Tax Type
Corporation Income Tax
Description
Apportionment of capital gains and interest; ACRS subtractions carried forward
Topic
ACRS Modifications
Allocation and Apportionment
Date Issued
08-15-1994
August 15, 1994
Re: §58.1-1821 Application: Corporate income taxes
Dear*********
This will reply to your letter of July 12, 1994 regarding the application filed on August 30, 1993 for correction of an assessment of additional corporate income taxes to*******(the "Taxpayer") for the 1990 and 1991 taxable years. apologize for the delay in responding.
FACTS
The Taxpayer was audited for 1990 and 1991, and numerous adjustments were made. The Taxpayer has objected to adjustments made with respect to certain capital gains and interest. The Taxpayer believes that these items should be allocated to its state of commercial domicile, and removed from Virginia apportionable income. The Taxpayer also contests an adjustment made with respect to charitable contributions in determining federal taxable income.
On July 14, 1994 the department received Forms 500-NOLD from the Taxpayer. These forms carry back net operating losses from the 1991 and 1992 taxable years.
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 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 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.
In any proceeding relating to the interpretation of the tax laws of the Commonwealth of Virginia, the burden of proof is on the taxpayer. In this particular matter, the Taxpayer must prove by clear and cogent evidence that Virginia's statutory method of allocation and apportionment would result in a tax on income derived from a discrete investment function having no connection with Virginia in violation of the principles set forth in Allied-Signal. Based upon the information provided, the department has not been able to make a decision with respect to the Taxpayer's claim. However, because of the 1991 and 1992 net operating loss carrybacks, it: is not necessary for the department to make a determination with respect to 1990 and 1991 allocable income at this time.
Virginia taxable income is determined by modifying federal taxable income for certain specific additions and subtractions required by Va. Code §58.1-402. Because of the federal net operating losses for 1991 and 1992, the Taxpayer's beginning point for determining Virginia taxable income for 1990 and 1991 is zero. However, there is no express authority in the Code of Virginia for a Virginia net operating loss. Accordingly, neither the adjustments required in determining Virginia taxable income nor allocable income may be used to create a Virginia net operating loss. The amount of income which the Taxpayer may allocate out of Virginia is therefore limited to the sum of its federal taxable income and the adjustments required by Va. Code §58.1-402. Because there is no provision for a Virginia net operating loss, allocable income from the 1990 and 1991 taxable years cannot be utilized to reduce Virginia taxable income in any other taxable year. See Public Document (P.D.) 94-167 (5/25/94), copy attached.
Therefore, absent a change in federal taxable income, allocable income in 1990 or 1991 would not change the determination of Virginia taxable income. Therefore, the department does not need to make a determination with respect to such income at this time. However, the department will consider the Taxpayer's letter to be a protective claim filed in accordance with Va. Code §58.1-1824 with respect to the items of allocable income identified therein. In the event that a future change to federal taxable income affects Virginia taxable income for 1990 or 1991, the department will allow the Taxpayer to raise the allocable income issues at that time.
Charitable contribution: Federal taxable income for 1991 was adjusted by the amount of charitable contributions deducted by the Taxpayer. Federal taxable income must be independently determined for Virginia purposes where the federal filing method is different than the Virginia method, or where the federal and Virginia groups contain different members. Because 1991 was a loss year, the auditor's adjustment is correct. The Taxpayer will be considered to have a charitable contribution carryforward, which for Virginia purposes will be allowed in accordance with federal law on a separate company basis.
ACRS Subtractions: As a result of the NOL carrybacks, the Taxpayer has unused ACRS subtractions from 1988 and 1990 which may be carried forward.
The refunds applied for on Forms 500-NOLD will be allowed in accordance with the provisions of this letter and the attached schedules, with interest at statutory rates. A check will be mailed as soon as practicable.
Sincerely,
Danny M. Payne
Tax Commissioner
Rulings of the Tax Commissioner