Tax Type
Corporation Income Tax
Description
Financial corporation; Apportionment formula
Topic
Allocation and Apportionment
Date Issued
11-04-1993
November 4, 1993
Re: §58.1-1821 Application: Corporate Income Taxes
Dear *****************
This will respond to your letter dated August 7, 1992 in which you protest certain adjustments made as a result of an audit of*************** (the "taxpayer").
FACTS
The taxpayer filed its return using a three-factor apportionment formula. The auditor determined that the taxpayer qualified as a "financial corporation" under §58.1-418 of the Code of Virginia, and was required to utilize a one factor cost of performance apportionment factor in computing Virginia taxable income.
Because the taxpayer could not provide the information necessary to compute the cost of performance factor, the auditor used financial reports for the retail branch offices to determine the percentage of branch office costs in Virginia. This percentage was then multiplied by the taxpayer's total cost of performance, in order to obtain the Virginia cost of performance numerator.
You have protested this treatment, stating that using a cost of performance percentage computed only with respect to one type of income is distortive, and does not accurately represent the proportion of the cost of performance actually incurred by the taxpayer in Virginia. The taxpayer has retail branch offices, but the majority of its income appears to be derived from other operations. You submitted additional cost information with your protest letter that purports to be consistent with the auditor's classifications, but which includes the costs associated with all operations.
In general, the "cost of performance" is the cost of all activities performed by the taxpayer for the ultimate purpose of obtaining gains or profit. See VR 630-3-418. The cost of performance percentage is the ratio of the cost of performance incurred in Virginia to the cost of performance incurred everywhere.
Using a cost of performance ratio based only upon a minority of the taxpayer's business to extrapolate the cost of performance for the entire business causes income with respect to the entire business to be distorted. This is because the cost of performance with respect to the entire business, and not with respect to one class of income, is utilized in determining the cost of performance apportionment factor.
I am returning this audit for a review of the additional information received, and a recomputation of the taxpayer's cost of performance factor based on total costs incurred in Virginia to total costs incurred everywhere. You should receive a revised audit report and bill reflecting these revisions and the recomputation of interest accrued to date. The bill must be paid in full within 30 days to avoid the accrual of additional interest.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/6348G
Rulings of the Tax Commissioner