Tax Type
Corporation Income Tax
Description
Capital gains
Topic
Allocation and Apportionment
Date Issued
06-13-1988
June 13, 1988
Re: §58.1-1821 Application; Corporation Income Tax
§58.1-408 Apportionment of Income
Dear****************
This is in reply to your letter of June 16, 1987, in which you applied for correction of an assessment of corporation income tax. I apologize for the delay in responding.
Facts
The taxpayer sold its sawmill and sawmill equipment which were located in West Virginia. on its Virginia return for F.Y.E. 4/30/86, the taxpayer claimed a subtraction for capital gains as well as a subtraction for rental income. The auditor disallowed these subtractions.
The taxpayer protests the disallowance of capital gains and states that it should not pay Virginia corporation income tax on West Virginia income.
Discussion
Any corporation subject to taxation in Virginia and at least one other state is required by §58.1-406 of the Code of Virginia to allocate and apportion its Virginia taxable income. Dividends are required to be allocated to the commercial domicile of the corporation. Va. Code §58.1-408 provides that all other Virginia taxable income is apportioned to Virginia by a three-factor formula.
Virginia taxable income is defined by Va. Code §58.1-402 as federal taxable income and any other income taxable to the corporation under federal law, as adjusted by certain specified modifications. Virginia law does not contain a provision allowing a subtraction for capital gains.
The taxpayer has not shown that the statutory method of allocation and apportionment produces an unconstitutional result. The United States Supreme Court has recognized that allocation and apportionment of income is an arbitrary process designed to approximate the income from business transactions within a state. Because each state has its own variations on what is allocated and in how the remainder is apportioned, it is inevitable that some overlap will occur; that is, such income will appear to be taxed by more than one state. As long as each state's method of allocation and apportionment is rationally related to the business transacted within a state, then each state's tax is constitutionally valid even though there may be some overlap. See Moorman Manufacturing Company v. Blair, 437 U. S. 279, 98 S. CT. 2340 (1978).
Virginia's method of apportioning all income of a corporation, except certain dividends. is designed to produce a tax that is rationally related to business transactions in Virginia. The fact that the capital gains were realized in West Virginia is not sufficient to show that Virginia's apportionment is unconstitutional, either in general or as applied to the taxpayer.
The corporation income tax regulations also provide that relief may be granted if the statutory method of allocation and apportionment produces a tax that is inequitable and that the inequity is attributable to Virginia. However, in determining whether inequity exists that is attributable to Virginia, I must consider the whole statutory structure under which the Virginia tax is computed, and not solely how a corporation's income is divided by Virginia versus another state. Each state's tax structure contains its particular method of determining the definition of "income," for dividing that income among the states and for applying a rate of tax, as well as credits against the tax. I do not find that, as a whole, the Virginia corporate income tax structure is the cause of any inequity in this case.
Determination
Accordingly, the assessment of additional tax for the fiscal year ending April 30, 1986, is correct and is now due and payable. You will shortly receive an updated bill reflecting interest accrued to date. The bill should be paid within 30 days to avoid the accrual of additional interest.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner