Tax Type
Corporation Income Tax
Description
Alternative method of allocation and apportionment denied
Topic
Allocation and Apportionment
Date Issued
04-30-1986
April 30, 1986
Re: §58.1-421 Corporation Income Tax
Request for an alternative method
Dear *****************
This is in response to your letter of April 20, 1985, which questions the statutory method of apportionment as it applies to your client. I have treated your letter as a request for permission to use an alternative method of allocation and apportionment under Virginia Code §58.1-421.
FACTS
The taxpayer's income consists of rental income from two properties, one in Virginia and one in another state. The property in the other state is fully depreciated and rented net of expenses. The Virginia property incurs significant expenses. You contend that application of the statutory three factor formula to the taxpayer results in a shifting of income to Virginia.
DETERMINATION
The statutory method of apportionment by a three factor formula is required for all taxpayers except certain types of businesses which have a special statutory formula. The provisions of §58.1-421 only allow an alternative method if it will reduce the tax. Therefore the provisions allowing an alternative method are not intended to allow taxpayers to use a method merely because they believe it more accurately measures income from Virginia sources. The use of an alternative method of allocation and apportionment is reserved for extraordinary situations in which the taxpayer has shown by clear and cogent evidence that the statutory method is inequitable or produces an unconstitutional result.
The department has adopted regulations which set forth the criteria used in allowing an alternative method. You have not shown that the statutory met-hod is unconstitutional as applied to the taxpayer or that there is double taxation attributable to Virginia's laws. In addition, the particular method you requested, a form of separate accounting, is not favored in Virginia. See Department of Taxation v. Lucky Stores Inc., 217 Va. 121 (1976).
It should be noted that the schedule A furnished by you appears to be incorrect in two respects. First, the property factor is based on the original cost of the buildings without reduction for accumulated depreciation. Second, the sales factor includes all gross receipts of the corporation except for allocable dividends. Interest income would be included in the denominator of the factor but not in the numerator because the commercial domicile of the corporation does not appear to be in Virginia. You may wish to file an amended return correcting these items.
Accordingly, your request for permission to use an alternative method of allocation and apportionment is denied.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner