94-217 | Virginia Tax

Tax Type

Corporation Income Tax

Description

Apportionment of income; Inclusion of factors

Topic

Allocation and Apportionment

Date Issued

07-08-1994

July 8, 1994

Re: §58.1-1821 Application: Corporate income taxes

Dear**********

This will reply to your letter of February 15, 1994, in which you have applied for correction of an assessment of additional corporate income taxes to *********( the Taxpayer) for the taxable year ended December 31, 1989.

FACTS

The Taxpayer was the subject of a field audit, and an adjustment was made to eliminate the Taxpayer's property and payroll factors from the overall Virginia apportionment factor. You contest the department's adjustments.

DETERMINATION

The Taxpayer was formed in late 1989 for the purpose of disposing of certain business assets formerly owned and used by the Taxpayer's corporate parent. The asset disposition activity began in 1989, and continued in 1990. Certain of these assets were physically located in Virginia. The Taxpayer had engaged the services of one part-time employee in December of 1989, and a second full time employee in 1990. The Taxpayer rented office space outside of Virginia in 1989 and 1990. The Taxpayer's Virginia property and payroll factors were zero for 1989. Sales of property physically located in Virginia were allocated to Virginia, creating a positive sales factor. The department's auditor eliminated the property and payroll factors on the basis that they were de minimis.

VR 630-3-408 provides in pertinent part:

- "[all] corporations are required to use a three factor formula based on the property, payroll and sales within Virginia. The formula is the average of the three factors, except that if the denominator of any fraction is zero, then that fraction is not included in the average."

In the instant case, the Taxpayer has documented that it actually paid rent and payroll. Accordingly, although the amounts were small, they represent bona fide payments and cannot be eliminated simply because of their size.

Va. Code §58.1-446 provides the department with the authority to make adjustments to taxable income where a corporation acquires and disposes of the goods of another related corporation in such a manner as to improperly reflect taxable income. In such a case, where it appears that such an arrangement exists in such a manner as to improperly reflect Virginia taxable income, the department may equitable adjust the tax.

The facts of the case reveal that if the Taxpayer's corporate parent had not transferred the subject assets to the Taxpayer, but had instead sold the assets itself and apportioned the resulting taxable income to Virginia as part of its other operations, the resulting tax liability would not have been greater than the actual tax liability reported by the two corporations separately. Based on the evidence provided, the department does not find that an arrangement exists for the 1989 taxable year to improperly reflect Virginia taxable income.

Accordingly, the assessment for the 1989 taxable year shall be abated.

Sincerely,

Danny M. Payne
Tax Commissioner

OTP/7705M

Rulings of the Tax Commissioner