Tax Type
Property Tax
Description
Currency exchange contracts
Topic
Property Subject to Tax
Date Issued
10-14-1987
October 14, 1987
Re: § 58.1-1821 Application: CNOT
Dear ********************
This will reply to your letter of February 13, 1987 and ************* August 10, 1987 telephone conversation with a member of my Tax Policy Division staff concerning an assessment of Virginia tax on capital not otherwise taxed ("CNOT") against the Taxpayer for 1982, and a refund of tax.
FACTS
The Taxpayer, a multistate manufacturing corporation, has a division in Virginia, which has its own operating management personnel and maintains its own books and records. Corporate headquarters are located outside Virginia, where such matters as major acquisitions or dispositions of businesses and treasury operations are handled.
The Taxpayer invested in the stock of a foreign corporation which manufactured and sold **** outside the United States. Because the Taxpayer's Virginia division also manufactured and sold ***** the investment in the foreign corporation was transferred to the Virginia division's books and records.
The foreign corporation kept its books in Danish kroner, which had to be translated into U.S. dollars on the books and records of the Virginia division. As the currency exchange rate varied, the value of the investment would change. To stabilize these value changes, the Taxpayer, through its corporate treasury operations located outside Virginia, negotiated contracts to sell forward amounts of the Danish kroner to hedge the net local currency balance sheet exposure. The forward exchange contracts were transferred to the books and records of the Virginia division. The Taxpayer asserts that, for internal reporting and control purposes, the contracts were reflected on the balance sheet as a sundry receivable called "Purchase of Exchange, Balance Sheet Hedges" in the amount of U.S. dollars to be received, and as a companion liability called n Sale of Exchange, Balance Sheet Hedges in the amount equal to the quantity of Danish kroner to be sold times the current rate of exchange The difference between the asset and the liability was amortized over the life of the contract.
The Taxpayer asserts that these contracts represent a "mere agreement to exchange one form of money for another" and, therefore, are exempt from the CNOT tax as "money on hand and on deposit." The Taxpayer further asserts that "the sundry receivable asset must not be recognized without also recognizing the companion liability."
In the alternative, the Taxpayer argues that the contracts have no business situs in Virginia in that the location of the business activity which resulted in the contracts and the administration and control of the contracts occurred outside Virginia. In support of its argument, the Taxpayer cites §8.58-411A (4)B. of the Department's March 31, 1982 draft regulations on capital not otherwise taxed, which, among other things, sets forth a noninclusive list of factors which determine situs of intangible property.
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- " (1) location of the business activity which produced or resulted in the acquisition of such intangible property, (2) location at which the intangible property is used, administered or controlled, (3) location at which payments are made, (4) location at which the proceeds from collection of the intangible property is utilized, or (5) location of delinquency follow-up Primarily the business situs is the location from which such intangible property is administered and controlled"
- " (1) location of the business activity which produced or resulted in the acquisition of such intangible property, (2) location at which the intangible property is used, administered or controlled, (3) location at which payments are made, (4) location at which the proceeds from collection of the intangible property is utilized, or (5) location of delinquency follow-up Primarily the business situs is the location from which such intangible property is administered and controlled"
Determination
From the information submitted, the Taxpayer has not substantiated that the contracts represent "money on hand [or] on deposit." Section 58-411A(4) of the Code of Virginia excludes from the definition of "capital," and thereby exempts from the CNOT tax, "money on hand and on deposit " Exemptions from tax are strictly construed. Art X, §6 of the Constitution of Virginia (1971).
The term "money" is defined as "a medium of exchange authorized or adopted by a domestic or foreign government as a part of its currency." Va Code §8 1-201 (24) (Uniform Commercial Code). The contracts do not fall within this definition, and cannot be considered money for the purpose of the CNOT tax. In addition, the contracts are not "on deposit."
The contracts, not exempt from the tax, were properly placed in the category "all other taxable personal property " That category does not permit any offsetting adjustments.
With respect to the business situs of the contracts, the Taxpayer argues that the business activity which produced the contract and the administration and control of the contract were outside Virginia. The Department has long recognized that the business situs of capital, once acquired, can be transferred Even though the contracts were negotiated outside Virginia, a decision was made to transfer the contracts to the books and records of the Virginia division. According to our information, the Virginia division exercised control over the foreign corporation and there was a significant amount of travel by management personnel between the Virginia division and Denmark Business situs of the contracts, thus, is in Virginia.
Based on the foregoing, I find that the 1982 assessment is proper, and remains due and payable However, in light of the Department's disposition of comparable CNOT cases, and as was discussed with you, we would be willing to entertain an offer by the Taxpayer to settle its outstanding 1982 CNOT liability by payment of not less than 50% of the tax and interest.
I find that the Taxpayer is entitled to a refund for 1983 and 1984, and that it has been timely requested. If the Taxpayer prefers, the assessment will be adjusted to reflect the net tax and interest due for the years 1982 through 1984.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner