Tax Type
Corporation Income Tax
Description
Request for alternative method of allocation and apportionment
Topic
Allocation and Apportionment
Date Issued
03-18-1985
March 18, 1985
RE: §58.1-421 Request for Alternative Method of Allocation and Apportionment; Corporation Income Tax; 1981, 1982 & 1983
Dear ****
The taxpayer has filed its returns for 1981 through 1983 using the statutory method of apportionment as required by Virginia Regulation §630-3-421. The taxpayer now requests permission to use an alternative method of allocation and apportionment.
Facts
The taxpayer is primarily an insurance agency doing business in the District of Columbia. It also owns rental real estate in the District and in Virginia.
The taxpayer proposes to compute Virginia taxable income by reporting only the net income showing on the company records which arises from the rent derived from the property located in Virginia less the actual direct expenses related to the Virginia property. The taxpayer does not propose to deduct any portion of its office expense as overhead. The proposed method would essentially continue its method of reporting this income as allocable income under former law.
Comparison of the two methods shows that the Virginia tax due under the alternative method is less than the tax due under the statutory method for two of the three years.
Determination
The gist of taxpayer's argument in support of its proposed method is contained in the following statement:
The property factor is inordinately biased against the taxpayer since the Virginia rental property, at cost, represents over 50% of the total property owned by the taxpayer. When the property factor is averaged with the remaining two factors, the resulting apportionment factor is always in excess of 17%. To put this in perspective, the sales factor which measures the gross revenue earned in Virginia averages less than 10%.
The fact that one of the three factors may be disproportionately large is not sufficient grounds for allowance of an alternative method. The fact that the property factor is averaged with the sales and payroll factors, significantly reduces the impact of any distortion in one of the factors.
In one of the years, the taxpayer realized a substantial capital gain on the sale of property located in Virginia. In this year, the statutory method results in significantly less tax than the taxpayer's proposed method. Thus, it is not at all clear that the statutory method is biased against the taxpayer.
The General Assembly has provided a statutory method of allocation and apportionment that applies to all corporations. Neither the taxpayer nor the Department may elect to use a different method I construe §58.1-421 as authorizing me to allow use of an alternative method only in extraordinary circumstances where the need for relief has been demonstrated by clear and cogent evidence.
The evidence before me does not demonstrate any inequity in requiring the taxpayer to use the statutory formula. Accordingly, permission to use an alternative method of allocation and apportionment is denied.
Sincerely
W. H. Forst
Tax Commissioner
RE: §58.1-421 Request for Alternative Method of Allocation and Apportionment; Corporation Income Tax; 1981, 1982 & 1983
Dear ****
The taxpayer has filed its returns for 1981 through 1983 using the statutory method of apportionment as required by Virginia Regulation §630-3-421. The taxpayer now requests permission to use an alternative method of allocation and apportionment.
Facts
The taxpayer is primarily an insurance agency doing business in the District of Columbia. It also owns rental real estate in the District and in Virginia.
The taxpayer proposes to compute Virginia taxable income by reporting only the net income showing on the company records which arises from the rent derived from the property located in Virginia less the actual direct expenses related to the Virginia property. The taxpayer does not propose to deduct any portion of its office expense as overhead. The proposed method would essentially continue its method of reporting this income as allocable income under former law.
Comparison of the two methods shows that the Virginia tax due under the alternative method is less than the tax due under the statutory method for two of the three years.
Determination
The gist of taxpayer's argument in support of its proposed method is contained in the following statement:
The property factor is inordinately biased against the taxpayer since the Virginia rental property, at cost, represents over 50% of the total property owned by the taxpayer. When the property factor is averaged with the remaining two factors, the resulting apportionment factor is always in excess of 17%. To put this in perspective, the sales factor which measures the gross revenue earned in Virginia averages less than 10%.
The fact that one of the three factors may be disproportionately large is not sufficient grounds for allowance of an alternative method. The fact that the property factor is averaged with the sales and payroll factors, significantly reduces the impact of any distortion in one of the factors.
In one of the years, the taxpayer realized a substantial capital gain on the sale of property located in Virginia. In this year, the statutory method results in significantly less tax than the taxpayer's proposed method. Thus, it is not at all clear that the statutory method is biased against the taxpayer.
The General Assembly has provided a statutory method of allocation and apportionment that applies to all corporations. Neither the taxpayer nor the Department may elect to use a different method I construe §58.1-421 as authorizing me to allow use of an alternative method only in extraordinary circumstances where the need for relief has been demonstrated by clear and cogent evidence.
The evidence before me does not demonstrate any inequity in requiring the taxpayer to use the statutory formula. Accordingly, permission to use an alternative method of allocation and apportionment is denied.
Sincerely
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner