Tax Type
Individual Income Tax
Partnerships
Description
Partnership income
Topic
Allocation and Apportionment
Partnerships
Date Issued
03-14-1986
March 14, 1986
Re: Section 58.1-1821 Application: Corporation Income Tax
Dear ******************
This will reply to your letter of November 22, 1985 in which you filed an appeal to request permission to use an alternative method of allocation and apportionment for ********** ("Taxpayer").
Facts
Taxpayer underwent an office audit for the period January 1 through June 30, 1984 in which, among other things, a subtraction for partnership income was disallowed. Taxpayer had allocated partnership net income to the appropriate states from which the income was derived. Taxpayer asserts that all the property, salaries and sales of the partnerships were outside of Virginia and that the allocation is consistent with how income was allocated and taxed in other states.
Determination
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. That method requires dividends to be allocated to the commercial domicile of the corporation. All other income is apportioned. I construe Virginia Code §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 policy applicable to requests for an alternative method is set forth in Virginia Regulation §630-3-421 (copy enclosed).
The Taxpayer has not shown that the statutory method of allocation and apportionment produces an unconstitutional result. The United States Supreme Court has recognized that allocation and apportionment of income is an arbitrary process designed to approximate the income from business transactions within a state. As long as each state's method of allocation and apportionment is rationally related to the business transacted within a state, then each state's tax is constitutionally valid even though there may be some overlap. See Moorman Manufacturing Company v. Bair, 437 U.S. 279, 98 S. Ct. 2340 (1978).
The regulations also provide that relief may be granted if the statutory method of allocation and apportionment produces a tax that is inequitable and that the inequity is attributable to Virginia. However, in determining whether inequity exists that is attributable to Virginia, I must consider the whole statutory structure under which the Virginia tax is computed, and not solely how a corporation's income is divided by Virginia versus another state. Each state's tax structure contains its particular method of determining the definition of "income," for dividing that income among the states and for applying a rate of tax, as well as credits against the tax. I do not find that, as a whole, the Virginia corporate income tax structure is the cause of any inequity in this case.
Accordingly, I find that the assessment of additional tax was correct in every respect and the outstanding balance remains due and payable.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner