Tax Type
Corporation Income Tax
Description
Alternative apportionment method denied
Topic
Allocation and Apportionment
Date Issued
06-01-1992
June 1, 1992
Re: Ruling Request: Corporation Income Tax
Dear **************
This will reply to your letter dated November 21, 1991 in which you request an alternate method of apportionment for * * * (the "Taxpayer").
FACTS
The taxpayer recently filed returns with the Department for the taxable years 1987 through 1990. Included in the 1990 federal taxable income is the income earned from an investment in two partnerships which own and operate properties within Virginia.
You feel that the statutory method of allocation and apportionment results in a greater portion of net income being taxed in Virginia than can be reasonably attributed to the business and source of income from Virginia. Accordingly, you ask that the Department allow the taxpayer to use an alternate method of apportionment, whereby the taxpayer would report the separate results of the Virginia partnerships as Virginia taxable income, and pay tax upon that income. This method would be in lieu of reporting the entire taxable income of the corporation, using the three factor apportionment factor in determining Virginia taxable income, and paying the resulting tax.
RULING
Use of an alternative method is allowed only in extraordinary circumstances where the need for relief has been demonstrated by clear and cogent evidence.
Any corporation subject to taxation in Virginia and at least one other state is required by Va. Code § 58.1-406 to allocate and apportion its federal taxable income in order to compute Virginia taxable income. Dividends are required to be allocated to the commercial domicile of the corporation. Va. Code § 58.1-408 provides that all other federal taxable income is apportioned to Virginia by a three factor formula. The Virginia corporation law makes no distinction between business and nonbusiness income. See Commonwealth v. Champion International Corporation, 220 Va. 981 (1980). Also, the use of separate accounting, such as you suggest as an alternative method of apportioning the taxpayer's income to Virginia, is generally held in disfavor. See Department of Taxation v. Lucky Stores, 217 Va. 121 (1976).
The United States Supreme Court has recognized that allocation and apportionment of income is an arbitrary process designed to approximate the income from business operations within a state. As long as each state's method of allocation and apportionment is rationally related to the business transacted within a state, then each state's tax is considered to be constitutionally valid, even though there may be some overlap. See Mooreman Manufacturing Company v. Blair, 437 U.S. 279, 98 S.Ct. 2340 (1978). You have not demonstrated that the statutory method of allocation and * * * apportionment produces an unconstitutional result. Further, I have considered the nature of your business and the portion of it conducted in Virginia and I find that the statutory method is rationally related to the business conducted in Virginia for all applicable taxable years.
The policies governing the granting of alternate methods under Va. Code § 58.1-421 are well established. See Virginia Regulation (VR) 630-3-421, and Public Document (P.D.) 86-184 (9/18/86) (copies enclosed). Also, the policy governing separate accounting is well established. See P.D. 90-221, (12/13/90) (copy enclosed). After considering the facts set forth, I conclude that you have not demonstrated by clear and cogent evidence that Virginia's statutory method is unconstitutional or inapplicable as applied to your situation.
Accordingly, your Virginia tax returns as originally filed are correct, and any tax shown thereon is now due and payable. Since there was no malicious intent on your part in avoiding filing Virginia income tax returns for all years, I hereby waive all penalties assessed. However, I am unable to waive the interest charges. Please remit any remaining tax and interest due within thirty days of the date of this letter in order to avoid additional interest assessment.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner