Tax Type
Corporation Income Tax
Description
Construction company; Single apportionment factor
Topic
Allocation and Apportionment
Date Issued
11-18-1991
November 18, 1991
Re: §58.1-1821 Application; Corporation Income Tax
Dear**************
This will reply to your letter of September 12, 1990, in which you seek correction of corporation income tax assessments for**************(the "Taxpayer").
FACTS
The taxpayer, a construction company, used a three factor apportionment formula for 1987 and 1988. The auditor recomputed the taxpayer's Virginia taxable income by applying a single apportionment factor of business within and without Virginia, in accordance with Va. Code §58.1-419 (applicable to construction companies which elect to report income on the completed contract basis). Because the completed contract method was not used exclusively for the years under review, you have submitted an apportionment formula in which the single factor apportionment factor is applied to income attributable to the completed contract method and the three factor formula is applied to income attributable to the percentage of completion method for each year.
DETERMINATION
There is no statutory authority for the apportionment formula used in your computations. 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 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.
A review of Internal Revenue Code IRC §460 reveals that it has been subject to federal legislation which has phased out the completed contract method of reporting income. The completed contract method was available for long-term contracts entered into before March 1, 1986. The percentage of completion method was also available for long-term contracts entered into before March 1, 1986. For long-term contracts entered into after February 28, 1986 and before July 11, 1989, income could be accounted for under the percentage of completion-capitalized cost method or the percentage of completion method. For contracts entered into after July 10, 1989, the percentage of completion method must be used, subject to an election to use a modified percentage of completion method.
Va. Code §58.1-419 does not refer to any of the percentage of completion methods, but only to the actual "completed contract method" formerly allowed. Construction companies electing to report income under the completed contract method must apportion income based on the ratio of business within Virginia to total business of the corporation. All other construction companies apportion income based on the statutory three factor formula.
The department has previously ruled that the applicable apportionment formula is determined by the majority of the business (measured by total revenue) conducted by the taxpayer for the taxable year. P.D. 90-128 (8/22/90) (copy enclosed). From the information provided, it appears that a majority of the taxpayer's total revenue for 1987 was from the percentage of completion-capitalized cost method. Because income reported on the completed contract basis did not represent a majority of the taxpayer's total revenue, the single business factor under Va. Code §58.1-419 should not be used for 1987. For 1988, a majority of the taxpayer's total revenue was reported on the completed contract basis; therefore, the single business factor should be used to apportion income.
Accordingly, the assessment for 1988 is correct and is now due and payable. For the 1987 taxable year, the assessment will be revised to reflect the use of the three factor formula. You will shortly receive an updated bill with interest accrued to dare.
The bill should be paid within 30 days to avoid the accrual of additional interest. Although you requested a conference, this letter has been issued without one. If you still desire a conference, you should request one within 30 days.
Sincerely,
W. H. Forst
Tax Commissioner
TPD/4636F
Rulings of the Tax Commissioner