Tax Type
Corporation Income Tax
Description
Multistate corporation, capital gains, interest income and royalties
Topic
Allocation and Apportionment
Appropriateness of Audit Methodology
Date Issued
05-01-1992
May 1, 1992
Re: § 58.1-1821 Application; Corporation Income Tax
Dear ****
This will reply to your letter of March 8, 1991, in which you seek correction of corporation income tax assessments for * * * (the "Taxpayer").
FACTS
The taxpayer, a multistate corporation, was audited and numerous adjustments were made, resulting in the assessment of additional tax. The issues you raise will be addressed separately.
DETERMINATION
Nonbusiness income: You object to the apportionment of capital gains, interest income and royalties, contending that the income is "nonbusiness" income which should be allocated.
Virginia law does not require or permit the subtraction or allocation of "nonbusiness" income; all income (other than dividends) is apportionable. See P.D. 84-210 (10/31/84); P.D. 87-104 (3/27/87); and P.D. 87-224 (10/14/87) (copies enclosed). 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 demonstrated that the inclusion of the income in question in apportionable income produces an unconstitutional or inequitable result. You have provided no details as to the taxpayer's corporate and operating structure that would prove that the disputed income did not arise from a unitary business. In particular, you have not shown that the activities or investments which generated the disputed income have been consistently treated as not part of a unitary business in the current or prior returns of Virginia and other states. For example, if apportionable income for any taxable year included deductions for wages, stewardship expenses, carrying costs and other expenses related to an activity or investment, then the apportionment of any gain, profit, and other income generated by the activity or investment would be consistent with the taxpayer's treatment.
The United States Supreme Court is currently considering a case involving the unitary business principle. This case may or may not have relevance to your factual situation. You may wish to file a protective claim for refund pursuant to Va. Code § 58.1-1824 (after paying the assessment) and request that the department hold it without action pending a final decision in Allied-Signal Inc. v. Director, Division of Taxation. This procedure will allow the department to investigate and ascertain the pertinent facts and apply the relevant principles, if any, of the final decision to the facts of your protective claim.
Sales factor: You contend that if capital gains are included in income subject to apportionment, then gross receipts from the gains should be included in the denominator of the sales factor. The auditor did include interest income and royalties in the sales factor when he included them in apportionable income, but such an adjustment was not made for capital gains included in * * * apportionable income.
The taxpayer is correct. The department has previously ruled that gross receipts producing capital gains and losses are included in the sales factor for taxable years that begin before January 1, 1990. See P.D. 88-172 (6/29/88) (copy enclosed). The audit report will be adjusted accordingly.
Partnership interest: The taxpayer held more than an 85% interest in a partnership. A portion of the taxpayer's interest was as a general partner, while most of its interest was as a limited partner. The taxpayer included its portion of the partnership's sales and assets in its apportionment factors. The auditor removed a majority of the partnership property and sales from the taxpayer's apportionment factors. You object on the grounds that the taxpayer and the partnership are in a unitary relationship.
The department has previously ruled that a taxpayer's portion of a limited partnership's payroll expense, sales and assets should not be included in the taxpayer's apportionment factors. See P.D. 88-235 (8/10/88). However, the department has never addressed the situation where a taxpayer owned both a general and a limited interest in the same partnership.
When a corporate taxpayer owns a general interest in a partnership, it is able to participate in the business operations of the partnership. Therefore, the allocation and apportionment of income should occur at the corporate level, and the apportionment data of the partnership should be included in the taxpayer's apportionment figures. This apportionment method should not change simply because a taxpayer also owns a limited interest in the same partnership. Therefore, when a taxpayer owns both a general interest and a limited interest in the same partnership, the general interest will control and the taxpayer's portion of apportionment data from the partnership will be included in the taxpayer's apportionment figures.
Accordingly, the auditor's removal of the apportionment data attributable to the limited partnership interest is in error. The audit report will be revised to include the taxpayer's portion of the partnership's sales and assets in its apportionment factors.
ESOP subtraction: On its 1986 Virginia corporation income tax return, the taxpayer reported a subtraction for an Employee Stock Option Plan (ESOP) credit, in accordance with Va. Code § 58.1-402 C.11. (repealed for taxable years beginning on and after January 1, 1987). However, the subtraction was based on consolidated contributions reported on the taxpayer's consolidated federal return. Because the taxpayer filed a separate Virginia return, the subtraction should have been based on the taxpayer's separate ESOP credit. The auditor recognized this and made an adjustment. While you agree that an adjustment is appropriate, you maintain that the amount of the auditor's adjustment is excessive because it includes the ESOP contributions of one of the taxpayer's wholly owned subsidiaries. You have enclosed a copy of federal Form 8007 and the supporting schedule to substantiate your claim.
The information provided gives a breakdown of the taxpayer's portion of the consolidated ESOP contributions on which the credit was based. A review of these amounts indicates that the adjustment amount stated in your letter is correct. The audit report will be adjusted accordingly.
The audit report will be revised: (1) to include gross receipts from capital gains in the denominator of the sales factor; (2) to include the taxpayer's portion of the partnership's sales and assets in its apportionment factors; and (3) to reflect the adjustment to the ESOP subtraction. You 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
Rulings of the Tax Commissioner