Tax Type
Corporation Income Tax
Description
Treatment of corporate divisions
Topic
Allocation and Apportionment
Date Issued
02-16-1988
February 16, 1988
Re: §58.1-1821 Application; Corporation Income Tax
§58.1-421 Application for Alternative Method
§58.1-408 Apportionment of Income
Dear**************
This is in response to your request that the department reconsider the determination letter issued on November 3, 1986, regarding the assessment of corporation income tax for taxable years 1981 and 1982. In view of the relief that you seek, your correspondence has been treated as a request for an alternative method of allocation and apportionment.
Facts
The taxpayer filed its 1981 and 1982 returns and treated its manufacturing division, with operations in Virginia and other states, as a separate line of business for purposes of allocation and apportionment. The taxpayer's other two divisions, with no operations in Virginia, were excluded from the computation of Virginia taxable income.
The department's auditor included all of the taxpayer's divisions in the computation of Virginia taxable income and in the allocation and apportionment of income. You claim that the divisions are autonomous and that there is no exchange of goods, services, personnel or other values which support treating the three divisions of the taxpayer as a single unitary business.
Discussion
You have stated that you recognize that the assessment based on treating the taxpayer as a single unitary business is consistent with Virginia law, in particular §58.1-408. However, you claim that Virginia law is unconstitutional as applied to the taxpayer's situation because there was no flow of value between the divisions or other circumstances which support taxing the taxpayer as a unitary business.
Most of the recent court cases and analysis of the unitary business issue have focused on whether two or more affiliated corporations should be considered a unitary business. When the issue is whether two or more divisions of a single corporation are unitary certain facts can be assumed. For example, in the divisional situation there will always be unity of ownership and unity of management, at least at the level of the board of directors and chief executive officer.
Although ownership and management, without more, are not sufficient for finding the existence of a unitary business, the department has examined the facts ascertained in conferences and in the correspondence and affidavits submitted and finds that additional inter-relationships exist.
You claim that substantial operating authority is exercised by the president of each of the divisions. However, it appears that personnel from the taxpayer's parent corporation exercise a great deal of supervision and control over the annual budget and other major decisions of the divisions. While the parent corporation is not subject to taxation in Virginia, the department cannot ignore the parent's role in managing the divisions of the taxpayer.
Virginia law clearly requires that the divisions of a single corporation be treated as a single taxpayer for purposes of computing Virginia taxable income. The method which you request, separate accounting for each division and application of the allocation and apportionment provisions only to the one division operating in Virginia, is allowable under §58.1-421 only if the department finds that the statutory method is inapplicable or inequitable or produces an unconstitutional result. The department is not persuaded by the facts brought out in the correspondence and at several conferences that the statutory method is inapplicable because it produces an unconstitutional result. Nor is the department persuaded that the statutory method is inequitable because of double taxation.
Determination
Accordingly, it is the position of the department that the assessment as made for taxable years 1981 and 1982 is correct. You will shortly receive an updated bill with interest accrued to date. To avoid the accrual of additional interest, the bill should be paid within thirty days.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner