Tax Type
Corporation Income Tax
Description
Apportionment of income; Income from investment fund
Topic
Allocation and Apportionment
Date Issued
06-08-1994
June 8, 1994
Re: §58.1-1824 Protective Claim; Corporate Income Taxes
Dear*******
This will reply to your letters of December 7, 1992, and July 14, 1993, regarding the protective claims for refund filed on behalf of**************** (the "Taxpayer") for the taxable years ended December 23, 1988, December 29, 1989, and February 24, 1990. I apologize for the delay in responding.
FACTS
The Taxpayer filed protective claims for refund, upon which it has claimed subtractions for allocable non-business income, net of related expenses.
The Taxpayer is a large publicly held corporation, headquartered outside of Virginia, whose principal business activity is the retail sale of various products in Virginia as well as other states. During 1987, the Taxpayer sold a significant amount of common stock in a public offering. The proceeds of this offering were in part used for capital expansion, known cash commitments, and shareholder distributions. A portion of the proceeds were also segregated into a separate investment account. It is the income from this investment account which the Taxpayer seeks to allocate.
The segregated funds were in a separate account under the responsibility of one employee, the Assistant Treasurer. The investment guidelines under which the funds were invested were set directly by the Board of Directors. All investment decisions were made by the Assistant Treasurer, under these guidelines. The funds were invested in stock and commercial paper issued by unrelated third parties. The investment account has remained separate and distinct from other assets of the Taxpayer, and has not been commingled with the Taxpayer's operational funds. The investment account has remained generally intact; distributions from it have generally been from accumulated income rather than principal. The Taxpayer maintains the investment account at its corporate headquarters outside of Virginia.
Prior to the public stock offering, the Taxpayer was profitable, and had sufficient operational working capital and cash flow. After the offering, the Taxpayer's financial statements clearly demonstrate that the Taxpayer has had sufficient cash flow from its operations to support its operational activities without reliance on, or utilization of, the separate investment fund.
The facts and circumstances surrounding the Taxpayer's investment income closely resemble those described in Public Document 94-167 (5/25/94), copy attached.
DETERMINATION
The Code of Virginia does not provide for the allocation of income other than certain dividends. Accordingly, the Taxpayer's subtraction of the non-business income has been treated as a request for an alternative method of allocation and apportionment in accordance with Va. Code 58.1-421.
The department has examined the evidence provided by the Taxpayer in order to determine if a unitary relationship existed between the Taxpayer and payors of the investment income, and to determine if the Taxpayer's activities related to the investment activity 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, Inc. v. Director, Div. of Taxation, 112 S. Ct. 2551 (1992).) Evidence regarding these factors was presented by the Taxpayer in clear and objective terms. There was no indication of a flow of goods or of a flow of values between the Taxpayer and any payor of investment income. Based on the information provided to the department it does not appear that a unitary relationship existed between the Taxpayer and any payor of investment income.
In considering the operational aspects of the investment, the department considered the evidence provided to support the Taxpayer's position. The evidence indicated that: the investment activity did not complement the Taxpayer's operational activities; no economies were achieved; and, the management of the investment activity was separate and distinct from the general management of the Taxpayer and functioned under the direct authority of the board of directors. The passive investments which produced the investment income were financed directly by the issuance of common stock. These funds were maintained in a segregated fund, separate and distinct from other working capital balances. Given the unique circumstances surrounding the source of the funds, the segregation of the funds, and the fact that the Taxpayer's operations did not rely on these funds, it is clear that the activity was conducted independently from the management and investment of necessary operational working capital balances.
In light of the substantial evidence provided, it does not appear that the Taxpayer's investment activities were related to its operational activities. Accordingly, it is possible to conclude that the Taxpayer's investment activities constitute a separate investment function making passive investments that are not of an operational nature.
Based upon the information provided, the department finds that the Taxpayer has demonstrated that an alternative method of allocation and apportionment is appropriate. Accordingly, permission is hereby granted to allocate the investment income recognized by the Taxpayer out of Virginia apportionable income. The apportionment factors for each taxable year will also be adjusted to remove items attributable to allocable income from the denominator of the respective factors. All other aspects of the Taxpayer's allocation and apportionment shall be determined in accordance with Va. Code §58.1-406 through §58.1-420. The claims will be allowed as provided herein and on the attached schedules, and a refund will be paid as soon as practicable with interest at statutory rates.
This ruling is limited to the taxable years identified herein, and further limited to the activity described herein, and shall not be considered as pertaining to any other taxable year or transaction.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/6480M
Rulings of the Tax Commissioner