Tax Type
Corporation Income Tax
Description
Sale of operations
Topic
Allocation and Apportionment
Date Issued
06-20-1988
June 20, 1988
Re: §58.1-1821 Application; Corporation Income Tax
§58.1-416 Sales Factor, Sales in Commonwealth
Dear****************
This is in response to your letter of January 19, 1988, in which you applied for correction of an assessment of corporation income tax.
Facts
The taxpayer is a corporation with its headquarters in another state. On the first day of its final taxable year the taxpayer sold all of its operations, some of which were located in Virginia. On its final Virginia return the taxpayer apportioned income using only the property and payroll factor, believing that it had no gross receipts for purposes of the sales factor. During a field audit the auditor included the contract sales price in the sales factor and limited the subtraction for ACRS modifications to the statutory amount.
In your application you request that several adjustments be made to the sales factor. Initially you acquiesced to the ACRS amount allowed by the auditor. However, in response to action by the 1988 General Assembly you have amended your application to request that the full amount of ACRS additions be allowed as a subtraction.
ACRS Subtraction
The final return claimed a subtraction for all ACRS additions made in previous years. The auditor reduced this subtraction to the amount allowed by statute, 20% of previous additions.
The 1988 General Assembly enacted chapter 773 (SB 441) effective July 1, 1988. The act permits a taxpayer who filed a final federal and Virginia return for a taxable year beginning before January 1, 1988, to apply for a refund of the outstanding amounts of ACRS additions which have not been subtracted. The application for a refund must be made pursuant to regulations and on forms prescribed by the department. The taxpayer appears to qualify for the relief allowed under this act because it filed a final return for a taxable year beginning before January 1, 1988. However, the department is not able to act on your request at this time. Please be advised that the department will hold this refund request but may require the taxpayer to submit additional information after forms and regulations have been developed.
Sales Factor
Adjustments to Contract: The auditor included the gross contract sales price in the sales factor. You state that the gross sales price was reduced before settlement because of certain adjustments required by the contract.
The audit report and assessment will be revised to reflect the actual sales price upon receipt of the necessary information.
Intangible Personal Property: The contract sales price was a lump sum for all property at the sites in Virginia and another state. The property included real estate and fixtures, tangible personal property and various items of intangible property such as accounts receivable, cash in vault, petty cash, prepaid expenses, trademarks, trade names, service marks, copyrights, deferred charges, and stock in another corporation.
Since the income producing activity related to the sale occurred at the corporate headquarters not at the Virginia site, you claim that the portion of the contract price allocated to such intangible property should be removed from the numerator of the sales factor.
Upon receipt of the necessary information, the audit report and assessment will be revised to exclude from the numerator of the sales factor the portion of the actual sales price attributable to intangible property.
Real Property: Because real estate and fixtures are not tangible personal property they are apportioned under §58.1-416 based on income producing activity. Regulation 630-3-416 provides:
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- The income producing activity is performed at the situs of real and tangible personal property or the place at which or from which such activities are performed by employees of the taxpayer.
- The income producing activity is performed at the situs of real and tangible personal property or the place at which or from which such activities are performed by employees of the taxpayer.
The income producing activity associated with the sale of real estate, particularly a complex operation such as in this transaction, must involve a significant amount of activity at the site of the real estate, for example, an in-depth inspection of the premises involving multiple visits by many persons; inventorying the real, personal, and intangible property; verification of marketable title; and recordation of documents in the local circuit court clerk's office.
Prior to 1981 capital gain on the sale of real estate was allocable to the state in which the real estate was located. The 1981 amendments removed capital gains from the definition of allocable income. Therefore, capital gains became part of apportionable income and the gross proceeds from a sale of real estate were included in the sales factor. It is our understanding that the intent of the General Assembly is that the location of the real estate is the most important consideration in the determination of the state to which the proceeds from the sale of real estate is assigned for purposes of the sales factor.
Therefore, the auditor properly included in the numerator of the sales factor the portion of the actual contract sales price attributable to real estate located in Virginia.
Recaptured Depreciation: You claim that the sales factor must be reduced by the amount of recaptured depreciation included in the sales price, relying on a ruling dated May 19, 1983, (copy enclosed).
The 1983 ruling stated that recaptured depreciation is not itself a receipt for purposes of the sales factor. It merely recharacterizes some of the gain on the sale from capital gain to ordinary income. The 1983 ruling involved the sale of a capital asset in a taxable year ending September 30, 1979, when capital gains were allocable income under Virginia law. All of the proceeds were excluded from the factor because the sale produced allocable income. The fact that some of the gain was recharacterized as apportionable ordinary income under the depreciation recapture provisions did not justify treating the recaptured amounts as a separate gross receipt.
Since 1981 capital gains have been included in apportionable income so all of the proceeds have been included in the sales factor. Because recaptured depreciation is not treated as a separate "receipt," the auditor properly included all gross proceeds in the sales factor without any adjustment to exclude recapture amounts.
Determination
Accordingly, the audit report and assessment will be revised upon receipt of the necessary information on contract price adjustments and the portion of the contract price attributable to intangible property. The information should be sent to: **********Supervisor, Technical Services Section, office Services Division, Department of Taxation, P. O. Box 6-L, Richmond, VA 23282.
You will receive an updated bill with interest accrued to date a few weeks after receipt of the necessary information. The bill should be paid within thirty days to avoid the accrual of additional interest.
Although you requested a conference in your application, this letter has been issued without one. If you still desire a conference You should request one within thirty days.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner