Tax Type
Corporation Income Tax
Description
Investment income; Foreign source income
Topic
Allocation and Apportionment
Date Issued
03-27-1987
March 27, 1987
Re: §58.1-1821 Application; Corporation Income Tax
§58.1-406 Allocation & Apportionment, ASARCO
§58.1-302 Foreign Source Income; Expenses
Dear *****************
This is in response to your letter of July 9, 1986, in which you applied for correction of an assessment for taxable year 1982, and a conference held on February 13, 1987.
ASARCO Issues
You object to the assessment primarily on the grounds that the inclusion of certain income from "investments" (interest and capital gains) in apportionable income is unconstitutional under ASARCO, Inc. v. Idaho State Tax Commission, 458 U.S. 307, 102 S.Ct 3103 (1982).
It is clear that Virginia cannot require apportionment of income unless the income is part of a unitary business. Your argument is based on the belief that the taxpayer's investment activities constitute a discrete, non-unitary business even though the activities are managed and controlled by the same board of directors and chief executive officer, the investments are owned by the same corporation and, presumably, the funds to acquire the investments and the income from the investments are derived from and used by the other activities of the corporation.
There has been some confusion between definitions of "business income" which some states use to define apportionable income, and "income from a unitary business" which is a constitutional requirement for apportionability. A state may define apportionable income to include less than all of the income from a unitary business. Virginia is such a state. Virginia law prohibits use of the worldwide combined method of reporting even though it is permissible under the U. S. Constitution.
As previously noted in the enclosed rulings dated October 31, 1984, (P.D. No. 84-210) and November 15, 1984, (P.D. No. 84-231), the discussion in ASARCO focused on whether dividend income from subsidiaries was income from a unitary business for constitutional purposes. Idaho's definition of business income treated interest and capital gains arising from subsidiary transactions in the same manner as dividend income. Therefore the parties agreed that the court's decision on dividends would apply to the disputed interest and capital gains arising out of transactions involving the same subsidiaries which paid the dividends. In the course of affirming this agreement, the court included dicta which implied that a unitary business relationship must exist between the taxpayer and the payor of all interest and capital gains.
I do not agree that the dicta in ASARCO renders Virginia's apportionment law unconstitutional as applied to the investment activities of the taxpayer. I note that the New Jersey Supreme Court upheld a similar apportionment law when applied to "investment" income in Silent Hoist & Crane Co., Inc Director, Division of Taxation, 100 N.J. 1, 494 A. 2d. 775 (1985).
Accordingly, the interest and capital gains were properly included in apportionable income.
Foreign Source Income
In its return the taxpayer included interest, capital gains and royalties in allocable income and reduced the allocable income by related expenses. The auditor removed the items from allocable income. Some of the income qualified for the subtraction for foreign source income. The auditor allowed the subtraction but reduced it by expenses determined under I.R.C. §§861-863. The expenses applied to the foreign source income subtraction are significantly greater than the expenses the taxpayer applied to allocable income.
The expenses which the taxpayer applied to allocable income are based on its accounting records and determinations as to which expenses are related to allocable income. The expenses applied to foreign source income are computed in accordance with I.R.C. §§ 861-863. One amount is the result of the taxpayer's judgment, the other is the result of the judgment of the U. S. Congress as adopted by the Virginia General Assembly. Although the taxpayer's determination may be reasonable, we are required to follow the law and use I.R.C. §§861-863 to determine the applicable expenses. See ruling dated August 14, 1986, P.D. No. 86-154.
Accordingly the assessment is correct and is now due and payable. You will shortly receive an updated bill with interest accrued to date. The bill should be paid within 30 days in order to avoid additional interest.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner