Tax Type
Corporation Income Tax
Description
Interest income; Apportionment
Topic
Allocation and Apportionment
Date Issued
06-29-1984
June 29, 1984
Dear *******************
This will acknowledge receipt of additional data contained in a letter dated June 8, 1984 and will respond to your letter of December 1, 1982 in which you applied pursuant to the provisions of Virginia Code § 58-1118 for correction of corporation income taxes assessed for the years 1978, 1979 and 1980.
Facts
Taxpayer, a multistate manufacturing business incorporated under the laws of Delaware, maintains its commercial domicile and several of its operating divisions within Virginia.
As a result of audit, the department assessed additional corporation income taxes for the years 1978, 1979 and 1980 in the amounts of $**** and $**** plus interest, for the years, respectively.
The additional tax assessments resulted substantially from the reclassification of interest income. In its filed returns, Taxpayer had included such income as income subject to apportionment, whereas Virginia law for the years in issue provide for the allocation of interest income to this state if the corporation is directed or managed in this state.
There is no contention that the corporation is not directed or managed in this state, nor is it contended that interest income is not required under applicable Virginia law to be allocated to the state of the corporation's commercial domicile. However, it is contended in protest that interest income is allocable only to the extent that it exceeds attributable expenses and it is contended that such attributable expenses equal or exceed the gross amounts of allocable interest income in the years 1979 and 1980. You have therefore requested that tax assessments be corrected by applying attributable interest expense in the amount of $**** for 1979 and $**** for 1980 against allocable interest income for such years. You have expressed agreement with all other audit adjustments.
Determination
§ 58-151.040 of the Code of Virginia, as it existed for the years here involved, provided for the allocation of interest and made no reference to net interest. However, in light of Code § 58-151.038 which provides for the allocation and apportionment of Virginia taxable income (net income), the department recognizes that certain expenses, principally interest on obligations, may be attributable to interest income in computing net interest income for purposes of allocation. It is our general view that money is fungible and that unless borrowed money is borrowed and used for a specific purpose, the interest paid on such borrowed money is considered related to all income producing activities and properties of the taxpayer and thus attributable to all gross income which the income producing activities and properties of the taxpayer generate, have generated or could reasonably have been expected to generate.
In the matter at issue, you have provided the detail of several substantial loans obtained in October 1979 as a hedge against future rate increases. While it has not been established that the funds were obligated for the specific purpose of investing in income producing securities, you have established to my satisfaction that the proceeds of these obligations were in fact invested in securities and that the amount of interest paid on the specific obligations during the period of investment exceeded the amount of interest received on the investments.
Therefore, tax assessments will be corrected by decreasing allocable income by attributable interest expense in the amount of $*** for 1979 and $*** for 1980. The tax assessment for 1978 will not be adjusted.
Revised assessments will be due and payable upon receipt with interest at applicable rates to date of payment.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner