Tax Type
Corporation Income Tax
Description
Apportionment of income; Interest income from investment of excess working capital
Topic
Allocation and Apportionment
Date Issued
07-27-1994
July 27, 1994
Re: §58.1-1821 Application: Corporate income taxes
Dear********
This will reply to your letters of July 8, 1994, and June 1, 1994, regarding the application for correction of an assessment of additional corporate income taxes to******** (the "Taxpayer") for the fiscal years ended November 30, 1988 and 1989. I apologize for the delay in responding.
FACTS
The Taxpayer was the subject of a field audit, and numerous adjustments were made. The Taxpayer has contested the adjustments made by the department's auditor with respect to nonbusiness income .
DETERMINATION
The Code of Virginia does not provide for the allocation of income other than certain dividends. Accordingly, a taxpayer's entire federal taxable income, adjusted and modified as provided in Va. Code §58.1-402 and 58.1-403, less dividends allocable pursuant to Va. Code §58.1-407 is subject to apportionment. The Taxpayer's protest has been treated as a request for an alternative method of allocation and apportionment pursuant to Va. Code §58.1-421.
The Taxpayer received interest income from the investment of excess working capital, and contends that such income was from the investment of passive funds effectively withdrawn from regular business operations. The Taxpayer also recognized gains on foreign currency translations, which the Taxpayer believes is outside of its regular business activities. The Taxpayer believes that this income should be allocated to its state of commercial domicile, and not subject to tax by Virginia.
The fact that income is allocated or apportioned to another state does not by itself bar Virginia from apportioning and taxing that same income. The Taxpayer has not furnished any substantive documentation to refute the statutory method, other than a general statements that Virginia should not be entitled to tax income allocated to another state. The Taxpayer has not shown that the statutory method of apportionment produces an unconstitutional result. The United States Supreme Court has recognized that allocation and apportionment of income is an arbitrary process designed to approximate income from business transactions within a state. As long as each state's method of allocation and apportionment is rationally related to the business transacted within a state, then each state's tax is constitutionally valid even though there may be some overlap. See Mooreman Manufacturing Company v. Bair, 437 U.S. 279, 98 S.Ct. 2340 (1978).
The Taxpayer has not demonstrated that its working capital investments are not operational assets involved in a unitary business. In this particular matter, the Taxpayer must do more than show that the payors of the interest are unrelated third parties. , the Taxpayer must bear the heavy burden of demonstrating that the imposition of Virginia's statute is a violation of the standards enunciated by the United States Supreme Court in Allied-Signal, Inc. v. Director, Division of Taxation, 112 S. Ct. 2251 (]992). In Allied-Signal, the court stated
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- "The existence of a unitary relation between payee and payor is one justification for apportionment, but not the only one. Hence, for example, a State may include within the apportionable income of a nondomiciliary corporation the interest earned on short-term deposits in a bank located in another state if that income forms a part of the working capital of the corporation's unitary business, notwithstanding the absence of a unitary relationship between the corporation and the bank."
"We agree that the payee and the payor need not be engaged in the same unitary business as a prerequisite to apportionment in all cases. Container Corp. says as much. What is required instead is that the capital transaction serve an operational rather than an investment function."
- "The existence of a unitary relation between payee and payor is one justification for apportionment, but not the only one. Hence, for example, a State may include within the apportionable income of a nondomiciliary corporation the interest earned on short-term deposits in a bank located in another state if that income forms a part of the working capital of the corporation's unitary business, notwithstanding the absence of a unitary relationship between the corporation and the bank."
In any proceeding relating to the interpretation of the tax laws of the Commonwealth of Virginia, the burden of proof is on the taxpayer. Based upon the information provided, the Taxpayer has not met the burden of proof. Accordingly, permission to use an alternative method of allocation and apportionment for interest income earned and currency translation gain is hereby denied.
The Taxpayer has provided evidence which indicates that some of the interest income in question was in fact foreign source income. Accordingly, subtraction will be allowed for foreign source interest income determined in accordance with Public Document 93-235 (12/28/93), copy attached.
The Taxpayer protested the department's taxation of dividend income, and the imposition of penalties. However, other than a $10 transpositional error in the year ended November 30, 1989, no dividend income has been included in Virginia taxable income. This error will be corrected. With respect to penalties, none have been assessed.
The assessments will be adjusted as provided herein this letter, and in accordance with the attached schedules. A refund with interest at statutory rates will be issued shortly.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/6745M
Rulings of the Tax Commissioner