Tax Type
Corporation Income Tax
Description
Motor carrier; Milage factor
Topic
Collection of Tax
Date Issued
10-31-1991
October 31, 1991
Re: §58.1-1821 Application; Corporation Income Tax
Dear***************
This will reply to your letter of June 5, 1989, in which you seek correction of a corporation income tax assessment for**************(the "Taxpayer").
FACTS
The taxpayer is a motor carrier operating in several states, including Virginia. The taxpayer was audited and adjustments were made, resulting in the assessment of additional tax. You object to three adjustments. The issues you raise will be addressed separately.
DETERMINATION
Mileage factor: For the years under review, the auditor increased the numerator of the mileage factor (vehicle miles in Virginia) to agree with proposed audit adjustments to mileage for Virginia motor fuel road tax purposes. The taxpayer objects to these adjustments.
Under Va. Code §58.1-417, motor carriers are to apportion their income on the basis of vehicle miles traveled. The ratio is vehicle miles in Virginia to vehicle miles everywhere. Virginia's road tax on motor carriers, administered by the State Corporation Commission (SCC), is based on the amount of motor fuel used in the motor carrier's operations within Virginia. One factor used to determine the amount of motor fuel used in Virginia operations is the total number of miles traveled in Virginia by all vehicles of the motor carrier. Virginia mileage for motor fuel road tax purposes provides a useful tool for our auditors in determining the numerator of the mileage factor for income tax purposes.
The auditor was justified in using the motor fuel road tax mileage figures as the basis for computing the numerator of the mileage factor for income tax purposes, because those figures represent the total number of miles traveled within Virginia by the taxpayer's vehicles; however, following the income tax audit, the motor fuel road tax mileage figures for the years in question were modified in a settlement between the taxpayer and the SCC. The department will adjust its audit report so that the numerator of the mileage factor will reflect Virginia mileage as determined in the settlement of the motor fuel road tax audit.
The taxpayer objects to an increase in the numerator of the mileage factor without a corresponding increase in the denominator (total vehicle miles of the corporation everywhere). There is no evidence that the miles added to the numerator were not already included in the denominator of the mileage factor; in other words, the taxpayer has not shown that the auditor's adjustment is something other than a reallocation of a portion of the total mileage figure. The taxpayer has not produced any records to show that "everywhere" miles are greater than those previously reported by the taxpayer and used by the auditor. The taxpayer has not substantiated its claim that the denominator of the apportionment factor is erroneous; therefore, the denominator is accepted as computed by the auditor.
Addition to Virginia Taxable Income - Taxes: The taxpayer increased its Virginia taxable income by income taxes deducted on the federal return. The auditor increased the income by adding back additional taxes deducted on the federal return. You claim that these taxes should not have been added back, because they were not imposed on net income.
Va. Code §58.1-402 B.4. provides that any net income taxes or other taxes which are based on, measured by, or computed with reference to net income, imposed by Virginia or any other taxing jurisdiction and deducted in determining federal taxable income shall be added to Virginia taxable income.
It appears that the auditor reconciled to total state taxes deducted on the federal return. The taxpayer has not provided a breakdown of state taxes to substantiate its claim that a portion of the state taxes deducted were not measured by or computed with reference to net income. Therefore, the auditor was justified in adding back the entire amount of state taxes deducted on the federal return. If the taxpayer chooses to furnish the department with a breakdown of the taxes. the department will consider it.
Allocable Income: The taxpayer objects to the auditor's characterization of certain income on the 1986 and 1987 returns as subject to Virginia income tax. The taxpayer believes that the income is "nonbusiness" income and should be included in allocable income.
Virginia law does not require or permit the allocation of "nonbusiness" income; only dividends are allocable. Va. Code §58.1-407 provides that dividends received to the extent included in Virginia taxable income are allocable to the state of commercial domicile of the taxpaying corporation.
On the 1986 return, the auditor removed a portion of dividends from allocable income because they were not included in federal taxable income. On Schedule C of the federal return, the taxpayer reported in Column (a) 100% of dividends received, and computed a special deduction for 85% of those dividends in Column (b). The deduction was claimed on line 29b on page one of the federal return. On Schedule A of the Virginia Corporation Income Tax Return, the taxpayer reported 100% of the dividends as allocable income. However, only 15% of the dividends were included in federal taxable income (the starting point for computing Virginia taxable income). The auditor properly reduced allocable income to reflect only those dividends included in federal taxable income.
On the 1987 return, the taxpayer reported no dividends on the federal return, but on Schedule A of the Virginia return, the taxpayer reported allocable income. Because no dividends were reported on the federal return, there was no income to be allocated for Virginia tax purposes, and the auditor properly removed the income from allocable income
The taxpayer's letter indicates that the income in question in 1987 is interest income which the taxpayer believes should be allocated because it is "nonbusiness" income. As previously noted, all income (other than dividends) is apportionable. However, under Va. Code §58.1-421 a corporation is permitted to request an alternative method of allocation and apportionment that would reduce its tax if it can show by clear and cogent evidence that the statutory method is unconstitutional or inequitable as applied to its situation. See Virginia Regulation (VR) 630-3-421 and P.D. 86-184 (9/18/86) (copies enclosed).
Treating your letter as a request to use an alternative method, I find that you have not shown by clear and cogent evidence that the statutory method is unconstitutional or inequitable as applied to the taxpayer's situation. Therefore, the request to use an alternative method is denied.
The audit report will be revised to reflect the correct mileage for the apportionment factor. In all other respects, the assessment is correct. If you choose to submit a breakdown of state taxes for purposes of computing the addback, please send it to the department's Technical Services Section, P.O. Box 6-L, Richmond, VA 23282 within 30 days.
Sincerely,
W. H. Forst
Tax Commissioner
TPD/348SF
Rulings of the Tax Commissioner