Tax Type
Corporation Income Tax
Description
Affiliates disallowed on consolidated return; Foreign source income
Topic
Allocation and Apportionment
Returns/Payments/Records
Subtractions and Exclusions
Date Issued
03-29-1993
March 29, 1993
Re: Va. Code § 58.1-1821 Application: Corporate Income Tax
Dear *********************
This will reply to your letter dated July 2, 1991 in which you protest certain audit adjustments pertaining to taxable years ending January, 1987 through 1989 for ***** (the "Taxpayer") and affiliates.
FACTS
The taxpayer and affiliates were audited by the department. There were several audit adjustments to the Virginia tax return, two of which are at issue in this protest.
The inclusion of certain subsidiaries of the taxpayer in the January, 1987 Virginia consolidated return was disallowed on audit, because they did not have property, payroll, or sales in Virginia for the taxable year of disallowance. These subsidiaries had intangible sales, as well as tangible property (for several days at a time) in Virginia during years before and after the year at issue. During the year at issue, the subsidiaries maintained bank accounts, and conducted business in Virginia by attempting to arrange for the performance of taxpayer's services at various locations in Virginia. These attempts were unsuccessful for the year at issue.
Also, the auditor disallowed certain foreign source income subtracted. The taxpayer has contracts with personnel in many foreign countries where its service is provided. Many contracts with these personnel contain a clause providing a "minimum guaranteed payment" to the taxpayer. The taxpayer contends that these payments should be treated as a subtraction of foreign source income in determining Virginia taxable income, because they are not dependent upon the taxpayer performing a service.
DETERMINATION
Inclusion of Subsidiaries in Virginia Consolidated Return: In general, a consolidated group must contain the income and apportionment factors of all members of an electing affiliated group which would be subject to Virginia income tax if separate returns were filed for each affiliate (Virginia Regulation (VR) 630-3-442.C). Any corporation that is subject to the federal income tax and has income from Virginia sources is generally subject to Virginia tax (VR 630-3-401.A).
A corporation has income from Virginia sources if there is sufficient activity within Virginia to make the property, payroll, or sales factor positive. See VR 630-3-302. These factors are not positive for the year at issue. The only Virginia contacts that the subsidiaries had during the taxable year were Virginia bank accounts and "contacts" with Virginia businesses. Whether the contacts were made by telephone or personal visits, merely soliciting business and maintaining Virginia bank accounts does not subject the subsidiaries to Virginia income tax if separate returns were filed. Therefore, the auditor properly excluded the subsidiaries from the consolidated Virginia return. The subsidiaries may be included as members of the consolidated group in any subsequent year in which they are subject to Virginia income tax.
Foreign Source Income: Under Va. Code § 58.1-402(c)(8), specified types of foreign source income are deductible in determining Virginia taxable income. The source is determined using the federal sourcing rules in Internal Revenue Code (I.R.C) § 861 et seq., and the regulations thereunder (VR 630-3-302).
You assert that the "minimum guaranteed payment" is foreign source income for Virginia purposes because "the payment is not dependent upon ticket sales." Although the payments may be "foreign" for federal purposes, they are not interest, dividends, rents, or other types of receipts specifically defined in Va. Code § 58.1-302 as "foreign source income" for purposes of determining the foreign source income subtraction for Virginia tax purposes. Therefore, these payments are not excludible in determining Virginia taxable income.
Accordingly, I hold that the assessment is correct as made and is now due and payable. You will be billed shortly for the amount owed with interest accrued to date. The bill should be paid within 30 days of receipt to avoid additional interest charges.
Sincerely,
W. H. Forst
Tax Commissioner
TPD/5378G
Rulings of the Tax Commissioner