Tax Type
Corporation Income Tax
Description
Apportionment of income; Capital gains
Topic
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 January 11, 1993 for correction of an assessment of additional corporate income taxes to******* (the "Taxpayer") for the 1986 taxable year. I apologize for the delay in responding.
FACTS
The Taxpayer was audited for 1989 and numerous adjustments were made. The adjustments made to 1989 affected the amount of net operating loss which had been carried back to the 1986 taxable year, resulting in an assessment to the 1986 taxable year. 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 the Virginia foreign source income subtraction.
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 §158.1-402 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 unequal 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 the 1989 taxable year resulted in a net operating loss, it is not necessary for the department to make a determination with respect to 1989 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.]-402. Because of the federal net operating loss for 1989, the Taxpayer's beginning point for determining Virginia taxable income for 1989 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 1989 taxable year 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 1989 will not change the determination of Virginia taxable income in 1989 or any other year. 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 1989, the department will allow the Taxpayer to raise the allocable income issues at that time.
Foreign Source Income: The Taxpayer has contested the adjustment made by the department's auditor with respect to the determination of expenses related to foreign source income. Upon review of the auditor's calculation it appears that the foreign source income subtraction was generally determined in accordance with department policy. However, the subtraction will be adjusted to the extent that expenses have been applied to reduce foreign dividends received from 50% or more owned corporations in accordance with P.D. 93-235 (12/28/93), copy attached.
ACRS Subtractions: As a result of the NOL carryback, the Taxpayer has an unused ACRS subtractions from 1989 which may be carried forward.
The 1989 Virginia taxable income, and the net operating carryback to 1986 will be adjusted in accordance with this letter and the attached schedules. Because the 1986 taxable year is the subject of a separate application under Va. Code 58.1-1821, the change to 1986 taxable income resulting from this letter will be incorporated with other action taken with respect to the 1986 taxable year.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/6693M
Rulings of the Tax Commissioner