantees by the United States or Virginia of obligations of private individuals or corporations are merely contingent obligations of the United States or Virginia even though the guarantees may be backed by the full faith and credit of the United States or Virginia. The obligation does not become an obligation of the United States or Virginia because of the guarantee and interest and dividends paid on such guaranteed obligations do not qualify for the subtraction unless specifically exempted by statute.

    (c) Specific statutory exemptions exist for certain securities issued by particular federal or Virginia agencies or political subdivisions. If a federal or Virginia statute exempts from state taxation the interest or dividends on specific securities of a particular agency or political subdivision then such interest or dividends qualify for the subtraction.

    For examples of specific statutory exemptions see Va. Code § 15.1-1383 and 12 U.S.C.A. § 2055.

    (d) Repurchase agreements are usually obligations issued by financial institutions which are secured by U.S. obligations exempt from Virginia income taxation under (a) or (c) above. In such cases the interest paid by the financial institutions to purchasers of repurchase agreements does not qualify for the subtraction. Repurchase agreements issued following current commercial practice will be regarded as obligations of the issuing financial institution. However, if the purchaser is regarded as the true owner of the underlying exempt obligation, the interest will qualify for the subtraction even though collected by the seller and distributed to the purchaser. Any claim of such ownership must be substantiated by a taxpayer claiming a subtraction.

    (2) Interest or dividends from pass-through entities. (a) Under federal law certain income received by a partnership, estate, trust or regulated investment company (pass-through entity) and distributed to a partner, beneficiary or shareholder (recipient) retains the same character in the hands of the recipient. If a pass-through entity receives interest or dividends on U.S. or Virginia obligations which is distributed to the recipients in a manner that the distributions retain their character in the hands of the recipients under federal law, then such interest or dividends may be subtracted by the recipients in computing Virginia taxable income.

    (b) A pass-through entity may invest in several types of securities, some of which are U.S. or Virginia obligations. When taxable income is commingled with exempt income all income is presumed taxable unless the portion of income which is exempt from Virginia income tax can be determined with reasonable certainty and substantiated. The determination must be made for each distribution to each shareholder. For example, if distributions are made monthly then the determination must be made monthly. As a practical matter, only pass-through entities which invest exclusively in U.S. or Virginia obligations, or which have extremely stable investment portfolios, will be likely to make such determinations.

    (c) Examples: (i) ABC Fund, a regulated investment company, invests exclusively in U.S. Treasury notes and bills which are exempt from state taxation under 31 U.S.C.A. § 3124. All distributions are considered to be interest on U.S. Obligations and may be subtracted by the recipient.

    (ii) Virginia Fund, a regulated investment company, invests exclusively in obligations of Virginia and its political subdivisions. Distributions are considered to be interest on Virginia obligations and qualify for the subtraction to the extent that such distributions are included in the recipient's federal taxable income.

    (iii) XYZ Fund, a regulated investment company, invests in a variety of securities including obligations of the U.S., Virginia, other states, corporations and financial institutions (repurchase agreements). Due to the commingling of taxable and exempt income, the turnover in XYZ Fund's investments and the fluctuation in a shareholder's investment in XYZ Fund, all distributions are considered taxable income and do not qualify for the subtraction unless XYZ Fund determines the portion of distributions which is interest and dividends from U.S. and Virginia obligations for each distribution to each shareholder. Note that any portion of XYZ Fund's distributions which are excluded from federal taxable income as interest on obligations of other states must be added to Virginia taxable income.

    (3) DISC Dividends. (a) A domestic international sales corporation (DISC) is exempt from the federal income tax under I.R.C. § 991. Virginia law does not provide a similar exemption. Therefore a DISC is subject to Virginia tax if it is a domestic corporation or doing business in Virginia.

    (b) I.R.C. § 995 imputes certain earnings of a DISC to the DISC's share-holders as a distribution taxable as a dividend. Subsequent actual distributions are excluded from the shareholder's income as being first made out of previously taxed income. I.R.C. § 996(a)(1). The deemed distributions will be considered dividends for the purpose of Va. Code § 58.1-407 (relating to allocation of dividend income). However, the provisions of Va. Code § 58.1-446 may apply to a DISC.

    (c) If 50% or more of the income of a DISC was assessable in Virginia for the preceding year, or the last year in which the DISC had income, then to the extent that deemed distributions from such DISC were included in taxpayer's federal taxable income, such amounts shall be subtracted from federal taxable income. For the purpose of this subtraction, 50% or more of the income of a DISC shall be deemed assessable in Virginia if the DISC filed a Virginia income tax return for the preceding year, or the last year in which the DISC had gross income, and such return shows either that all income was taxable in Virginia or that 50% or more of the net income was allocated or apportioned to Virginia.

    (4) State Tax Refunds. If federal taxable income included a refund or credit for overpayment of income taxes to this state or any other state, the amount of such refund or credit shall be subtracted from Virginia taxable income.

    (5) Foreign Dividend Gross Up. I.R.C. § 78 requires corporations electing to claim a credit for taxes paid to a foreign government by a subsidiary to deem the amount of such taxes a dividend and include such amount in federal taxable income. If I.R.C. § 78 requires the inclusion of an amount in federal taxable income then such amount, net of any expenses attributable to such amount, shall be subtracted from Virginia taxable income. A copy of I.R.S. form 1118, or similar form, shall be attached to the return to substantiate the subtraction.

    (6) WIN or Targeted Jobs Credit. Federal law permits a taxpayer to claim a credit based upon certain wages paid. I.R.C. §§ 40 and 44B. If a WIN or Targeted Jobs credit is elected I.R.C. § 280C bars the deduction of the wages on which the credit is based. To the extent such wages were not deducted from federal taxable income, they shall be subtracted from Virginia taxable income.

    (7) Sub part F income. If I.R.C. § 951 requires an amount to be included in federal taxable income, then such amount, net of any expenses attributable to such amount, shall be subtracted from Virginia taxable income.

    (8) Foreign Source Income. If federal taxable income includes any amount that is "foreign source income," as that term is defined in Va. Code § 58.1-302 and the regulations thereunder, such amount may be subtracted.

    (9) Excess cost recovery. If the taxpayer included any excess cost recovery in its additions for taxable years beginning after December 31, 1981 then taxpayer may subtract a portion of such excess cost recovery in returns for taxable years beginning after December 31, 1983. See Va. Reg. § 630-3-323.

    (10) Dividends Received. To the extent included in federal taxable income there shall be subtracted from Virginia taxable income the dividends received from a corporation when the taxpaying corporation owns fifty percent or more of the voting power of all classes of stock of the payer.

    (11) ESOP contributions. Federal law allows employers to claim a credit for contributions made to an Employee Stock Ownership Plan (ESOP), and further provides that any ESOP contributions for which a credit is allowed may not be deducted in computing federal taxable income. I.R.C. § 44G. If any ESOP contributions are not deducted in computing federal taxable income because of the provisions of I.R.C. § 44G, such contributions may be subtracted in computing Virginia taxable income.

    § 630-3-403 ADDITIONAL MODIFICATIONS

    (A) In General. In addition to the modifications set forth in Va. Code § 58.1-402 for determining Virginia taxable income for corporations generally, the adjustments set forth in subsection (B) below shall be made to the federal taxable income of savings and loan associations and as set forth in subsections (C) and (D) below for railway companies.

    (B) Addition for Bad Debts. (1) If the federal bad debt deduction is based on a percentage of income, such amount shall be added to federal taxable income. After federal taxable income has been adjusted by all of the additions and subtractions in Va. Code § 58.1-402 and the bad debt addition a new bad debt deduction is determined by applying to the adjusted federal taxable income the same percentage used to compute the federal bad debt deduction. The new bad debt deduction is then subtracted from the adjusted federal taxable income to arrive at Virginia taxable income.

    (2) If the federal bad debt deduction is computed by a method other than the percentage of net income (such as the experience method) then no addition or subtraction is required for the bad debt deduction.
    (C) Addition for NOLD. If federal taxable income for any taxable year has been reduced by a Net Operating Loss Deduction (NOLD) attributable to a net operating loss occurring in a taxable-year beginning before January 1, 1979, then such NOLD must be added to federal taxable income.

    (D) Subtraction for NOLD. (1) Because federal law requires an NOLD to be carried back to the earliest year in which there is income to be offset, a railway company suffering a net operating loss in a taxable year beginning on or after January 1, 1979, might be required to carry such loss back to taxable years beginning before January 1, 1979. Since a railway company was not subject to Virginia income tax for years beginning before January 1, 1979, it would receive no Virginia benefit from such carryback, and the NOLD for other taxable years would be reduced or eliminated by the required federal carryback.

    (2) In this situation, railway companies must add back the NOLD actually allowed on their federal return for losses occurring in taxable years beginning on or after January 1, 1979. Anew NOLD is computed for Virginia purposes following the federal law and regulations except that no such loss is carried back to a taxable year beginning before January 1, 1979.

    (3) Example A. XYZ Co. is a railway company reporting on a calendar year basis. For the years 1976-1982 XYZ Co. had no additions or subtractions to federal taxable income except for an adjustment for net operating loss deductions. The income of XYZ is as follows:

    1975 1976 1977 1978 1979
    Federal Taxable Income 50,000 50,000 25,000 (150,000) 75,000
    Before NOLD
    NOLD (50,000) (50,000) (25,000) - (25,000)

    Fed. Taxable Income -0- -0- -0- -0- 50,000

    Va. NOL Adjustment 25,000

    Va. Taxable Income (Virginia Income Tax Not Imposed) 75,000

    Under federal law the 1978 net operating loss is first carried back to offset 1975, 1976 and 1977 income. There would be $25,000 of the NOL remaining to be carried forward and deducted on YYZ Co.'s 1979 federal return. Because the loss occurred in a taxable year beginning before December 31, 1978, the NOLD on the 1979 return must be added to federal taxable income to determine Virginia taxable income.

    (4) Example B. Same facts as in Example A except that the loss occurred in 1980. The income of YYZ is as follows:

    1977 1978 1979 1980 1981
    Federal Taxable Income 25,000 25,000 75,000 (100,000) 75,000 Before NOLD

    NOLD (25,000) (25,000) (50,000) - -0--

    Fed. Taxable Income -0- -0- 25,000 -0- 75,000

    +50,000

    Va. NOL Adjustment (Virginia Income) (75,000) (25,000)

    Va. Taxable Income (Tax Not Imposed) -0- -0- 50,000

    Under federal law the 1980 net operating loss is first carried back to offset income in 1977 and 1978. The remaining $50,000 NOL is carried back to the 1979 federal return.

    Because the loss occurred in a taxable year beginning on or after January 1, 1979, the entire NOL will be available to offset Virginia income reported in taxable years beginning on or after January 1, 1979. The federal NOLD of $50,000 is first added to the 1979 federal taxable income and then a new Virginia NOL carryback is computed and subtracted. The federal laws and regulations are followed except that no NOL shall be carried back further than 1979. The result is that the carryback to 1979 is $75,000 instead of $50,000 and there is still $25,000 of the NOL left to carryover to the 1981 return.

    § 630-3-405 BUSINESS ENTIRELY WITHIN VIRGINIA.

    (A) In General. If the entire business of a corporation is conducted within Virginia, the tax imposed by Va. Code § 58.1-400 shall be upon the entire Virginia taxable income. A corporation is presumed to be doing business entirely within Virginia unless it is subject to one of the following taxes in another state:

    (1) A tax imposed on net income, or
    (2) A franchise tax measured by net income, or
    (3) A franchise tax for the privilege of doing business.

    (B) Definitions. (1) "State" is defined in Va. Code § 58.1-302 and includes foreign countries.

    (2) A corporation is "subject to" one of the taxes enumerated in subsection (A) above if it carries on sufficient business activity within any other state so that the other state has jurisdiction to impose one of the enumerated taxes, whether or not such other state actually imposes one of the enumerated taxes. For purposes of determining whether or not a state has sufficient jurisdiction to impose a tax the provisions of federal law (P.L. 86-272, 15 U.S.C.A. §§ 381-384) regulating state taxation of interstate commerce shall be applied even if the state in question is a foreign country provided that income from such foreign country is included in Virginia taxable income. If jurisdiction is otherwise present, a foreign country is not considered as without jurisdiction by reason of a treaty between the foreign country and the United States.

    (C) Voluntary payment of tax. The taxpayer is not "subject to" one of the specified taxes in another state if the taxpayer voluntarily files and pays one or more of such taxes when not required to do so by the laws of that state or pays a fee for qualification, organization or for the privilege of doing business in that state, but

    (1) does not actually engage in business activities in that state, or

    (2) does actually engage in some activity, not sufficient for nexus, and the tax bears no relation to the corporation's activities within such state.

    (D) Examples. These principles are illustrated by the following examples:

    (1) State A requires all nonresident corporations which qualify or register in State A to pay to the Secretary of State an annual license fee or tax for the privilege of doing business in the state regardless of whether the privilege is in fact exercised. The amount paid is determined according to the total authorized capital stock of the corporation; the rates are progressively higher by bracketed amounts. The statute sets a minimum fee of $50 and a maximum fee of $500. Failure to pay the tax bars a corporation from utilizing the state courts for enforcement of its rights. State A also imposes a corporation income tax. Nonresident Corporation X is qualified in State A and pays the required fee to the Secretary of State but does not carry on any activities in State A which exceed the limitations of P.L. 86-272. Corporation X is not subject to tax in State A.

    (2) Same facts as Example (1) except that Corporation X is subject to and pays the corporation income tax. Payment is prima facie evidence that Corporation X is "subject to" the net income tax of State A.

    (3) State B requires all nonresident corporations qualified or registered in State B to pay to the Secretary of State an annual permit fee or tax for doing business in the state. The base of the fee or tax is the sum of (1) outstanding capital stock, and (2) surplus and undivided profits. The fee or tax base attributable to State B is determined by a three factor apportionment formula. Nonresident Corporation X which operates a plant in State B, pays the required fee or tax to the Secretary of State. Corporation X is subject to tax.

    (4) State A has a corporation franchise tax measured by net income for the privilege of doing business in that state. Corporation X files a return based upon its business activities in the state but the amount of computed liability is less than the minimum tax. Corporation X pays the minimum tax. Corporation X is subject to State A's corporation franchise tax.

    § 630-3-406 ALLOCATION AND APPORTIONMENT.

    (A) In General. (1) If a corporation has income from business activity which is subject to taxation both within and without Virginia, as defined in Va. Reg. § 630-3-405, the corporation shall allocate and apportion its Virginia taxable income as provided in Va. Code §§ 58.1-407 through 58.1-420.

    (2) Only corporations allocate and apportion income. Individuals and other taxpaying entities follow other rules.

    (B) Alternate method. If the statutory method of allocation and apportionment unfairly states the income from Virginia sources, a corporation may petition the Department of Taxation to allow an alternate method under Va. Code § 58.1-421.See Va. Reg. § 630-3-421.

    § 630-3-407 HOW DIVIDENDS ALLOCATED.

    (A) In General. If a corporation is subject to tax in Virginia and at least one other state, as defined in Va. Code § 58.1-405, it must allocate and apportion its Virginia taxable income. Dividends are allocated to the commercial domicile of the corporation. All other income is apportioned.

    (B) Definition of dividend. A distribution to the taxpaying corporation from another corporation shall be allocated if such distribution is treated as a dividend under I.R.C. § 316.

    (C) Amount allocated. Dividends are allocated only to the extent that they are included in Virginia taxable income. Allocable dividends are gross dividends received reduced by the following:

    (1) Any dividends exempt from taxation under federal law.
    (2) The dividends received deduction allowed by federal law.
    (3) Dividends which are subtracted from federal taxable income in computing Virginia taxable income (e.g. 50% owned corporations, foreign source income, foreign dividend gross up, sub-part F income). See Paragraph (C) of Va. Reg. § 630-3-402 for details.

    (D) Commercial domicile. Commercial domicile means the state in which is located the principal office from which the business affairs of the corporation are normally directed or managed. The commercial domicile will normally be the location of the headquarters office of the corporation. If the corporation has no office then the commercial domicile may be where the officers, directors and shareholders regularly meet or where the principal officer or majority shareholder/officer conducts the affairs of the corporation, depending upon the facts and circumstances.

    § 630-3-408 WHAT INCOME APPORTIONED AND HOW.

    (A) In General. (1) If a corporation is subject to taxation in Virginia and at least one other state (as determined by Va. Code § 58.1-405) then all Virginia taxable income, other than dividends allocable under Va. Code § 58.1-407, is apportioned by the appropriate formula. Each factor is a fraction (expressed as a decimal carried to 6 places) based on activity within Virginia divided by similar activity everywhere. (But see (B) below. The activity must also be effectively connected with a trade or business in the United States and produce Virginia taxable income).

    (2) Except as noted below, all corporations are required to use a three factor formula based on the property, payroll and sales within Virginia. The formula is the average of the three factors, except that if the denominator of any fraction is zero, then that fraction is not included in the average. The following types of corporations apportion income using special one- factor formulas:

    (a) Motor carriers according to vehicle miles. Va. Code § 58.1-417.
    (b) Financial corporations according to cost of performance. Va. Code § 58.1-418.
    (c) Construction corporations using the completed contract method according to business within and without Virginia. Va. Code § 58.1-419.
    (d) Railway companies according to revenue car miles. Va. Code § 58.1-420.
    (e) In exceptional circumstances any corporation may request permission to use an alternate method. Va. Code § 58.1-421.

    (B) Additional Requirements. In order to be included in the numerator and denominator of each factor in the three-factor formula, property, payroll and sales must meet two requirements.

    (1) The property, payroll and sales must be used to produce Virginia taxable income. Income or gain produced by the property, payroll and sales must be included in federal taxable income and not subtracted in computing Virginia taxable income. In the alternative, deductions for expenses or losses associated with the property, payroll and sales must be both deducted in computing federal taxable income and not an addition in computing Virginia taxable income.

    (2) The property, payroll and sales must be effectively connected with the conduct of a trade or business within the United States and income therefrom must be includible in federal taxable income.

    (a) Reference is made to the Treasury regulations under I.R.C. §§ 882, 861, 862, 863 and 864 for determining whether property, payroll and sales are effectively connected with the conduct of a trade or business within the United States. Attention is directed to the fact that under the regulations mentioned, particularly § 1.864-4, activity may be located in a foreign country and still be effectively connected with the conduct of a trade or business within the United States.

    (b) The property, payroll and sales of a corporation which are used to produce income qualifying for the subtraction for foreign dividend gross up sub-part F income and foreign source income shall not be included in the denominator of the fractions.

    (C) Examples. The principles of this section may be illustrated by the following examples.

    (1) Corporation C is organized under the laws of Delaware and has its commercial domicile in New York. C manufactures goods in New York and sells them through its sales offices located throughout the world, including Virginia. C also owns stock in a corporation which pays dividends. After the dividends-received deduction, $10,000 is included in C's federal taxable income of $10,000,000. Under federal law all of C's foreign sales are effectively connected with a trade or business within the United Sales. The property, payroll and sales factors are as follows:
          • Virginia World Wide Factor
    Property $3,000,000 $100,000,000 .030000
    Payroll 750,000 75,000,000 .010000
    Sales 2,500,000 125,000,000 .020000

    The apportionable income is $9,990,000 (total income less allocable dividends of $10,000). The income from Virginia sources on which Virginia income tax is imposed is $199,800, computed as follows:

    $9,990,000 X (.03 + .01 + .02) = $199,800
      • 3

    (2) Same facts as in example (1) except that C only recently opened its Virginia office and made no sales in Virginia during the taxable year. The income from Virginia sources is $133,200 computed as follows:

    $9,990,000 X (.03 + .01) = $133,200
    3

    § 630-3-409 PROPERTY FACTOR.

    (A) In General. (1) The property factor is a fraction. The numerator is the average value of real and tangible personal property which is used in Virginia. The denominator is the average value of real and tangible personal property which is used everywhere. Property shall be included in the property factor if it is:

    (a) owned or rented by taxpayer, and
    (b) used by taxpayer, and
    (c) effectively connected with the taxpayer's trade or business within the United States and the income from such trade or business is includible in both Virginia taxable income and federal taxable income.

    (2) "Property." (a) Property means all real and tangible personal property including land, mineral rights, buildings, machinery, inventory and any other real or tangible personal property in which the corporation has any right of use or possession. For valuation of property see Va. Reg. § 630-3-410. For explanation of "average value" see Va. Reg.
    § 630-3-411.

    (b) Partnership property. For purposes of the property factor each item of partnership property shall have the same character for a corporate general partner as if direct corporate ownership of the property existed. However, if the inclusion of partnership property in the property factor does not materially affect the factor and information is difficult to obtain then partnership property may be treated as intangible property and excluded from the property factor provided that such treatment is adequately disclosed. See paragraph (E)(4) of Va. Reg. § 630-3-302.

    (c) Leasehold improvements. For purposes of the property factor lease-hold improvements are deemed to be owned by the lessee of the property to which the improvements are made regardless of any right the landlord may have to the improvements at the end of the lease term.

    (d) Mining property. A corporation engaged in the business of mining mineral ore, oil, gas or other natural resources or cutting timber may own or lease the real estate on which such operations are conducted or it may own or lease only the mineral rights to such property or some other interest in the operations. For purposes of the property factor the corporation is deemed to own or lease the property, mineral rights or other interest in such property and the value, as determined under Va. Reg. § 630-3-410, will be included in the property factor.

    (3) "Owned or rented." Property will be included in the property factor regardless of whether the corporation owns, rents or leases the property. Ownership or rental affects only the method used to determine the value of the property. See Va. Reg. § 630-3-410.

    (4) "Used." (a) Property held as reserves or standby facilities or property held as a reserve source of materials shall be included in the factor.

    (b) Property under construction during the taxable year (except inventoriable goods in process) shall be excluded from the factor until such property is actually used. If the property is partially used while under construction, the value of the property to the extent used shall be included in the property factor.

    (c) Mineral rights are used when placed in production or developed to the point where they could be placed in production but are held as reserves. Exploration and development do not place mineral rights in use for the property factor. But see Va. Reg. § 630-3-410 for valuation.

    (d) Once used or available for use, property shall remain in the property factor until its permanent withdrawal is established by an identifiable event such as its sale. The fact that taxpayer ceases to actively use property does not, of itself, remove the property from the property factor because it is still available to be used.

    (e) Property is not permanently withdrawn from use by merely offering it for sale. Property offered for sale shall be deemed available for use unless other circumstances clearly show that use of the property has been permanently abandoned.

    (f) Property which the corporation ceases to actively use in its operations but leases to others is still being used by the corporation to produce income and shall be included in the factor.

    (5) Property is effectively connected with the taxpayer's business within the United States if it is actually used or available to be used in taxpayer's trade or business. Generally any use of property which produces income, including rental income, is income from a trade or business. A taxpayer may have more than one trade or business. See Treasury Reg. § 1.861-4 for definition of "effectively connected….”

    (6) Safe harbor leases. The Economic Recovery Tax Act of 1981 (ERTA) allows corporations to treat certain financial agreements concerning property as leases for federal income tax purposes even though such agreements would not be recognized as leases under the general property law of a state. Such agreements are treated as leases for purposes of the Virginia income tax to the same extent that they are treated as leases for federal income tax. Thus the "lessee" will be treated as a corporation renting property, and the value of the property will be included in the property factor. The "lessor" will be treated as a corporation owning property and the value of the property will be included in the property factor.

    (B) Examples. These principles are illustrated by the following examples:

    Example (1): On June 30, 1981, taxpayer shut down its manufacturing operations in State X and announced its intention to sell the land, buildings and machinery. The property was sold on October 31, 1982. The value of the manufacturing plant is included in the property factor until November 1, 1982.

    Example (2): Same as example (1) except that in addition to closing the plant taxpayer removed all equipment from the plant, relocated key employees and awarded severance pay to other employees. The plant is included in the property factor until July 1, 1981.

    Example (3): Same as example (1) except that the plant was rented on a month to month basis until the plant was sold. The plant is included the property factor until November 1, 1982.

    Example (4): On June 30, 1981, taxpayer closed its manufacturing plant and leased the building under a 5-year lease on October 1, 1981. The plant is included in the property factor for all of 1981 and subsequent years.

    Example (5): The taxpayer operates a chain of retail grocery stores. On June 30, 1981, taxpayer closes Store A which is then remodeled into three small retail stores such as a dress shop, dry cleaning, and barber shop. The new stores are advertised for lease on November 1, 1981. The property remains in the property factor for all of 1981 and subsequent years.

    Example (6): Taxpayer, a retailer, owns a 10 story building. The first floor is used by taxpayer as a retail store. The remaining floors are rented to various businesses as offices. The entire building is included in the property factor.

    § 630-3-410 VALUATION OF PROPERTY OWNED OR RENTED.

    (A) In General. The taxpayer shall be consistent in the valuation of property and in excluding or including property in the property factor in filing returns or reports to all income tax states to which the taxpayer reports to the extent that the laws of the other states are similar to Virginia's laws. In the event the taxpayer is not consistent in its reporting it shall disclose in its return to Virginia the nature and extent of the inconsistency.

    (B) Owned Property. (1) Property owned by the taxpayer shall be valued at its original cost. As a general rule, "original cost" is deemed to be the basis of the property for federal income tax purposes at the time of acquisition by the corporation and adjusted by subsequent capital additions or improvements thereto and partial disposition thereof, by reason of sale, exchange, abandonment, etc. The original cost shall not be reduced by amounts allowed or allowable for depreciation, amortization, depletion, accelerated cost recovery or similar allowances.

    (2) Inventory of stock of goods shall be included in the factor in accordance with the valuation method used for federal income tax purposes.

    (3) Property acquired by gift or inheritance shall be included in the property factor at its basis for determining depreciation for federal income tax purposes.

    (C) Rental Property. (1) The property factor includes the average value of property rented by the taxpayer valued at eight times the net annual rental rate. Net annual rental rate is the annual rental rate paid by the corporation.

    (2) Annual Rental Rate. (a) The "annual rental rate" is the amount paid as rental for the property for a 12-month period, or the "annual rent".

    (b) Where property is rented for less than a 12-month period, the net rent paid for the actual period of rental shall be annualized to determine the annual rental rate. For example, if equipment is rented for 3 months at $100 per month the annual rental rate is $1,200.

    (c) "Annual rent" is the actual sum of money or other consideration payable, directly or indirectly, by the taxpayer or for its benefit for the use of the property and includes any amount payable for the use of real or tangible personal property, or any part thereof, whether designated as a fixed sum of money or as a percentage of sales, profits or otherwise and any amount payable as additional rent or in lieu of rents, such as interest, taxes, insurance, repairs or any other items which are required to be paid by the terms of the lease or other arrangement.

    However, rent does not include amounts paid as service charges, such as utilities, janitor services, etc. If a payment includes rent and other charges unsegregated, the amount of rent shall be determined by consideration of the relative values of the rent and other items.

    (d) "Annual rent" does not include incidental day-to-day expenses such as hotel or motel accommodations, daily rental of automobiles, etc.

    (3) Leasehold improvements shall, for the purpose of the property factor, be treated as property owned by the lessee regardless of whether the lessee is entitled to remove the improvements or the improvements revert to the lessor upon expiration of the lease. Hence, the original cost of leasehold improvements shall be included in the factor of the lessee.

    (D) Movable Tangible Personal Property. (1) The value of movable tangible personal property shall be included in the numerator to the extent of its utilization in this state. The extent of such utilization shall be determined by multiplying the total value of such property by a fraction, the numerator of which is the number of days of physical location of the property in Virginia during the taxable period and the denominator is the number of days of physical location of the property everywhere during the taxable period.

    (2) An automobile assigned to a traveling employee may be included in the numerator of the property factor of the state to which the employee's compensation is assigned under the payroll factor.

    (3) Motor carriers apportion income entirely by vehicle miles. Va. Code § 58.1-417.

    (4) In the case of a contractor who has elected to use the completed contract method of accounting for Federal income tax purposes the contractor shall apportion income in accordance with Va. Code § 58.1-419.

    (E) Mineral Rights. (1) Mineral rights involve ownership of less than the entire fee simple interest in land. If the mineral rights consist of ownership of all minerals in place with no payments in the nature of rents or royalties required and no time limitations imposed then the mineral rights will be valued as owned property.

    (2) Most mineral rights involve several types of expenditures variously called "bonus", "rental", "delay rental", "royalty" etc. The value of such mineral rights is the sum of:
      • (a) Acquisition cost, bonus payments and other substantial, nonrecurring items valued at original cost, and

        (b) Exploration and development costs and other leasehold improvements valued at original cost.

    (F) Examples. The principles of this section are illustrated by the following examples.
    Example (1): On January 1, 1970 X corporation acquired a factory building in this State at a cost of $500,000 and on July 1, 1971, expended $100,000 for major remodeling of the building. The book value of the building on December 31, 1982 is $456,000 (cost less accumulated depreciation). The value of the building for purposes of the numerator and denominator of the property factor is $600,000.00.

    Example (2)' In 1980, X corporation is merged into Y corporation in a tax free reorganization under the Internal Revenue Code. At the time of merger, X corporation owns a factory which X built in 1975 at a cost of $1,000,000. X has been depreciating the factory at the rate of two percent per year, and its adjusted basis (cost less depreciation) in X's hands at the time of merger is $900,000. The property is acquired by Y in a transaction in which, under the Internal Revenue Code, its basis in Y's hands is the same as its basis in X's. Y includes the property in its property factor at X's original cost, without adjustment for depreciation, i.e., $1,000,000.

    Example (3): Corporation Y acquires the assets of corporation X in liquidation by which Y is entitled to use its stock cost as the basis of the X assets. Under these circumstances, Y's cost of the assets is the purchase price of the X stock, prorated to the assets acquired in the liquidation of X.

    Example (4): A taxpayer, pursuant to the terms of a lease, pays a lessor $1,000 per month as a base rental and at the end of the year pays the lessor one percent of its gross sales of $100,000. The annual rent is $13,000 ($12,000 plus one percent of $100,000 or $1,000).

    Example (5): A taxpayer pursuant to the terms of a lease, pays the lessor $12,000 a year rent plus taxes in the amount of $2,000 and interest on a mortgage in the amount of $1,000. The annual rent is $15,000.

    Example (6): Taxpayer leases a 40,000 sq. ft. warehouse for 5 years but only uses 20,000 sq. ft. in its operations. The lease provides for an annual rental of $200,000 and taxpayer is to pay utilities and taxes. The local taxes are $12,000 per year. Within a few months’ taxpayer subleases 10,000 sq. ft. to another corporation for the remainder of the 5 years at an annual rental of $75,000 but taxpayer will furnish utilities and pay the taxes. The balance of the warehouse space is rented to various businesses and individuals on a month-to-month basis. The annual rental rate for the warehouse is $212,000 (200,000 rent plus 12,000 taxes). The entire property is included in the property factor because the entire warehouse is actually used or available for use on short notice or used to produce rental income.

    § 630-3-411 AVERAGE VALUE OF PROPERTY.

    (A) In General. (1) The average value of property shall be determined by averaging the value at the beginning and end of the taxable year, but the department may require the averaging of monthly values during the taxable year if reasonably required to reflect properly the average value of the corporation's property.

    (2) Averaging by monthly values may be elected by the taxpayer and will generally be required by the Department if there is substantial fluctuation in the values of the property during the taxable year or where a substantial amount of property is acquired after the beginning of the taxable year or disposed of before the end of the taxable year. Taxpayer may elect to average by monthly values whether or not the department requires it.

    (3) Substantial fluctuations in the values of property will be deemed to exist if the value for any month is outside a range of values which is the average of the beginning and ending value plus or minus 25%.

    (4) The taxpayer may elect to compute the average value of rental property by one of the following methods:

    (a) the net annual rental rate of property rented at the beginning and end of the taxable year may be averaged and multiplied by eight, or

    (b) the net annual rental rate of property rented at the beginning of each month may be averaged and multiplied by eight, or

    (c) the total rent paid for all property for the taxable year may be multiplied by eight. This method is deemed equivalent to monthly averaging.

    (d) the Department may require a taxpayer to determine the average value of property by using method (b) and (c).

    (B) Examples. Example (1). Taxpayer reports on a calendar year. The value of property at the end of the preceding year (and therefore the beginning value for this year) was $1,250. The value of property at the end of each month for this year is as follows:
      • January 1,300 July 5,000
        February 1,350 August 7,500
        March 1,500 September 10,000
        April 1,700 October 12,000
        May 2,000 November 4,000
        June 3,000 December 2,000

    The average of the beginning and ending values is $1,625.

    1,250 + 2,000 = 3,250 2 = 1,625

    However there is substantial fluctuation in the monthly values.

    1,625 - 25% = 1,218.75; 1,625 + 25% = 2,031.25

    Because the property values for some of the months is outside the acceptable range of fluctuation ($1,218.75 to $2,031.25) the department requires that the property be averaged monthly. The total of the 12 monthly values is $51,350 and the average value is $4,279.

    § 630-3-412 PAYROLL FACTOR.

    (A) In General. The payroll factor is a fraction, the numerator of which is the total amount paid or accrued within Virginia during the tax period by the corporation for compensation, and the denominator of which is the total compensation paid or accrued everywhere during the tax period.

    (B) Compensation. (1) Compensation, as defined in Va. Code § 58.1-302, shall be included in the payroll factor if it is effectively connected with the taxpayer's trade or business within the United States and the income from such trade or business is includible in both Virginia taxable income and federal taxable income.

    (2) The denominator of the payroll factor is the total compensation paid everywhere during the tax period. Accordingly, compensation paid to employees whose services are performed entirely in a state where the taxpayer is exempt from taxation, for example, by federal law 15 U.S.C.A. §§ 381-384, is included in the denominator of the payroll factor. However, compensation paid to employees whose services are connected with foreign source income as defined in Va. Code § 58.1-302 is excluded from the denominator because such income is not effectively connected with the taxpayer's trade or business within the United States and such income is not includible in Virginia taxable income.

    (C) Compensation within Virginia. The total wages reported to Virginia for unemployment compensation purposes are presumed to be compensation paid in Virginia (except for compensation excluded above). Compensation paid to employees which is deemed paid or accrued in Virginia under Va. Code § 58.1-413 shall be included in the numerator of the fraction whether or not such compensation is subject to the Virginia Unemployment Tax Act (Va. Code §§ 60.1-1 et. seq.).

    § 630-3-413 WHEN COMPENSATION DEEMED PAID IN THIS COMMONWEALTH.

    (A) In General. Compensation is paid in Virginia if any one of the following tests, applied consecutively, is met:

    (1) The employee's service is performed entirely within Virginia;
    (2) The employee's service is performed both within and without Virginia,
    but the service performed without Virginia is incidental to the employee's service within Virginia.
    (3) If the employee's service is performed both within and without Virginia, the employee's compensation will be attributed to Virginia if:

    (i) The employee's base of operations is in Virginia, or

    (ii) If there is no base of operations in any state in which some part of the service is performed, but the place from which the employee's service is directed or controlled is in Virginia, or

    (iii) If the base of operations or the place from which the employee's service is directed or controlled is not in any state in which some part of the service is performed, but the employee's residence is in Virginia.

    (4) Any wages reported pursuant to the Virginia Unemployment Compensation Act (Va. Code §§ 60.1-1 et. sue.) shall be presumed to be compensation paid in Virginia.

    (B) Definitions.

    (1) "Incidental" means any service which is temporary in nature or which is rendered in connection with an isolated transaction. An "isolated transaction" is a transaction which is not one of a regular or consistent series of the corporation's business transactions.

    (2) "Base of operations" means a place of more or less permanent nature from which the employee starts his work and to which he customarily returns in order to receive instructions from the taxpayer or communications from his customers or other persons, or to replenish stock or other materials, repair equipment, or perform any other functions necessary to the exercise of his trade or profession at some other point or points. A contractor's job site will be considered to be a base of operations.

    (3) "Place from which the service is directed or controlled" means the place from which the power to direct, control or supervise the employee's service is exercised by the taxpayer.

    (C) Examples:

    Example (1): A corporation manufactures and sells technical equipment. It does not install such equipment, but if technical problems arise it will from time to time send out one of its home based experts. This service is considered "incidental" within the meaning of this subsection.

    Example (2): A corporation manufactures and sells technical equipment. Due to the highly specialized nature of the equipment, the corporation either installs the equipment or supervises the installation. The installation requires 4 or 5 people for several weeks and the installation is performed under an installation contract. The installation work is not considered incidental within the meaning of this subsection. However, if the installation work is normally performed by others without the general supervision of one of the corporation's employees, the occasional inspection or supervision by an employee would be considered incidental.

    § 630-3-414 SALES FACTOR.

    (A) In General. (1) The sales factor is a fraction, the numerator of which is the total sales in Virginia during the taxable year, and the denominator of which is the total sales of the corporation everywhere during the taxable year.

    (2) "Sales" is defined in Va. Code § 58.1-302 and means all gross receipts of the corporation except dividends allocated under Va. Code § 58.1-407. Sales shall be included in the sales factor if the gross receipts are included in Virginia taxable income and are connected with the conduct of taxpayer's trade or business within the United States. See Va. Reg, § 630-3-408.

    § 630-3-415 WHEN SALES OF TANGIBLE PERSONAL PROPERTY DEEMED IN THIS COMMONWEALTH.

    (A) In general. (1) Sales of tangible personal property are in Virginia if such property is received in Virginia by the purchaser. In the case of a direct delivery to a person designated by the purchaser, a sale of such property is in Virginia if such property is ultimately received in Virginia by such designated person.

    (2) Receipts and transfers by persons other than the purchaser, or a designated ultimate recipient, are part of the transportation process and not considered in assigning sales to Virginia or any other state. A receipt by a person is a direct delivery to such person unless some other person is known to be the ultimate recipient at or before the time of first shipment.

    (3) The state in which title passes has no bearing on the state to which a sale is attributed. However, the fact that title has passed from the seller is indicative that a sale is complete and that the property is either at its ultimate destination or in transit to the ultimate destination.

    (B) Examples. Example (1). The taxpayer, with inventory in State A, sold $100,000 of its products to a purchaser having branch stores in several states including Virginia. The order for the purchase was placed by the purchaser's central purchasing department located in State B. $25,000.00 of the purchase order was shipped directly to purchaser's branch store in Virginia. The branch store in Virginia is the "purchaser within this Commonwealth" with respect to $25,000.00 of the taxpayer's sales.

    Example (2). The taxpayer makes a sale to a purchaser who maintains a central warehouse in Virginia at which all merchandise purchases are received. The purchaser reships the goods to its branch stores in other states for sale. All of taxpayer's products shipped to purchaser's warehouse in Virginia are property "received by a purchaser within this Commonwealth."

    Example (3). A wholesaler subject to income tax in Virginia sells merchandise to a retailer in State A. Pursuant to the retailer's instructions, the wholesaler directs the manufacturer located in State B to ship the merchandise directly to the retailer's customer in Virginia. The sale by the wholesaler is a sale in Virginia.

    Example (4). Same facts as in example (3) except that both the retailer and manufacturer are subject to income tax in Virginia due to other business activity. For purposes of the retailer's Virginia tax return, the sale to the retailer's customer in Virginia is a sale in Virginia. For purposes of the manufacturer's Virginia tax return, the sale to the wholesaler, which is shipped to the retailer's customer in Virginia, is a sale in Virginia. In other words, although there is only one shipment of goods, for apportionment purposes there are three sales, all of which are attributed to Virginia.

    Example (5). Taxpayer sells merchandise to purchaser who is located in State A. The merchandise is manufactured at taxpayer's plant in Virginia. Purchaser pays for the merchandise but directs taxpayer to hold the merchandise until further notice. Six months later purchaser directs taxpayer to ship the merchandise to purchaser's customer in State B. The sale is complete when the purchaser pays for the merchandise. The sale is attributed to Virginia because the purchaser accepted delivery at the manufacturing plant located in Virginia.

    § 630-3-416 WHEN CERTAIN OTHER SALES DEEMED IN THIS COMMONWEALTH.

    (A) In General. The numerator of the sales factor shall include sales, other than sales of tangible personal property governed by Va. Code § 58.1-415, if:
    (1) the income producing activity is performed in Virginia, or
    (2) the income producing activity is performed both in and outside Virginia and a greater proportion of the income producing activity is performed in Virginia than in any other state, based on costs of performance.

    (B) Income producing activity. The term "income producing activity" means the act or acts directly engaged in by the taxpayer for the ultimate purpose of producing the sale to be apportioned by this section. Such activity does not include activities performed on behalf of a taxpayer, such as those conducted on its behalf by an independent contractor. Accordingly, the income producing activity includes but is not limited to the following:

    (1) The rendering of personal services by employees or the utilization of tangible or intangible property by the taxpayer in performing a service.

    (2) The rental, leasing, licensing the use of or other use of real property.

    (3) The rental, leasing, licensing the use of or other use of tangible personal property.

    (4)The sale, licensing the use of or other use of intangible personal property.

    (C) Location. (1) The income producing activity is deemed performed at the situs of real and tangible personal property or the place at which or from which such activities are performed by employees of -the taxpayer.

    (2) If the sale to be apportioned was produced by activity occurring both in Virginia and outside Virginia, the sale will be in Virginia if a greater portion of such activity occurred in Virginia than in any other state. The portion of the income producing activity occurring in each state shall be determined by the cost of performance of such activity.

    (3) "Cost of Performance" is the cost of all activities directly per-formed by the taxpayer for the ultimate purpose of producing the sale to be apportioned. The cost of performance does not include:

    (a) the cost of activities performed for the purpose of obtaining dividends allocable under Va. Code § 58.1-407;

    (b) the cost of activities performed for the purpose of producing sales of tangible personal property apportionable under § 58.1-415;

    (c) the cost of indirect expenses such as interest or activities per- formed by an independent contractor; or

    (d) the cost of activities performed for the purpose of producing both sales to be apportioned under this section and other income which is not apportionable under this section, unless either:
      • (i) the cost of activities associated with sales to be apportioned under this section can be identified and separated from the cost of activities associated with other sales, or
        (ii) the primary purpose of such activity is to produce sales apportionable under this section and substantially all of the income produced by such activity are such sales.

    (D) Examples. Example (1). (a) Taxpayer owns a computer and operates a data processing service center in Virginia. Services are provided from this center for the entire eastern part of the United States. The corporation is developing a nationwide data processing service and it plans to eventually set up a processing service center in the western part of the United States to service that section of the country. In the meantime, it has made arrangements with an independent computer processing center in California to service its processing business from western states. All business is solicited and all customers are billed from taxpayer's offices in Virginia. Taxpayer in turn pays a fee to the independent computer processing center in California.

    (b) Since activities of an independent contractor are not considered activities of the taxpayer for this purpose, all of taxpayer's "income producing activity" is in Virginia and all of taxpayer's sales of computer services are included in the numerator.

    Example (2). (a) Taxpayer, a corporation whose principal business activity is factoring, factors the accounts receivable of XYZ Corporation. The accounts receivable arose from XYZ's sale of tangible personal property in several states. XYZ's headquarters, accounting and collection offices are located in Virginia and the factoring of accounts receivable was arranged with XYZ personnel located in Virginia. XYZ continues to bill accounts and forwards collections to taxpayer.

    (b) Taxpayer's income arises from its factoring relationship with XYZ in Virginia not from collection of the accounts receivable. All income received is assigned to Virginia. Note that taxpayer may be considered a financial corporation under Va. Code § 58-151.050:1.

    (c) To XYZ the proceeds from the factoring of accounts receivable to taxpayer are proceeds from the sales of the tangible personal property which generated the accounts receivable and assigned to the state of the ultimate recipient under Va. Code § 58-151.048. (Sales will not be double counted. If XYZ accrued the entire sales price, the subsequent factoring of the resulting account receivable will be ignored. If XYZ is a cash basis taxpayer, the factoring of the accounts receivable will be counted.)

    Example (3). Taxpayer is a collection agency which attempts to collect the delinquent accounts receivable of XYZ corporation, a retailer located in another state, by means of phone calls and letters originating from taxpayer's Virginia office. Taxpayer's income arises from its collection activity in Virginia and all income will be assigned to Virginia regardless of where the debtor resides or where the retailer is located.

    Example (4). Corporation A's principal business is the sale of tangible personal property to purchasers in various states. As part of the sale transaction, A frequently receives interest bearing notes secured by the property sold. The acceptance of the note is deemed full payment for the purpose of assigning the sale of tangible personal property to a state. The sales price of the tangible personal property will be assigned to the state where it is delivered. Interest and other income arising from the notes will be assigned to the state in which A maintains its recordkeeping and collection activity for the notes.

    Example (6). Taxpayer is a stockbroker with offices in Virginia and other states. Virtually all of the income produced by taxpayer's Virginia office is connected with the sale of securities and other intangible property. All of the expenses of maintaining the Virginia office are included in the cost of performing the income producing activity. In addition to the Virginia office expenses, Taxpayer's cost of performance includes the cost of executing customer orders in other states. Analysis of Taxpayer's records indicates that the cost of performance associated with sales made by or through the Virginia office are assigned as follows: 497 is associated with maintaining the Virginia office, 40% is associated with execution of customer orders on exchanges in New York and the transfer of securities by its New York office, and 11% is associated with execution of customer orders on exchanges located in other states and foreign countries. All of the sales by or through the Virginia office are assigned to Virginia because the greater portion of the income producing activity is performed in Virginia than in New York or any other state. Note that a stockbroker is likely to be a financial corporation under Va. Code § 58.1-418.
      § 630-3-417 MOTOR CARRIERS; APPORTIONMENT.

      (A) In General. (1) Motor carriers do not use the three factor formula to apportion Virginia taxable income but instead apportion solely on the basis of vehicle miles traveled. The ratio is vehicle miles in Virginia to vehicle miles everywhere.

      (2) Foreign source income is excluded from Virginia taxable income. However, income from vehicle miles traveled in a foreign country is not one of the categories of foreign source income qualifying for exclusion. Therefore, all income from such vehicle miles is included in Virginia taxable income and such vehicle miles are included in the denominator, but not the numerator.

      (3) "Motor carrier" means all corporations licensed by the Interstate Commerce Commission or the Virginia State Corporation Commission as motor carriers of property or passengers which use the highways of Virginia.

      (4)(a) "Vehicle miles" means miles traveled on a scheduled route or, in any case, while carrying property or passengers for a charge. A scheduled route is any route for which the motor carrier has been granted operating authority by the Interstate Commerce Commission, State Corporation Commission or similar agency. The miles traveled by all vehicles operated by the taxpayer shall be included, regardless of whether they are owned or leased by the taxpayer.

      (b) Vehicle miles shall not include travel for repairs or service whether the vehicle is normally used for carrying property or passengers or is normally used to service such vehicles.

      (B) Exception. (1) A motor carrier shall not be subject to Virginia income tax if the corporation:

      (a) neither owns nor rents real or tangible personal property in Virginia, except vehicles, and

      (b) the vehicle miles in Virginia are not more than 5% of the total vehicle miles annually traveled in all states, and

      (c) the corporation either:
          • (i) has made no pick-ups or deliveries in Virginia and has traveled less than 50,000 miles in Virginia, or
            (ii) has made no more than twelve round trips into Virginia.

        (2) A motor carrier which is not subject to Virginia income tax because of this exception may still be required to file a Virginia income tax return reporting its qualification for the exception.

        § 630-3-418 FINANCIAL CORPORATIONS; APPORTIONMENT.

        (A) In general. (1) Financial corporations do not apportion Virginia taxable income using the three factor formula but instead apportion income based solely on cost of performance.

        (2) Financial corporations include, but are not limited to, banks, savings and loan associations, mortgage companies, small loan companies sales finance companies, brokerage companies, investment companies and other corporations which meet the definition of a financial corporation set forth in Subsection (B).

        (3) If a corporation meets the definition of a financial corporation, it apportions Virginia taxable income, less allocable dividends, on a one factor formula based on cost of performance in Virginia over cost of performance everywhere.

        (B) Definitions, (1) "Financial corporation" means any corporation not exempt from taxation under Va. Code § 58.1-401 which derives more than 70% of its gross income from:

        (a) Fees, commissions, other compensation for financial services rendered;
        (b) Gross profits from trading in stocks, bonds or other securities;
        (c) Interest; and
        (d) Dividends received to the extent included in Virginia taxable income.

        (2) "Cost of Performance." (a) The cost of performance is the cost of all activities directly performed by the taxpayer for the ultimate purpose of obtaining gains or profit except activities directly performed by the taxpayer for the ultimate purpose of obtaining dividends allocable under the provisions of Va. Code § 58.1-407. See Va. Reg. § 630-3-407.

        (i) Such activities do not include activities performed on behalf of a taxpayer, such as those performed on its behalf by an independent contractor.

        (ii) The cost of performance does not include the cost of funds (interest, etc.), but does include the cost of activities required to procure loans or other financing.

        (b) Activities constituting the cost of performance are deemed performed at the situs of real and tangible personal property or the place at which or from which activities are performed by employees of a taxpayer.

        (c) Cost of performance of a financial institution within and without Virginia shall be determined without regard to the location of borrowers, location of property in which the financial corporation has only a security interest or the cost to the financial corporation of the funds which it lends.

        (C) Inter-affiliate transactions. (1) If the taxpayer is a member of an affiliated group and renders financial services to its affiliate for compensation, or sells stock, bonds or other securities to its affiliate, or receives interest or dividends from its affiliate, then taxpayer shall include the net income, not gross income, from such transactions for the purpose of the 70% test. The net income for this purpose is the gross income less directly related expenses. Whether an item of expense is directly related to an item of gross income depends on the facts of each case.

        (2) Taxpayer is a member of a affiliated group if it meets the test of I.R.C. § 1504(a) (concerning ownership of 80% of voting power and nonvoting stock) without regard to I.R.C. § 1504(b) (concerning certain exceptions).

        Example A: Retailer sells its accounts receivable to a wholly owned subsidiary called Finance Co. The terms of the accounts provide for interest on balances due of 1 ½% per month which Finance Co. collects in addition to the balances. Finance Co. borrows from banks in order to purchase the accounts receivable. Finance Co. has several employees and various other expenses. For purpose of the 70% test Finance Co. receives interest from the consumers not the affiliated retailer. All interest received on the accounts receivable is included for the 70% test without any deduction of directly related expenses. Therefore, Finance Co. qualifies as a financial corporation.

        § 630-3-419 CONSTRUCTION CORPORATION; APPORTIONMENT

        (A) In general. (1) If a construction corporation used the completed contract method of accounting for its federal income tax return it is required by Va. Code § 58.1-440 to use the same method for computing Virginia taxable income.

        (2) If a construction corporation is required to allocate and apportion income by Va. Code § 58.1-405, it shall apportion income (other than dividend income allocable under Va. Code § 58.1-407) within and without this state in the ratio that the business within this state is to the total business of the corporation.
        (3) If a construction corporation does not use the completed contract method, it shall use the three factor apportionment formula in Va. Code § 58.1-408 et. seq.

        (B) Definitions. (1) The total business of a corporation using the completed contract method of accounting is its gross receipts from completed contracts and all other gross receipts except income allocable under Va. Code § 58.1-407.

        (2) Business within this state is the gross receipts of such corporations from completed contracts on jobs within Virginia and all other gross receipts attributable to income from sources within Virginia.

        § 630-3-420 RAILWAY COMPANIES; APPORTIONMENT.

        (A) In general. Railway companies are required to apportion income by use of a special factor. The factor is a fraction, the numerator of which is the revenue car miles in Virginia and the denominator of which is revenue car miles everywhere.

        (B) Definitions. (1) "Railway company" means any corporation subject to regulation as a railway company by the U.S. Interstate Commerce Commission.

        (2) "Income" subject to apportionment means the entire Virginia taxable income of the corporation except income allocable under Va. Reg. § 630-3-407.

        (3) "Revenue car mile" means the movement of loaded car equipment a distance of one mile determined in accordance with the Uniform System of Accounts for Railroad Companies of the Interstate Commerce Commission.

        § 630-3-421 ALTERNATIVE METHOD OF ALLOCATION AND APPORTIONMENT.

        (A) In General. (1) All corporations are required to file returns allocating and apportioning income using the statutory methods set forth in Va. Code § § 58.1-407 through 58.1-420, and no corporation has a right under this section to use an alternative method without specific permission from the Department. Such permission will generally be granted only on a year by year basis. Even if an alternative method has been allowed for a prior year, or is expected to be allowed for the current year, a return following the statutory method must be filed.

        (2) The policy of the Department is that the statutory method is the most equitable method of determining the portion of a multistate corporation's income that is attributable to business activity in Virginia. Permission to use an alternate method of allocation and apportionment will be granted only in extraordinary circumstances.

        (B) Application Procedure. In order to request the Department to redetermine the portion of Virginia taxable income subject to Virginia income tax based on an alternate method, the taxpayer must:

        (1) File a return using the statutory method of allocating and apportioning income and pay the resulting tax.

        (2) File an amended return within the time prescribed for filing amended returns claiming refunds. The amended return must follow the proposed alternative method and contain the following information:

        (a) a statement of why the statutory method is inapplicable or inequitable as applied to taxpayer, and

        (b) an explanation of the proposed method of allocation and apportionment in sufficient detail for the Department to make a meaningful review.

        (3) If the situation causing the claimed inequity or inapplicability is expected to continue from year to year, the corporation may apply for permission to pay the income tax for future years based on the alternate method. If granted, such permission will relieve the corporation of the obligation to file a return based on the statutory method and the information in (2) above. If the Department determines that circumstances have changed and no longer justify use of an alternate method, the Department will revoke such permission effective with the change in circumstances and will assess any additional tax due.

        (4) The Department will not grant permission to use an alternate method of allocation and apportionment unless it determines:

        (a) That the statutory method is in fact inapplicable because it produces an unconstitutional result under the particular facts and circumstances of the taxpayer's situation; or

        (b) That the statutory method is in fact inequitable because:

        (i) It results in double taxation of the income, or a class of income, of the taxpayer; and

        (ii) The inequity is attributable to Virginia, rather than to the fact that some other state has a unique method of allocation and apportionment.

        (c) Such determination shall be made each year based on a review and information filed.

        (5) Permission to pay the income tax based on an alternate method will not be granted for future years unless the Department also determines that the statutory method will probably be inapplicable or inequitable in future years to the same extent and for the same reasons as in the taxable period applied for.

        § 630-3-431 ENERGY INCOME TAX CREDIT.

        (A) In General. Effective for taxable years beginning on and after January 1, 1983, a credit is allowed against the income tax liability of a corporation for a portion of "renewable energy source expenditures" as defined by § 44C of the Internal Revenue Code (IRC) of 1954 (as amended, 1982) and the regulations thereunder except as modified by this regulation.

        (1) Termination of federal credit. If the federal renewable energy source income tax credit is terminated prior to January 1, 1988, all references herein to IRC § 44C and its accompanying regulations shall mean the statute and regulations as they exist at the date of termination.

        (2) Qualifying Expenditures. This credit is applicable only to qualifying renewable energy source expenditures (as defined in subsection (B) below) installed in, on or in connection with a building or complex of buildings located in Virginia. No credit is allowed for energy conservation expenditures regardless of the fact that such expenditures also qualify for federal credit under IRC § 44C.

        (3) Credit Amount. A credit, in the amounts set forth below, but not in excess of $1,000 per expenditure, is allowable for expenditures made within the specified time period. An expenditure will be deemed made when original installation of the renewable energy source property is completed or, in the case of an expenditure in connection with the construction or reconstruction of a building, when the building is completed and available for use by the taxpayer. See subsection (C)(1).
          • Percent of Expenditure Period in Which
        Allowable as Credit Expenditure is Made
                • 25% January 1, 1983 through December 31, 1984
                  20% January 1, 1985 through December 31, 1985
                  15% January 1, 1986 through December 31, 1986
                  10% January 1, 1987 through December 31, 1987

        Renewable energy source expenditures made prior to January 1, 1983 or after December 31, 1987 do not qualify for this credit.

        (4) Limitations and Carryover. Only one $1,000 credit is allowed for each expenditure. The credit allowable in any taxable year may not exceed the actual tax liability of a corporation for such year; however, if an otherwise allowable credit exceeds the tax liability, such excess may be carried forward to the succeeding taxable year until used. No excess credit may be carried to a taxable year beginning on or after January 1, 1989.

        (B) Definitions. (1) Renewable Energy Source Expenditures. (a) the term "renewable energy source expenditures" means an expenditure by a corporation subject to Virginia income tax made on or after January 1, 1983 and before January 1, 1988 for renewable energy source property (as defined in (2) of this paragraph) installed and located in Virginia.

        (b) The term "renewable energy source expenditure" does not include any expenditure made for, or allocable to, any of the following:
          • (i) labor of the taxpayer;
            (ii) a swimming pool or other energy storage medium whose primary function is other than the storage of energy;
            (iii) the cost of maintenance of an installed system; or (iv) the cost of leasing renewable energy source property.

        (2) Renewable energy source property. The term "renewable energy source property" includes any solar energy property, wind energy property, geothermal energy property, or certain property specified by the Secretary of the U.S. Treasury as these terms are defined in § 44C IRC and Treasury Regulation § 1-44C-2, except that:
          • (a) References to a "dwelling" shall be interpreted to mean "building or complex of buildings."
            (b) Restrictions to "principal residence" and "residential use" shall be ignored.

        (C) Special Rules. (1) When expenditures are treated as made. In general, an expenditure is treated as made when original installation of the renewable energy source property is completed. In the case of renewable energy source property which is included in the construction of a new building or the reconstruction of an existing building, the expenditure is treated as made when construction has progressed to the point where the building may be put to its intended use by the taxpayer even though comparatively minor items remain to be finished or performed in order to conform to the plans or specifications of the completed building.

        (2) Expenditures financed with Federal, etc., grants. Qualified expenditures financed with Federal, State or other grants shall be taken into account for purposes of computing the energy credit only if such grants are subject to Virginia income tax.

        (3) Joint occupancy. If two or more corporations (or other persons) jointly occupy a building or complex of buildings during any portion of a calendar year, the amount of the credit allowable by reason of renewable energy source expenditures shall be determined by treating all of the joint occupants as one corporate taxpayer whose taxable year is such calendar year. The credit shall be allocated to such joint occupants according to the expenditures of each joint occupant.

        (4) Joint ownership. (a) If renewable energy source property is owned by two or more corporations (or other persons) and such property serves two or more buildings or complex of buildings then each corporation may treat its share of the cost of such property as a separate expenditure related to its own building or complex of buildings.

        (b) Example. Corporations A, B and C own buildings in an industrial park. A owns one building, B owns two buildings, C owns one building, but it rents to D, a corporation. The corporations agree to build a solar hot water heater to serve the four buildings, the cost to be divided on a per building basis. The renewable energy source property is completed on November 1, 1984 at a cost of $40,000. Corporation A's share of the expenditure is $10,000 and may claim a credit of $1,000 (10,000 X 25%, limited to $1,000). Corporation B's share of the expenditure is $20,000 and may claim a credit of $1,000 (20,000 X 25% limited to $1,000 for the complex of buildings). Corporations C and D are treated as joint occupants and their share of the expenditure is $10,000. If C and D each pay half of the cost for the building, each may claim a credit of $500.

        (5) Recordkeeping. A taxpayer claiming an energy income tax credit shall maintain records that clearly identify the renewable energy source property with respect to which an energy income tax credit is claimed, and substantiate its cost to the taxpayer, any labor costs properly allocable to the onsite preparation, assembly or original installation of renewable energy source property which is paid for by the taxpayer, and the method used for allocating such labor costs. Such records shall be retained so long as the contents thereof may become material in the administration of the Virginia income tax.

        (6) Separate expenditures, effect on $1,000 limitation. (a) All costs incurred in purchasing, constructing and installing a renewable energy source system in, on or in connection with a building, or complex of buildings, shall be considered a single expenditure. All renewable energy source property installed in, on or in connection with a building, or a complex of buildings, shall be deemed part of a single system.

        (b) In the case of a renewable energy source system consisting of separate components capable of functioning independently, which are installed or constructed in stages, the energy income tax credit may be claimed with respect to each component as each is completed, provided that no more than $1,000 is claimed as a credit with respect to the entire system.

        (7) Carry over of unused credit to subsequent years. If any portion of an otherwise allowable energy income tax credit is not used solely because it exceeds the income tax liability of the corporation, the unused portion of the credit may be carried to the succeeding taxable year and added to any credit allowable for that taxable year. No credit is allowable for expenditures made on or after January 1, 1988, however a credit can be carried to the succeeding taxable year beginning on or after January 1, 1988. No credit can be carried to a taxable year beginning on or after January 1, 1989.

        Note: Adopted March 16, 1983 as § 3.58-151.014:2. Renumbered 630-3-431 and adopted September 14, 1984 without substantive change.

        § 630-3-440 ACCOUNTING.

        (A) Accounting Periods. A corporation shall use the same taxable year for Virginia tax purposes as is used for federal income tax purposes.

        (B) Change of Accounting Periods. (1) If a corporation's taxable year is changed for federal income tax purposes, its taxable year for Virginia Tax purposes shall be similarly changed.

        (2) If a change in a corporation's taxable year results in a taxable period of less than twelve months, no proration is required because the corporate tax rate is a flat 6%. However, if a corporation is required to annualize its federal taxable income and prorate the federal income tax, then the Virginia taxable income shall be similarly annualized and the tax prorated.

        (C) Accounting Methods. (1) Virginia taxable income is defined as federal taxable income with certain additions, subtractions and modifications. Therefore Virginia taxable income will always be based upon the same accounting methods as used for federal purposes.

        (2) The allocation and apportionment formulas use information not required in computing federal taxable income. See Va. Reg. §§ 630-3-407 through 630-3-420.

        (D) Change of Accounting Methods. If a corporation's method of accounting is changed for federal income tax purposes, its method of accounting for Virginia tax purposes must be similarly changed. Since Virginia taxable income is based upon federal taxable income, any accounting adjustments for federal purposes for any taxable year shall also apply to the computation of Virginia taxable income.

        § 630-3-441 REPORTS BY CORPORATIONS

        (A) Who to file returns. (1) Every corporation organized under the laws of Virginia and every foreign corporation registered with the State Corporation Commission for the privilege of doing business in Virginia shall file a return with the Department of Taxation under this section. A return must be filed even if the corporation has no income from Virginia sources and no Virginia income tax is due.

        (2) Every corporation having income from Virginia sources shall file a return with the Department of Taxation. "Income from Virginia sources" is defined in Va. Reg. § 630-3-302. If a corporation has income from Virginia sources it shall file a return regardless of where it is organized, headquartered or from where it is managed or directed, or where its shareholders reside or whether it has registered with the State Corporation Commission for the privilege of doing business in Virginia.

        (3) Corporations exempt from Virginia income tax may be required to file a return even though the income from Virginia sources is exempt from income tax.

        (4) U.S. Public Law 86-272 (15 U.S.C.A. §§ 381-384) prohibits Virginia from taxing income from Virginia sources if the corporation does not have sufficient connection with Virginia. Corporations whose income from Virginia sources is not subject to tax because of P.L. 86-272 must file a return if they are registered with the State Corporation Commission for the privilege of doing business in Virginia.

        (5) (a) Receivers appointed by a court shall file a return for a corporation if:
          • (i) property or business of the corporation is being operated by the receiver, or

            (ii) the receivers have full custody of and control over the business or property of a corporation.

        (b) Returns must be filed whether the receivers are carrying on the business for which the corporation was organized or only marshalling, selling or disposing of its assets for the purpose of liquidation.

        (6) Trustees in dissolution, trustees in bankruptcy and assignees for the benefit of creditors shall file returns for a corporation if they are operating the property or business of the corporation. Property or business is being operated if there are any gross receipts from such property or business.

        (B) When returns to be filed. (1) Returns of corporations shall be filed on or before the fifteenth day of the fourth month following the close of the taxable year.

        (2) Extensions of time to file returns may be granted by the Department under the provisions of Va. Code § 58.1-453 and the regulations there-under.

        (c) What information to be filed with return. (1) Returns shall be made on forms prescribed by the Department of Taxation.

        (2) A complete copy of the federal return shall be filed with the Virginia return. Any schedules or other information supplied to the Internal Revenue Service shall also be supplied to the Department of Taxation.

        § 630-3-442 SEPARATE, COMBINED OR CONSOLIDATED RETURNS OF AFFILIATED CORPORATIONS.

        (A) In General. In the first year two or more members of an affiliated group of corporations, as defined in Va. Code § 58.1-302, are required to file Virginia returns, the group may elect to file separate returns, a consolidated return or a combined return. All returns for subsequent years must be filed on the same basis unless permission to change is granted by the Department of Taxation. The group may elect to file on a basis different from its federal return(s). Other members of the affiliated group of corporations which become subject to Virginia income tax in subsequent years must conform to the initial election made by the group unless permission to change is granted by the Department.

        (B) Separate Return. (1) A separate return shows only the income, expenses, gains, losses, allocation and apportionment factors of the filing corporation. All affairs of other members of the affiliated group are ignored unless Va. Code § 58.1-446 applies.

        (2) If the affiliated group filed a consolidated federal return and the filing corporation files a separate Virginia return, a complete copy of the federal consolidated return must be filed with the Virginia return along with a worksheet showing the adjustments and eliminations for consolidation in form similar to that set forth in (C)(3) below.

        (C) Consolidated Returns. (1) A consolidated return is a single return for all eligible members of an affiliated group of corporations. The return shall show consolidated net income prepared in accordance with I.R.C. § 1502 and the regulations thereunder and consolidated apportionment factors (See Va. Code §§ 58.1-407 through 58.1-420).

        (2) Eligible members. (a) A consolidated return must include the net income and apportionment factors of all members of the affiliated group which would be subject to Virginia income tax if separate returns were to be filed.

        (b) A consolidated return may not include corporations which are:
          • (i) exempt from Virginia income tax under Va. Code § 58.1-401 or U.S. Public Law 86-272 (15 U.S.C.A. § § 381-384), or
            (ii) required to use different apportionment factors (e.g. three factor (Va. Code § 58.1-408) and revenue miles (Va. Code § 58.1-420)) it separate returns were to be filed, or
            (iii) not affiliated as defined by Va. Code § 58.1-302, or
            (iv) not subject to Virginia income tax if separate returns were to be filed, or
            (v) using different taxable years.

        (c) No affiliated corporations, otherwise eligible, will be denied the privilege of consolidation merely because other members of the affiliated group are not eligible to be included.

        (3) A copy of the federal consolidated return, or the separate federal return of each corporation included in the consolidated Virginia return, must be filed with the Virginia return. All supplementary and supporting schedules filed with a consolidated Virginia return should be prepared in columnar form, one column being provided for each corporation included in the consolidation, one column for a total of like items before adjustments are made, one column for inter-company eliminations and adjustments, and one column for a total of like items after giving effect to the eliminations and adjustments. The items included in the columns for eliminations and adjustments should be symbolized so as readily to identify contra items affected, and suitable explanations appended, if necessary.

        (4) Consent. (a) The filing of a consolidated return requires the consent of all corporations eligible to be included. The filing of a consolidated return will be deemed to be consented to by all eligible corporations included therein. See Va. Reg. § 630-3-447 for requirements as to the execution of the consolidated return and consent to be included.

        (b) Once a consolidated return has been filed all subsequent returns by such corporations, their successors, and other members of the affiliated group who are subsequently required to file a Virginia income tax return, must also be filed on a consolidated basis unless the Department grants permission to change from a consolidated return.

        (D) Combined Returns. (1) For a combined return the Virginia taxable income or loss is separately determined for each eligible corporation. The Virginia taxable income is then separately allocated and apportioned for each eligible corporation using each corporation's commercial domicile and apportionment factors. The resulting income or loss from Virginia sources is then combined and reported on a single return.

        (2) Eligible members. (a) Members of an affiliated group are eligible to file a combined return if they are:
          • (i) Subject to Virginia income tax if a separate return were to be filed, and
            (ii) Affiliated as defined by Va. Code § 58.1-302, and
            (iii) Filing using the same taxable year.

        (b) Members of an affiliated group are eligible to file combined returns even though they use different apportionment formulas.

        (3) A combined return shall contain all of the information that would be contained in a separate return for each corporation. A copy of the federal consolidated return, or the separate federal returns of each corporation included in the combined return, must be filed with the Virginia return. In addition, a schedule shall be included with the Virginia return showing the separate income, adjustments, allocation and apportionment factors for each included corporation.

        (4) Consent. The filing of a combined return requires the consent of all of the corporations eligible to be included. The filing of a combined return will be deemed to be consented to by all eligible corporations included therein. All subsequent returns must also be filed on a combined basis. See Va. Reg. § 630-3-447 for requirements as to execution of the combined return and the required consent of each included corporation.

        (E) Permission to change (1) Permission to change to or from filing consolidated returns will generally not be granted. Such changes affect the allocation and apportionment factors and distort the business done in Virginia and the income arising from activity in Virginia.

        (2) Separate and combined returns do not affect the allocation and apportionment formulas for each corporation and permission to change from separate to combined returns or from combined to separate returns will generally be granted.

        (3) Elections as to filing method are deemed to be made by the affiliated group as a whole. Changes in the membership of an affiliated group do not affect the original election by the affiliated group. If a new corporation becomes a member of the affiliated group, the new corporation must follow the filing method previously elected by the group.

        (4) The filing of a separate short year return upon organization or acquisition of a new corporation will not be deemed an election of separate return status. The filing of the first return for a 12 month taxable year beginning on or after the date of organization or acquisition of a new corporation which creates the affiliated group will be deemed the filing which elects a return filing status.

        (F) Carryovers. (1) When any corporation elects to file, or is granted permission to file, a consolidated or combined return and subsequently incurs a net operating loss for federal income tax purposes, such loss may be carried back to prior years under federal law. A loss may not be used to offset income of other members of the affiliated group in a Virginia combined or consolidated return and also to reduce income for Virginia purposes of the loss corporation in other years via the federal net operating loss deduction.

        (2) Virginia does not have any provisions in the law permitting the carryback of net operating losses except when recognized as changes in federal taxable income. When the affiliated group files federal and Virginia returns on a different basis or files a federal consolidated return including corporations which are not subject to Virginia income tax, the term "federal taxable income" requires special definition for Virginia purposes. In such cases the federal taxable income (before and after carrybacks) of the affiliated group and of each member shall be computed as if the affiliated group contains only those members included in the Virginia consolidated or combined return. The details of such computations shall be disclosed in the return together with copies of any federal returns filed.

        (3) When any federal return for a member of an affiliated group claims a net operating loss deduction from a loss year in which a consolidated or combined Virginia return was filed then the federal net operating loss deduction shall be deemed to carry with it a Virginia modification from the loss year computed in the following manner:
          • (a) If the Virginia return of the affiliated group for the loss year shows a positive Virginia taxable income then all of the loss corporation's federal loss and Virginia additions and subtractions have been offset by the income, additions and subtractions of other members of the affiliated group. Therefore 1001 of any federal net operating loss deduction attributable to such loss year shall be added to the Virginia taxable income of the corporation claiming it.

            (b) If the Virginia return of the affiliated group for the loss year shows a negative Virginia taxable income then the procedures of U.S. Treasury Regulation § 1.1502-79 shall be applied to the Virginia taxable income of each member of the group to determine a tentative Virginia loss of each loss corporation. The difference between the tentative Virginia loss and the federal taxable income (loss) of each corporation, computed as if all corporations had filed separate federal returns, represents the amount of the additions and subtractions of the loss corporation and the income, additions and subtractions of affiliated corporations which were offset in the Virginia consolidated or combined return for the loss year. Such amount shall modify the net operating loss and shall be carried back or over to other years in the same proportion as the net operating loss deduction claimed for any year.

        (G) Examples. The principles of this section are illustrated by the following examples: Example (1). Corporations A, B, C, D, E, F and G constitute a controlled group of corporations within the meaning of section 1563 of the Internal Revenue Code. Corporations A, B, and C are manufacturing companies, subject to the Virginia income tax. Corporations D and E are motors carriers, subject to the Virginia income tax. Corporation F is a Virginia-based insurance company exempt from Virginia income tax under Va. Code § 58.1-401. Corporation G is a manufacturing company exempt from the Virginia income tax under Public Law 86-272.

        (i) Corporations A, B and C may file a consolidated return. Corporations D and E may not be included therein because they are not subject to the same three-factor apportionment formula but apportion income using vehicle miles under Va. Code § 58.1-417. Corporations F and G may not be included because they are not subject to the Virginia income tax.

        (ii) Corporations A and B may not file a consolidated return without corporation C. All eligible corporations must be included in a consolidated return. If corporation C is on a different fiscal year than corporations A and B, it must change its fiscal year in order for a consolidated return to be filed.

        (iii) Corporations D and E may file a consolidated return whether or not consolidation is elected for corporations A, B and C.

        Example (2). Same facts as in example (1) above. Corporation A, B and C file consolidated Virginia returns for 1979 and 1980. In 1981 corporation G expands its activity within Virginia and becomes subject to Virginia income tax. Corporation G must be included in the 1981 consolidated Virginia return with corporations A, B and C. The corporations may not file separate or combined returns unless corporations A, B, and C apply to the Department for permission.

        § 630-3-443 PROHIBITION OF WORLDWIDE CONSOLIDATION OR COMBINATION.

        (A) A consolidated or combined return may not include a controlled foreign corporation the income of which is derived from sources without the United States.

        (1) A controlled foreign corporation is a corporation which:

        (a) is organized under the laws of a foreign country, and
        (b) has its commercial domicile in a foreign country, and
        (c) is an affiliate of one or more corporations having income from Virginia sources.

        (2) The income of a controlled foreign corporation is derived from sources without the United States if:

        (a) such controlled foreign corporation is not subject to income tax under the laws of the United States, and
        (b) dividends paid by such controlled foreign corporation would qualify as "income from foreign sources" under Va. Code § 58.1-302.

        § 630-3-444 SEVERAL LIABILITY OF AFFILIATED CORPORATIONS

        (A) Each affiliated corporation included in a consolidated or combined return shall be jointly and severally liable for the entire tax and any assessments of additional tax, penalty and interest for the affiliated group. The Department of Taxation may assess and collect the tax for the consolidated or combined group against any one or more of the corporations included in a consolidated or combined return without regard for the tax such corporation might have owed had it filed a separate return or any other circumstances.

        (B) Corporations may agree among themselves as to the liability for taxes, but such agreements shall have no effect on the tax liability owed by the affiliated group or on the joint and several liability of each member of the affiliated group.

        § 630-3-445 CONSOLIDATION OF ACCOUNTS.

        (A) In general. (1) This section allows the Department of Taxation to consolidate the accounts of two or more related trades or businesses which are owned or controlled directly or indirectly by the same interests and liable to taxation under this chapter, if the Department determines such consolidation is necessary to accurately distribute or apportion gains, profits, income, deductions or capital between or among such trades or businesses.

        (2) If related trades or businesses have been conducted in such a manner that income is inaccurately stated, the Internal Revenue Service will usually apply I.R.C § 482 to make necessary adjustments. This section applies to situations in which the federal taxable income is accurately stated but the income from Virginia sources taxable by Virginia is inaccurate.

        (3) If one of the related trades or businesses is a corporation, Va. Code § 58.1-446 may also apply.

        (B) Definitions. (1) "Trades or businesses" means any trade or business which keeps its own accounting records and which is required to make a separate report of its income to the Department of Taxation or any other taxing authority.

        (2) "Related." Trades or businesses are related if they are doing business with each other directly or indirectly. Such business dealings may consist of buying and selling of goods, services or other property, or borrowing or lending money or other property.

        (3) Liable to taxation under this chapter." A trade or business is liable to taxation under this chapter if:

        (a) in the case of a sole proprietorship, the owner is subject to Virginia income tax;
        (b) in the case of a partnership, any of the partners is subject to Virginia income tax;
        (c) in the case of a corporation, it is subject to Virginia income tax;

        (d) in the case of an electing small business under sub-chapter S of the Internal Revenue Code, any of the shareholders is subject to Virginia income tax;
        (e) in any case where an owner, partner or shareholder is an estate or trust, either the estate or trust is subject to Virginia income tax or any beneficiary is subject to Virginia income tax on distributions from such estate or trust.

        (4) "Owned or controlled directly or indirectly." A trade or business is owned or controlled directly or indirectly by another person or entity if such other person or entity has substantial influence over the manner in which the business is conducted. Substantial influence may be exerted by owners, shareholders, partners and others depending upon the facts and circumstances of each case.

        (5) "Same interests." Two or more related trades or businesses are owned or controlled directly or indirectly by the same interests if any one person or entity or group of persons or entities acting together, has enough ownership or control of each trade or business to have substantial influence over the manner in which the business is conducted. The nature of the ownership .or control interest does not have to be identical for each trade or business.

        (6) "Accurate distribution or apportionment." The purpose of this section is to assure that items of income, gain, profit, deductions and capital are properly distributed or apportioned between taxpayers who may be taxable at different rates, by different methods or in different states.

        (7) "Consolidate the accounts." If the Department finds it necessary to consolidate the accounts of two or more related trades or businesses then the accounts will be adjusted in order to accurately distribute or apportion gains, profits, income, deductions or losses of such trades or businesses.

        (8) "Request of the taxpayer." A taxpayer may request permission to consolidate accounts of related trades or businesses by filing an amended return using the proposed consolidation and shall attach an explanation of nature and cause of the distortion of income from Virginia sources and an explanation of why the consolidation of accounts is necessary in order to make an accurate distribution or apportionment of gains, profits, income, deductions or capital between or among such related trades or businesses. If the Department finds that consolidation is necessary, the tax shall be adjusted accordingly.

        § 630-3-446 PRICE MANIPULATION, INTERCORPORATE TRANSACTIONS

        (A) In General. (1) Price manipulation. When a corporation liable to taxation under this chapter by agreement or otherwise conducts the business of such corporation as to directly or indirectly benefit the members or stockholders of the corporation, or any of them, or any person or persons directly or indirectly interested in such business, by either buying or selling its products or the goods or commodities in which it deals at more or less than a fair price then the department may redetermine the income from Virginia sources.

        (2) Intercorporate transactions. When a corporation liable to taxation under this chapter sells its products, goods or commodities to another corporation or acquires and disposes of the goods, products or commodities of another corporation in such manner as to create a loss or improper taxable income, and such other corporation by stock ownership, agreement or otherwise controls or is controlled by the corporation liable to taxation under this chapter, then the department may redetermine the income from Virginia sources of the corporation liable to taxation.

        (3) Parent corporations and subsidiaries. When any corporation liable to taxation under this chapter owns or controls or is owned by or controlled by another corporation the department may require the corporation liable to taxation to make a report consolidated with such other corporation and furnish such other information as the Department may require. If the department finds that any arrangements exist which cause the income from Virginia sources to be inaccurately stated then the department may equitably adjust the tax of the corporation liable to taxation under this chapter.

        (B) Definitions. (1) "Corporation liable to taxation under this chapter" means any corporation, as defined in Va. Reg. § 630-3-302, which is subject to tax under Va. Code § 58.1-400.

        (2) "By agreement or otherwise." (a) Whenever the income from Virginia sources of a controlled or controlling corporate taxpayer is other than it would have been had the taxpayer in the conduct of its affairs been an uncontrolled corporation dealing at arms' length with another uncontrolled corporation or unrelated individual or entity, then the manner in which taxpayer conducts its business will be deemed to be the result of an agreement, arrangement or understanding.

        (b) In many situations the Internal Revenue Service will apply I.R.C. § 482 to redetermine the federal taxable income of a corporation. Va. Code § 58.1-446 will be applied in situations where the federal taxable income is correct but, after application of the statutory allocation and apportionment formulas, the income from Virginia sources does not accurately reflect the business done in Virginia.

        (c) An example of such an agreement or arrangement is a subsidiary qualifying as a Domestic International Sales Corporation (DISC) under the Internal Revenue Code. In order to encourage international exports federal law permits federal taxable income to be artificially reduced by use of a DISC. As a result the income from Virginia sources of a corporation using a DISC to artificially reduce federal taxable income may not reflect the business done in Virginia.
          (3) Conducts the business. The conduct or manner in which business is conducted reached by this section is not restricted to the case of improper accounting, to the case of a fraudulent, colorable, or sham transaction or to the case of a device designed to reduce or avoid tax by shifting or distorting income, deductions, credits or allowances. The conduct may be legal or even encouraged by the laws of other jurisdictions, including laws of the United States. The determining factor is whether the conduct of taxpayer's affairs, by inadvertence or design, causes the income from Virginia sources to be inaccurately stated.

          (4) "Benefit the members or stockholders." (a) The benefit from the manner in which business is conducted may be direct, as when the corporation sells its products to any one or more stockholders at less than a fair price, or indirect, as when the corporation sells its products to a subsidiary corporation in a manner which reduces the taxes owed by the corporation. Such reduction of taxes benefits all stockholders by increasing the earnings of the corporation available for dividends.

          (b) The direct or indirect benefit may be to any stockholder of the corporation, stockholder of any controlled or controlling corporation, member of an association taxed as a corporation, employee, creditor, any other person interested in the corporation, or a related taxpayer of one of the foregoing. "Related taxpayer" is defined in I.R.C. § 1313(c).

          (5) "Buying and selling" includes purchases and sales and may also include other transactions which are the equivalent of a purchase or sale, such as certain leases. The entire transaction or series of transactions will be considered. For example, the use of a product of the corporation by a stockholder without consideration followed by the sale of such used product to an unrelated party may be a sale reached by this section depending on the facts and circumstances.

          (6) "Products." The product of a corporation is tangible personal property held or produced for sale in the normal course of business and includes all services connected with the purchase or sale of products such as delivery, maintenance and credit.

          (7) "Goods or commodities." The goods or commodities in which a corporation deals are raw materials and tools used in a manufacturing process or merchandise for resale.

          (8) "Fair Price." Fair price means "arms length charge," "arms length consideration" and "arms length price" as such terms are defined in Treasury Reg. § 1.482-2. For purpose of this section, products, goods or commodities sold to employees as part of a bona fide employee discount program shall not be deemed sold at other than a fair price.

          (9) "Acquires and disposes." The term "acquires and disposes" is not limited to purchases and sales in the normal course of business but includes all transactions in which property is acquired or disposed of, including, but not limited to, corporate reorganizations.

          (10) "Improper taxable income." An improper taxable income is created whenever the income from Virginia sources on which Virginia may impose a tax does not accurately reflect the business done in Virginia. The intent of the parties engaging in transactions reached by this section has no effect on whether or not an improper taxable income is created.

          (11) "Fair profit." In determining the proper amount to be deemed income from Virginia sources, the Department will consider the profit which might have been earned by the corporation if the transactions reached by this section had occurred at a fair price. Both income and expenses resulting from the transactions will be considered.

          (12) "Control." For purpose of (A) (2) (inter-corporate transactions) and (A) (3) (parent corporations and subsidiaries) above, one corporation controls another if one is able to influence the manner in which the business of the other corporation is transacted. The control may be direct or indirect and result from ownership of a substantial voting interest, management contract or other agreements, depending upon the facts and circumstances.

          (13) "Own." For purpose of (A) (3) (parents corporations and subsidiaries) one corporation (parent) owns another corporation (subsidiary) if the parent and subsidiary are members of a parent subsidiary con-trolled group under I.R.C. § 1563.

          (14) "Consolidated Report." If a consolidated report is required by the Department it shall be prepared in accordance with § 1502 of the Internal Revenue Code and the regulations thereunder for the corporations designated by the Department, without regard to whether or not the corporations are eligible corporations under Va. Code § 58.1-442.

          § 630-3-447 EXECUTION OF RETURNS.

          (A) Corporations. (1) The return of a corporation with respect to its income shall be signed by one of the following officers: president, vice-president, treasurer, assistant treasurer, chief accounting officer or any other officer duly authorized to act. In the case of a return made for a corporation by a fiduciary such as a receiver, trustee or assignee, such fiduciary shall sign the return. The fact that an individual's name is signed on the return shall be prima facie evidence that such individual is authorized to sign the return on behalf of the corporation.

          (2) Consolidated and combined returns. (a) The return of an affiliated group of corporations shall be signed by an officer of the lead corporation. The name and address of the lead corporation shall be shown on the return. All correspondence from the department to the affiliated group may be mailed to the lead corporation. The lead corporation will usually be a parent corporation, if the parent is subject to tax in Virginia, but may be any member subject to tax in Virginia.

          (b) The return shall contain the following information for each member of the affiliated group included in the return:

          (i) Name, address and taxpayer I.D. No. of the consenting corporation,
          (ii) Name, title and phone number of an officer authorized to sign a return for the member,
          (iii) Name and address of the person with custody of the books of the member.

          § 630-3-449 SUPPLEMENTAL REPORTS.

          (A) Audits. During the course of an office or field audit the department may request additional information if the auditor determines that the information is necessary to compute the tax. For example, when an adjustment is contemplated under Va. Code § 58.1-446, the department will ask for a copy of the federal return of the Domestic International Sales Company.

          (B) Penalty. If the additional information or supplemental report is not supplied within a reasonable time after written demand, the penalty under Va. Code § 58.1-450 may be imposed.

          § 630-3-453 EXTENSION OF TIME FOR FILING RETURNS.

          (A) Automatic Extension. (1) Whenever a corporation has been granted an extension of time for filing by the Internal Revenue Service, a similar extension will be granted to a date thirty days after the extended federal due date but not later than six months after the due date required by Virginia law. In other words, an extension will not be granted beyond the fifteenth day of the tenth month following the close of the taxable year.

          (2) A penalty will be imposed unless a tentative tax return is filed and the tax paid as provided in sub-§ (C).

          (B) Good cause extension. (1) When no federal extension has been granted, the department may grant an extension for filing if the taxpayer shows good cause for requesting such an extension. The extension may not exceed six months. (2) A penalty will be imposed unless a tentative tax return is filed and the tax paid as provided in sub-section (C).

          (C) Tentative tax return. (1) Any corporation requesting an extension of time for filing its return must file a tentative tax return with the request. The tentative tax return must estimate the tax liability of the corporation and be accompanied by payment of the balance due after allowance for prior payments of estimated tax and prior tentative tax returns, if any.

          (2) Interest will accrue under Va. Code § 58.1-1812 on any unpaid tax liability from the due date of the return without regard to any extensions. This section extends only the date for filing a return, not the date for payment of the tax.

          (3) If the underestimation of the balance of tax due exceeds ten percent of the actual tax liability a penalty will be imposed. The penalty is one half of one percent per month for each month or fraction thereof from the original due date for the filing of the income tax return to the date of payment. The penalty will be imposed in addition to interest under Va. Code § 58.1-1812.

          (D) Application procedure. The extension request and tentative tax return must be filed before the original due date of the return. An additional extension may be requested if filed before the expiration of a previous extension. Requests will not be acknowledged or returned unless the request for extension is denied. A copy of each extension request and tentative tax return shall be attached to the income tax return when filed.

          § 630-3-455 TIME OF PAYMENT OF CORPORATION INCOME TAXES.

          (A) In general. The tax payable as shown on the face of the return shall be paid on or before the due date of the return. Where an extension of time for filing the return has been obtained pursuant to Va. Code § 58.1-453, the balance of the actual tax due shall be paid on or before the due date as extended.

          (B) Penalty. (1) If the tax, or unpaid balance of the tax, is not paid in full when due then a penalty of five percent of the unpaid tax shall be imposed. No penalty will be imposed on the late payment of a tax, or portion of the tax if all three or the following conditions are satisfied:

          (a) the unpaid tax is attributable to an assessment of additional tax by the department, and
          (b) the return was filed by the taxpayer in good faith, and
          (c) the understatement of tax in the return was not due to any fault of
          the taxpayer.

          (C) Interest. (1) If the penalty is imposed, interest under Va. Code § 58.1-1812 shall accrue on the unpaid tax and penalty from one month after the original due date of the return (without regard to any extensions) until paid.

          (2) If no penalty is imposed, interest under Va. Code § 58.1-1812 shall accrue on the unpaid tax from the original due date of the return (without regard to any extension) until paid.

          § 630-3-500 DECLARATIONS OF ESTIMATED INCOME TAX REQUIRED.

          (A) In general. Every corporation which expects its income tax to exceed $1,000 for the taxable year is required to file a declaration of estimated tax and to pay the tax in installments during the taxable year. The payments of estimated tax are considered payments on account of the income tax for the taxable year and shall be applied toward payment of the income tax upon filing of the income tax return for the taxable year. The declaration of estimated tax may be amended with each installment and subsequent payments adjusted accordingly. No refund of estimated tax can be made until the income tax return is filed except in extraordinary circumstances. For example, if a credit union pays estimated tax without realizing that it is exempt from income tax under Va. Code § 58.1.-401, it would be entitled to a refund of estimated tax because a credit union is not required to file an income tax return.

          (B) Who to file. (1) A declaration of estimated tax shall be made by every corporation which is-subject to the Virginia income tax under Va. Code § 58.1-400 if its income tax less the credit allowable under Va. Code §§ 58.1-430 (relating to credit for investments under the Neighborhood Assistance Act of 1981) and 58.1-431 (relating to the Energy Income Tax Credit) can reasonably be expected to exceed $1,000.

          (2) The term "estimated tax" means the amount which the corporation estimates as the amount of the income tax for the taxable year less the amount which the corporation estimates as the sum of any credit allowable against the income tax under Va. Code §§ 58.1-430 and 48.1-431. For the purpose of determining if a declaration of estimated tax is required, a refund of income tax for prior taxable year, which the corporation requests be applied toward the estimated tax for the subsequent taxable year, is not an allowable credit but a payment of the first installment of estimated tax. For example, a corporation which estimates its 1984 income tax to be $2,500, its Energy Income Tax Credit to be $1,000 and which has a refund from 1983 of $300 has an "estimated tax" of $1,500. The $300 refund will be applied toward the first quarterly installment payment of $375 (1,500/4).

          (C) Contents of declaration. (1) The declaration of estimated tax shall be made on form 500-ES. For the purpose of making the declaration, the estimated tax should be based upon the amount of federal taxable income for the federal estimated tax plus the estimated net Virginia modifications. Such amounts of federal taxable income and net Virginia modifications should be determined upon the basis of facts and circumstances existing as at the time prescribed for the declarations as well as those reasonably to be anticipated for the taxable year.

          (2) Copies of form 500-ES will so far as possible be furnished taxpayers by the Department. A taxpayer will not be excused from making a declaration, however, by the fact that no form has been furnished. Taxpayers not supplied with the proper form should make application therefor to the Department in ample time to have their declarations prepared, verified, and filed with the Department on or before the date prescribed for filing the declaration. If the prescribed form is not available a statement disclosing the estimated income tax should be filed as a tentative declaration within the prescribed time, accompanied by the payment of the required installment. Such tentative declaration should be supplemented, without unnecessary delay, by a declaration made on the proper form.

          (D) Short taxable year. If a corporation expects its income tax less allowable credits to exceed $1,000 for a short taxable year then such corporation shall make a declaration of estimated tax. If the short taxable year results from a change in accounting period, the tax shall be placed on an annual basis to determine if the annualized tax exceeds $1,000. The tax shall be placed on an annual basis by multiplying the expected income tax less allowable credits by 12 and dividing by the number of months in the short taxable year.

          (E) Consolidated and combined returns. (1) Affiliated groups of corporations which have properly elected, or received permission, to file Virginia income tax returns on a consolidated or combined basis shall also make declarations of estimated tax on a consolidated or combined basis.

          (2) Corporations registering with the State Corporation Commission for the privilege of doing business in Virginia will receive a "Combined Registration Application" to register the corporation for Sales and Use, Withholding, Litter and Income taxes. Corporations which have decided to file their Virginia income tax returns on a consolidated or combined basis at the time of registration should so indicate on the application. A affiliated group of corporations makes an election to file returns on a separate, consolidated or combined basis when two or more members of the affiliated group file their first income tax returns. Thereafter the affiliated group must obtain permission from the Department to change the method of reporting. Members of the affiliated group which become subject to Virginia income tax in subsequent years must use the method of reporting previously elected by the group. For additional information on separate, consolidated and combined returns see Va. Reg. § 630-3-442. The Filing of a registration application or declaration of estimated tax is not an election of a method of reporting.

          § 630-3-501 TIME FOR FILING DECLARATIONS.

          (A) In general. (1) If a corporation expects its income tax less allowable credits to exceed $1,000 at the beginning of the taxable year then the corporation must make its declaration of estimated tax on or before the 15th day of the 4th month of the taxable year (April 15 for a calendar year corporation) and the declaration must be accompanied by the installment payment for the first quarter.

          (2) Corporations which expect their income tax less allowable credits to exceed $1,000 as a result of events occurring after the beginning of a taxable year shall make a declaration of estimated tax at the time specified in paragraph (3) below. Examples of events occurring after the beginning of a taxable year are: a foreign corporation registering to do business in Virginia and acquisition of a corporation doing business in Virginia.

          (3) The date on which a corporation first estimates that its Virginia income tax less allowable credits will exceed $1,000 determines the date that the declaration of estimated tax is required to be filed.
            • (a) If such date is before the 1st say of the 4th month of the taxable year the declaration is required to be filed on or before the 15th day of the 4th month of the taxable year.
            • (b) If such date is after the last day of the 3rd month and before the 1st day of the 6th month of the taxable year the declaration is required to be filed on or before the 15th day of the 6th month of the taxable year.
            • (c) If such date is after the last day of the 5th month and before the 1st day of the 9th month of the taxable year the declaration is required to be filed on or before the 15th day of the 9th month of the taxable year.

              (d) If such date is after the last day of the 8th month and before the 1st day of the 12th month of the taxable year the declaration is required to be filed on or before the 15th day of the 12th month of the taxable year.

          (B) Amendments. If a corporation expects its Virginia income tax less allowable credits to differ from the declaration of estimated tax for the taxable year, it shall amend the declaration. Only one amendment may be filed in the interval between installment dates. The amendment shall be reported on the voucher for the installment of estimated tax due after the corporation discovers the change in the estimated tax.

          (C) Short taxable years. No declaration of estimated tax is required for a short taxable year of less than 4 months or if the date the corporation first expects its estimated tax to exceed $1,000 occurs on or after the first day of the last month of the short taxable year. In all other cases the declaration is due as provided in subsection (A) above.

          § 630-3-502 INSTALLMENT PAYMENT OF ESTIMATED INCOME TAX.

          (A) In general. The estimated tax shall be paid in installments as follows: (1) If the declaration is required to be filed on the 15th day of the 4th month of the taxable year, twenty-five percent (25%) shall be paid with the declaration and on the 15th day of the 6th, 9th and 12th month of the taxable year.

          (2) If the declaration is required to be, filed on the 15th day of the 6th month of the taxable year, thirty-three percent (33%) shall be paid with the declaration and on the 15th day of the 9th and 12th month of the taxable year.

          (3) If the declaration is required to be filed on the 15th day of the 9th month of the taxable year, fifty (50%) shall be paid with the declaration and on the 15th day of the 12th month of the taxable year.

          (4) If the declaration is required to be filed on the 15th day of the 12th month of the taxable year, one hundred percent (100%) shall be paid with the declaration.

          (B) Late declarations. (1) If the declaration is filed after the time prescribed then the corporation shall pay with the declaration all installments of estimated tax which would have been payable on or before the filing if the declaration had been filed within the prescribed time. Subsequent installments shall be payable as if the declaration had been timely filed.

          (2) For example, on January 1 a calendar year corporation expected its estimated tax to be $2,000 but did not file a declaration until June 15, even though the filing requirements for filing a declaration were met before April 1. Had the declaration been timely filed 50% of the estimated tax would have been paid on or before the filing (25% on April 15 and June 15). The corporation must pay 50% of the estimated tax with the declaration and 25% on September 15 and December 15.

          (C) Amendments. (1) If the declaration of estimated tax is amended the amount payable with the declaration and the amount of each remaining installment (if any) shall be the difference between the new estimate and the amount actually paid prior to the amendment divided by the number of installments remaining. However, if the payments made exceed the new estimated tax the difference may not be refunded until the income tax return is filed for the taxable year.

          (2) For example, a corporation expects its estimated tax to be $2,000 and timely files its declaration and pays the first two installments of $500. Upon payment of the third installment the corporation amends its declaration of estimated tax to $3,000. The third and fourth installments are $1,000 each computed as follows: $3,000 new estimate less $1,000 paid to date divided by the two payments remaining equals $1,000.

          (D) Short taxable year. All installments due before the close of the short taxable year shall be paid. If the declaration is amended the corporation shall follow the same procedure for computing the amount of the remaining installments due before the close of the short taxable year.

          (E) Application of payments. All payments of estimated tax shall be applied toward the income tax liability of the taxpayer for the taxable year. No refunds of estimated tax may be obtained except upon filing of the income tax return for the taxable year. Payments of estimated tax may not be applied toward any other tax or taxable year unless and until an income tax return is filed showing a refund. In extraordinary circumstances where the taxpayer is not required to file an income tax return the taxpayer may request a refund of estimated tax.

          § 630-3-503 WHERE DECLARATIONS FILED AND HOW PAYMENTS MADE.

          The declaration of estimated tax and all installments shall be mailed to the Department of Taxation, P.O. Box 1500, Richmond, VA 23212.

          § 630-3-504 FAILURE TO PAY ESTIMATED TAX.

          (A) Definitions. The following definitions apply only to the computation of the addition to the tax for failure to pay estimated tax.

          (1) Underpayment. With respect to any installment, the underpayment is the excess of
            • (a) the installment which would be required to be paid if the estimated tax were equal to 90% of the income tax shown on the income tax return for the taxable year (or the amount to the tax, if no return was filed) over
          (b) the amount, if any, of the installment paid on or before the last day prescribed for payment of the installment.

          (2) Tax or income tax. For the purpose of computing the addition to the tax, the term tax means the income tax shown on the income tax for the taxable year less the credits allowed by Va. Code §§ 58.1-430 and 58.1-431.

          (3) Period of underpayment. The addition is computed with respect to each underpayment for which there is an underpayment: The period of underpayment begins with the date the installment was required to be paid and ends on the earlier of:
            • (a) the 15th day of the 4th month following the close of the taxable year, or
            • (b) the date on which any portion of the underpayment is paid. A payment of estimated tax on any installment date shall be considered a payment of previous underpayment only to the extent such payment exceeds the installment which would be required to be paid if the estimated tax were equal to 90% of the income tax.

          (4) Rate. The rate applied to each underpayment to determine the amount of the addition to the tax shall be the interest rate determined under Va. Code § 58.1-15.

          (B) Exceptions. The addition to the tax will not be imposed for any underpayment of any installment of estimated tax if, on or before the date prescribed for payment of the installment, the total amount of all payments of estimated tax made equals or exceeds the amount which would have been required to be paid on or before such date if the estimated tax were the least of the following amounts:

          (1) the tax shown on the return for the preceding taxable year, provided that the preceding taxable year was a year of 12 months and a return showing a liability for tax was filed for such year. For the purpose of this exception the credits allowable under Va. Code §§ 58.1-430 and 58.1-431 shall not be taken into account in determining the prior year's tax.

          (2) An amount equal to a tax determined on the basis of the tax rates for the taxable year but otherwise on the basis of the facts shown on the return for the preceding year and the law applicable to such year, in the case of a corporation required to file a return for such preceding taxable year.

          (3) (a) An amount equal to 90% of the income tax for the taxable year computed by placing on an annual basis the taxable income
            • (i) For the first 3 months of the taxable year, in the case of an installment required to be paid in the 4th month.
            • (ii) Either the first 3 months or the first 5 months of the taxable year (whichever results in no addition being imposed), in the case of an installment required to be paid in the 6th month.
            • (iii) Either the first 6 months or the first 8 months of the taxable year (whichever results in no addition being imposed), in the case of an installment required to be paid in the 9th month.

              (iv) Either the first 9 months or the first 11 months of the taxable year (whichever results in no addition being imposed), in the case of an installment required to be paid in the 12th month.
          (b) The taxable income shall be placed on an annual basis for the purpose of exception (3) by first multiplying the taxable income by 12 and dividing the resulting amount by the number of months in the taxable year (3, 5, 6, 8, 9 or 11, as the case may be). A taxpayer whose taxable year consists of 52 or 53 weeks shall use the procedure set forth in U.S. Treasury Regulation § 1.6655-2(a)(4) to place its taxable income on an annual basis. In determining the applicability of this exception, there must be an accurate determination of the amount of income, deductions, and Virginia modifications for the appropriate period, that is, for the 3, 5, 6, 8, 9 or 11 months of the taxable year.

          Rulings of the Tax Commissioner

          Last Updated 08/25/2014 16:46