Tax Type
Corporation Income Tax
Description
Work incentive program deductions
Topic
Allocation and Apportionment
Subtractions and Exclusions
Taxable Income
Date Issued
03-19-1984
March 22, 1984
Re: § 58-1118 Application/Corporate Income Tax
FYE 12/31/78 and 12/31/79
Dear *******************
This is in response to your application under Virginia Code § 58-1118 for a correction of corporate income tax assessments for the 1978 and 1979 taxable years. Because the assessment for 1978 was made beyond the three years statue of limitations provided in § 58-151 0104, it has been abated. As for the 1979 assessment, the facts and determination are as follows:
FACTS
Taxpayer, ***** filed a consolidated Virginia income tax return which includes its subsidiaries subject to Virginia income tax. Taxpayer is a manufacture incorporated in ***** and has a branch processing plant located in Virginia. One of its subsidiaries, ***** sells ice cream products in Virginia.
During an audit of the 1979 income tax return, several adjustments were made to which Taxpayer objects. First, Taxpayer protests the disallowance of a WIN subtraction. Secondly, Taxpayer objects to the inclusion of certain rental and royalty income in the apportionment formula, stating that such income is subject to allocation to its state of commercial domicile. Thirdly, Taxpayer protests the department's calculation of the payroll and sales factors in the apportionment formula. In addressing the payroll factor issue, Taxpayer maintains that only those employees that live and work in Virginia should be included in the payroll factor. As to the sales factor, Taxpayer notes that while the department included "other income" of ****** (as reported on is federal return) in the denominator, its failure to also include ***** "other income" was improper.
DETERMINATION
The department's disallowance of a WIN subtraction for Taxpayer's taxable year 1979 was correct. Virginia Code § 58-151.013(c)(7) was amended in 1981 to provide a subtraction for the amount of expenses eligible for the federal work incentive program not otherwise deducted. This amendment was made effective for taxable years beginning on or after January 1, 1981. Therefore, because this subtraction was not in effect for the 1979 taxable year, the disallowance of it was proper.
With regard to the issue of rents and royalties, Virginia Code § 58-151.037 does permit rents and royalties from real or tangible personal property to be allocated. However the rents that are allocable are net rents (see Virginia Code § 58-151.038). In this case, Taxpayer allocated gross rents. Because the taxpayer did not provide the expenses applicable to the rental income, such income was properly excluded.
Additionally, Taxpayer protests the exclusion of royalty income. § 58-151.037 provides for the allocation of royalty income derived from tangible personal property. The royalty income in the instant case was derived from intangible property. Accordingly, the audit adjustment was correct.
Taxpayer also contests the apportionment factors determined by the department. Specifically, it objects to the calculation of the payroll factor and to the exclusion of other income derived from ***** in the denominator of the sales factor.
With respect to the payroll factor, Taxpayer reported no portion of its payroll in its filed returned as attributable to its Virginia operations. However, substantial sales were made in Virginia by employees of ******** operating on regular sales routes in Virginia and in absence of Taxpayer data to the contrary, payroll was attributed to Virginia in audit in the ratio of Virginia sales to total sales.
On the basis of assertions of fact and additional data submitted by Taxpayer in protest, the amount of payroll attributable to Virginia operations was overstated in audit and will be adjusted to *****.
Taxpayer's further assertion that the department should have included ***** "other income" in the denominator of the sales factor is correct. An adjustments will be made to include "other income" in the amount of ***** in the denominator of the sales factor.
Assessments, corrected in accordance with this determination, will be mailed in the near future and will be due and payable with interest accrued to date of payment.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner