Tax Type
Corporation Income Tax
Description
Construction Corporations; Income from Out-of-State Partnership
Topic
Allocation and Apportionment
Date Issued
10-30-1992
October 30, 1992
Re: §58.1-1821 Application; Corporation Income Tax
Dear***********
This will reply to your letter of June 17, 1992, in which you seek correction of corporation income tax assessments for********* (the "Taxpayer").
FACTS
On its Virginia income tax returns for the years under review, the Taxpayer reported a subtraction for the income derived from a 15% interest in a North Carolina limited partnership. You state that the entire share of income from the partnership was reported to and taxed by North Carolina.
The department disallowed the subtraction and assessed Virginia income tax on 100% of the partnership income. You object to this treatment and ask how the Taxpayer should report this income on its Virginia income tax return to avoid double taxation.
DETERMINATION
Subtraction of income: The Virginia corporation income tax is imposed on the Virginia taxable income of every corporation having income from Virginia sources. Virginia taxable income is defined as federal taxable income with certain specified additions, subtractions and exemptions. For purposes of computing Virginia taxable income, the term "federal taxable income" means all income from whatever source derived and however named on which a federal tax is imposed. There is no modification to allow the subtraction you claim for income from a limited partnership. Therefore, the auditor properly disallowed the subtraction.
Apportionment: Virginia law and regulations require corporations which have income from both within and without Virginia to compute their income subject to Virginia tax in accordance with the applicable statutory formula. Income from a limited partnership is apportioned along with the rest of the taxpayer's income.
A review of the federal corporation income tax return reveals that the Taxpayer utilized the completed contract method of accounting for the years under review. Under Va. Code §58.1-419, construction corporations which report income on a completed contract basis are required to apportion income based on the ratio of business within Virginia to total business of the corporation.
A review of the Virginia corporation income tax return reveals that, other than the limited partnership interest, the Taxpayer conducted its business entirely within Virginia and, therefore, did not apportion its income between Virginia and other states. The Taxpayer should have apportioned income based on a fraction, the numerator of which is Virginia business (which does not include the limited partnership income) and the denominator of which is total business of the corporation (including income from the limited partnership). None of the limited partnership's apportionment data may be included in the Taxpayer's apportionment factor. See P.D. 88-235 (8/10/88).
Accordingly, the assessment will be revised to reflect the proper apportionment method. The Taxpayer will shortly receive an updated bill with interest accrued to date. The bill should be paid within 30 days to avoid the accrual of additional interest.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/6329P
Rulings of the Tax Commissioner