89-235 | Virginia Tax

Tax Type

Corporation Income Tax

Description

Sales of marketable securities

Topic

Allocation and Apportionment

Date Issued

09-06-1989

September 6, 1989

Re: §58.1-1821 Application; Corporation Income Tax
§58.1-416 Sales Factor; Sale of Securities

Dear **************

This is in response to a conference held on October 17, 1988, in which you asked us to reconsider our ruling dated June 29, 1988, P.D. No. 88-172 (copy enclosed). You also requested us to allow you to use an alternative method of allocation and apportionment.

Facts

The taxpayer is a manufacturer with its commercial domicile in Virginia. In addition to its income from manufacturing, the taxpayer earns a significant amount of interest income from its investments in various forms of marketable securities and capital gain from trading in securities.

The inclusion of gross proceeds from these sales of securities in the numerator and denominator of the sales factor increased the sales factor from 7.6% to 37.0%. This adjustment accounts for most of the additional tax assessed.

Determination

You claim that the inclusion of the gross proceeds of security sales distorts the amount of income apportioned to Virginia. To illustrate this you point out that three alternative investments earning apportionable interest income have significantly different impacts on Virginia's sales factor.

Bank account: The withdrawal of funds from a bank account is not a gross receipt for purposes of the sales factor.

Mutual fund: The gross proceeds from the sale of mutual fund shares are included in the sales factor, but trading by the fund itself does not affect the taxpayer's sales factor.

Direct purchase of bonds: The gross proceeds from the sale of the bonds are included in the sales factor.

It is recognized that each of the three types of investments has a different impact on the Virginia sales factor; however, that does not mean that the different tax treatment is unjustified. The direct purchase of a bond involves selecting, purchasing, and ongoing monitoring of the market interest rates and the issuer's credit rating. The salary and wages of the employees who engage in these activities are, of course, included in the payroll factor. There is no distortion when the gross receipts generated by an employee's activity are also included in the sales factor.

The selection and purchase of a mutual fund involves activities similar to the direct purchase of a bond, so gross proceeds from sales of mutual fund shares are appropriately included in the sales factor. The taxpayer's employees have no involvement in the trading activities of the mutual fund itself; thus the fund's sales do not affect the taxpayer's sales factor. Money deposited into a bank account is not a "purchase," nor is a withdrawal equivalent to a sale of property. Therefore, withdrawals from a bank account have never been included in the sales factor.

Accordingly, the ruling dated June 29, 1988, P.D. No. 88-172, is reaffirmed. Since there is no distortion of income, there is no basis for finding that an alternative method of allocation and apportionment is justified. The assessment, as adjusted in accordance with the June 29, 1988, ruling, is correct.

Sincerely,

W. H. Forst
Tax Commissioner

Rulings of the Tax Commissioner