Tax Type
Corporation Income Tax
Description
Proceeds from sale of stock
Topic
Accounting Periods and Methods
Allocation and Apportionment
Date Issued
02-27-1987
February 27, 1987
Re: §58.1-1821 Application; Corporation Income Tax
§58.1-414 Sales Factor
§58.1-421 Alternative Method of Apportionment
Dear ***************
This is in response to your application dated September 20, 1985 for correction of an erroneous assessment of corporate income tax for the taxable year ended March 31, 1982.
Facts
After a field audit the taxpayer was assessed additional tax. The taxpayer protests only the portion of the assessment attributable to the inclusion of certain proceeds from the sale of stock in the numerator and denominator of the sales factor.
In order to take advantage of the federal 85% special dividend deduction for dividends from domestic corporations, the taxpayer purchased substantial amounts of stock a few days before dividends were paid and sold the stock a few days after the dividends were paid. on the taxpayer's federal return the stock transactions were reported on Schedule D as short term gains and losses.
The auditor adjusted the sales factor to include the proceeds from the sales in the numerator and the denominator of the sales factor. The taxpayer protests the inclusion on the grounds that the proceeds were not gross receipts for purposes of the sales factor; that the receipts were derived from activity performed for the purpose of obtaining allocable dividends; that the income producing activity occurred in New York; and that the inclusion of the proceeds results in double taxation of income.
Gross Receipts
The sales factor includes all gross receipts of the corporation not allocated. Va. Code §§58.1-302, 58.1-414. Since the term "gross receipts" is not defined in the income tax chapter of the Virginia Code, the taxpayer refers to Va. Code §58.1-2600 where the term "gross receipts" is defined to exclude receipts from the sale of assets. The taxpayer contends that this definition should be applied to the sales factor to exclude proceeds from stock sales.
This definition is expressly limited by §58.1-2600 to use within the chapter on taxation of public service corporations and has no application to the income tax. In the absence of a statutory definition terms are given their ordinary meaning. The ordinary meaning of "gross receipts" would include all receipts or proceeds without reduction for expenses or basis. The fact the definition in §58.1-2600 expressly excludes receipts from the sale of assets is another indication that the ordinary meaning of the term "gross receipts" includes proceeds from the sale of stock. Therefore proceeds from the stock sales are gross receipts for the purpose of the sales factor.
Allocable Dividends
The taxpayer contends that the sole purpose of the transactions was to generate dividend income, which is allocable income under Virginia law. Because items which produce allocable income are excluded from the apportionment factors, the taxpayer claims that the proceeds from the stock sales should be excluded from the sales factor.
The ownership of stock may generate two types of income for federal and Virginia tax purposes: dividends and capital gain (or loss). The two types of income are defined under federal law and treated differently under federal law. It should be noted that the purpose of these transactions was to generate two types of income: dividends qualifying for the federal 85% special dividend deduction and fully deductible capital losses. Since Virginia begins with federal taxable income, Va. Code §58.1-402, and terms have the same meaning under both laws, Va. Code §58.1-301, the two types of income are recognized as different types of income under Virginia law. Allocable dividend income is limited to income treated as dividends under federal law. All other income, including capital gains and sale proceeds which generate capital gains, is included in apportionable income and the apportionment factors.
Income Producing Activity
The taxpayer appointed a New York agent to make all decisions about which stock to buy and sell for dividends. All purchases and sales were made in New York. The taxpayer contends that all income producing activity related to the stock sales took place in New York and that the proceeds should not be included in the numerator of the sales factor.
Not all of the income producing activity took place in New York. Some oversight and decision making occurred in Virginia where the headquarters and commercial domicile of the taxpayer is located. Virginia Regulation §630-3-416 states that the cost of indirect expenses, such as the activities performed by independent contractors and agents, is not included in determining the income producing activity associated with receipts. Therefore none of the costs of performance or income producing activity performed by the New York agent is taken into consideration in determining the location of receipts for the sales factor. The only other income producing activity associated with the receipts from these stock sales occurred at the commercial domicile of the taxpayer in Virginia. Therefore the receipts were properly included in the numerator.
Double Taxation
The taxpayer claims that it is subject to tax in twenty-nine states and that Virginia is the only one to include the receipts from stock sales in the sales factor. The inclusion significantly increases the Virginia sales apportionment factor and results in apportioning income to Virginia that other states also tax.
There is nothing unreasonable or unconstitutional about the method Virginia uses to allocate and apportion income. The taxpayer has not demonstrated that the income attributed to Virginia is out of all appropriate proportion to the business transacted in Virginia. Simply because two states have different methods of taxing income is no reason to find one of them unconstitutional. Container Corp. of America v. Franchise Tax Board, 463 U.S. 159 (1983), Moorman Mfg. Co. v. Bair, 437 U.S. 267 (1978).
Therefore the auditor properly included the receipts from the stock sales in the numerator and denominator of the sales factor and the assessment of additional tax was not erroneous.
Alternative Method
Your application also requested that an alternative method of allocation and apportionment be considered under §58.1-421. The requested method would exclude the receipts from both the numerator and denominator of the sales factor. Although the tax has not been paid, and thus the request does not comply with the procedures set forth in Va. Regulation §630-3-421, the request will be considered at this time.
In support of its request the taxpayer states that if the type of transactions involved had been carried out all year the sales factor would have been clearly distorted. The regulations of the Multistate Tax Commission and some other states contain authority for the exclusion of items from both the numerator and denominator of a factor if the items would distort the factor.
Virginia law contains detailed apportionment provisions. The only authorization for discretionary exclusion of items from the factors is in the alternative method provisions of §58.1-421. This section provides that the assessment may be reduced, but not increased, if it is found that the statutory method is inequitable. Thus the legislative intent is not to allow variations from the statutory method merely because the taxpayer believes that some other method may be more accurate. The department has previously stated that an alternative method is reserved for extraordinary situations where the taxpayer has shown by clear and cogent evidence that the statutory method produces an inequitable or unconstitutional result.
The inclusion of the stock sales causes the overall apportionment factor to increase by about five (5) percentage points. Even if one assumes, for the sake of argument, that inclusion of the stock sales distorts the measurement of income from Virginia sources, a difference of such a small amount does not justify such an extraordinary remedy as the allowance of an alternative method.
Determination
Accordingly, the assessment of additional tax is correct and is now due and payable. Permission to use an alternative method of allocation and apportionment is denied. You will shortly receive an updated bill with accrued interest to date. The bill should be paid within 30 days to avoid additional interest.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner