Tax Type
Corporation Income Tax
Description
Apportionment of income; Gain from sale of stock in foreign corporation
Topic
Allocation and Apportionment
Date Issued
06-15-1994
June 15, 1994
Re: Protective Claim: Corporate income taxes ******1987 taxable year
Dear **************
This will reply to the protective claim filed on October 15, 1991, and to your letters of July 2, 1992, November 16, 1992, July 16, 1993, December 28, 1993 and June 8, 1994, on behalf of (the "Taxpayer") for the 1987 taxable year.
PROCEDURAL HISTORY
Pursuant to an amended 1987 Virginia income tax return, the Taxpayer has claimed a subtraction from Virginia apportionable income equal to the amount of a capital gain recognized on the sale of the stock of another corporation ("Company A"). You contend this capital gain is not properly subject to apportioned taxation in Virginia.
The Code of Virginia does not provide for the allocation of income other than certain dividends. The Taxpayer's subtraction of the capital gain has been treated as a request for an alternative method of allocation and apportionment in accordance with Va. Code 58.1-421.
The decision of the U. S. Supreme Court in Allied-Signal, Inc. v. Director, Div. of Taxation, 112 S. Ct. 2551 (1992) made it clear that the payee and payor need not be engaged in the same unitary business as a prerequisite to apportionment in all cases. In the absence of a unitary relationship, apportionment is permitted when the investment serves an operational rather than a passive investment function. The Court also made it clear that the test is fact sensitive.
FACTS
The Taxpayer is a large multi-national corporation, headquartered outside of Virginia. During 1985, the Taxpayer acquired 100% of the stock of Company X. Company X owned approximately 5% of Company A. Company A was incorporated in a foreign country, and is a publicly traded corporation engaged in business in that country.
In 1985, the Taxpayer merged Company X and several of its subsidiaries together. In 1987, the Taxpayer sold the stock of Company A to an unrelated third party. For state income tax purposes, the gain from the sale of Company A was allocated to the Taxpayer's state of commercial domicile.
The facts surrounding the Taxpayer's ownership of Company A are similar to and consistent with the facts described in Public Documents 94-79 (3/22/94), and 94-108 (4/11/94), copies attached.
DETERMINATION
The department has examined the evidence provided by the Taxpayer in order to determine if a unitary relationship existed between the Taxpayer and Company A, and to determine if the Taxpayer's activities related to the investment in Company A were in any way connected to the Taxpayer's operational activities.
In considering the existence of a unitary relationship, the Supreme Court has focused on three objective factors: (1) functional integration; (2) centralization of management; and (3) economies of scale. (See Mobil Oil Corp. v Commissioner of Taxes, 445 U.S., 425 (1980); F. W. Woolworth Co. v. Taxation and Revenue Dept. of N.M., 458 U.S., 352 (1982); and Allied-Signal.) The Taxpayer has presented evidence regarding each of these factors in clear and objective terms. There was no indication of a flow of goods or of a flow of values between the Taxpayer and Company A. Based on the information provided to the department it does not appear that a unitary relationship existed between the Taxpayer and Company A.
In considering the operational aspects of the investment, the department considered the evidence provided to support the Taxpayer's position. The evidence indicated that: Company A was not used to complement the Taxpayer's operational activities before or after the acquisition; no integration of the two businesses ever occurred; no economies were achieved; there was no attempt to take advantage of the fact that common ownership existed; and with few immaterial exceptions, no business transactions of any type occurred between the companies. In light of the substantial evidence provided, it does not appear that the Taxpayer used its own operational activities to enhance the value of its investment in Company A stock, nor does it appear that the ownership of Company A stock enhanced the operational activity of the Taxpayer. Accordingly, I conclude that the Taxpayer held a passive investment in the Company A stock that was not of an operational nature. As the Taxpayer's headquarters and management of its investment function was located outside of Virginia, the gain recognized by the Taxpayer on the sale of Company A stock did not relate to the Taxpayer's operational business carried on in Virginia.
Based upon the information provided, I find that the Taxpayer has demonstrated that an alternative method of allocation and apportionment is appropriate. Because of the extraordinary circumstances surrounding the relationship between the Taxpayer and Company A, permission is hereby granted to allocate the capital gain recognized by the Taxpayer on the sale of the Company A stock in 1987, net of related expenses, out of Virginia apportionable income. The sales factor for 1987 will also be adjusted to remove the gross proceeds of the allocable income from the denominator.
All other aspects of the Taxpayer's 1987 allocation and apportionment shall be determined in accordance with §58.1-406 through §58.1-420. The protective claim will be revised in accordance with this ruling and the attached schedules, and a refund will be issued in due course with interest at statutory rates.
This ruling is limited to the 1987 taxable year, and further limited to the transaction described herein, and shall not be considered as pertaining to any other taxable year or transaction.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/6476M
Rulings of the Tax Commissioner