Tax Type
Corporation Income Tax
Description
Proceeds from sale of stock
Topic
Allocation and Apportionment
Date Issued
10-14-1987
October 14, 1987
Re: §58.1-1821 Application; Corporation Income Tax
§58.1-408 Apportionment of Income
Dear *************
This is in response to your letter of March 27, 1987, protesting an assessment of tax for 1984, and a letter of January 28, 1986, protesting an assessment of tax for 1983. Since the issues are identical, both assessments will be addressed in this letter.
Facts
In its returns for the years in question the taxpayer included certain capital gains and interest in allocable income. The auditor included this income in apportionable income.
The capital gain and interest in question were derived from the installment sale of stock in a subsidiary. Pursuant to a consent decree entered in antitrust litigation, the taxpayer had been prohibited from exercising any control or direction in management, commercial policy or other dealings with the subsidiary, and ultimately was required to divest a substantial amount of stock of the subsidiary. The capital gain and interest income arose from the required divestiture.
The taxpayer also protests the assessment for 1983 on the grounds that it did not allow credit for an overpayment of tax for 1981.
Discussion
Income From Virginia Sources
The taxpayer claims that the assessments are erroneous because the sale of stock is not "income from Virginia sources" as that term is defined in §58.1-302 of the Code of Virginia ("Income and deductions from Virginia sources").
Section 58.1-302 contains definitions only. One must look to other sections of the Code of Virginia to see how the defined terms are used. In this case the operative section is §58.1-400, which reads as follows:
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- A tax at the rate of six percent is hereby annually imposed on the Virginia taxable income for each taxable year of every corporation organized under the laws of the Commonwealth and every foreign corporation having income from Virginia sources.
- A tax at the rate of six percent is hereby annually imposed on the Virginia taxable income for each taxable year of every corporation organized under the laws of the Commonwealth and every foreign corporation having income from Virginia sources.
Federal Limitations on State Taxation
The taxpayer claims that the inclusion of this capital gain and interest in apportionable income results in taxing extraterritorial income having no relationship with the taxpayer's presence in Virginia in violation of the U.S. Constitution.
The taxpayer's argument relies on a number of court cases which have stated that income must be derived from a unitary business in order to be apportioned. The taxpayer claims that the income in question is nonbusiness income, or, in other words, income which is not derived from a unitary business. Therefore, the nonbusiness income can not be included in apportionable income.
First of all, it is important to note that Virginia is not seeking to include any income earned by the subsidiary in the taxpayer's apportionable income, either through consolidation or by apportioning dividend income. The income in question is received directly by the taxpayer as a consequence of a transaction between the taxpayer and an unrelated party.
The Virginia taxable income of the taxpayer is reduced by the salary, travel and other expenses of the taxpayer's employees involved in the transaction. The taxpayer had to seek a purchaser, negotiate the terms of the sale and consummate it. The decision to accept the purchaser's notes in payment, which generated the interest in question, required consideration of the purchaser's credit worthiness, the taxpayer's capital structure and cash management, as well as the terms of the note and sales contract. All of this activity had to be performed by the taxpayer's board of directors or by its employees.
No court has held that Virginia's allocation and apportionment laws result in unconstitutional taxation of extraterritorial values and the department does not believe that any such holding is likely. In particular, the department does not believe that Virginia is prohibited from apportioning income arising from this transaction.
Determination
Accordingly, the assessment of additional tax for 1983 and 1984 is correct and is now due and payable. You will shortly receive an updated bill reflecting interest accrued to date and the application of the 1981 refund to the balance due for 1983. The bill should be paid within thirty days to avoid the accrual of additional interest.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner